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China's reopening is 'good news' for growth - but could be inflationary, economists in Davos warn

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The reopening of China was one of the most discussed topics at the World Economic Forum in Davos.

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DAVOS, Switzerland – China’s economic reopening could boost global growth, but business leaders and policymakers at this week’s World Economic Forum are also a little anxious about its potential inflationary impact.

China’s decision to welcome tourists again and facilitate travel abroad by those in the country was one of the most discussed topics at the meeting in Davos, in the Swiss Alps.

Overall, this is seen as one of the most important economic events in 2023 and the business community is visibly excited about doing new business with the world’s second largest economy.

On the other hand, though, there are concerns about what this means for inflation and the cost of living.

“[If] Chinese demand for other goods starts to increase, if this creates more pressure on commodity prices, for example natural gas, big problem in Europe, if Chinese demand for natural gas increases, because factories, their families demand more electricity, then it goes to pressure Europe because natural gas is competing [in] the same markets for liquid natural gas,” Raghuram Rajan, former central bank chairman of the Reserve Bank of India, told CNBC.

“So the opening of China [is] good news overall, but potentially, the inflationary impact – there could be some,” he said.

WEF Davos: the reopening of China

The International Energy Agency has warned that European companies could face higher costs when looking to buy natural gas this year as there will be more competition for the commodity. Inflation has been one of the biggest challenges for European citizens over the last year, driven mainly by higher energy bills.

Speaking at a panel moderated by CNBC, Satish Shankar, APAC managing partner at consultancy Bain & Company, said: “I think opening up China will increase global energy consumption, it might cause some inflation.”

Felix Sutter, president of the Swiss-Chinese Chamber of Commerce, said at the same panel that “Chinese needs for energy and raw materials will compete with European needs, global needs, so I see the easing of inflation now, [but] we will see more pressure on inflation in the third quarter.”

Some economists have warned that if that’s the case, the US Federal Reserve may have to keep raising rates. “In our view … a stronger China increases the odds of a doggedly hawkish Fed,” said Tavis McCourt, institutional equity strategist at Raymond James, in his 2023 outlook.

“With China, we need more of everything – if that generates enough demand to get commodity prices back to where they were in the spring of last year, then that puts the progress we’ve seen in inflation at a much more tenuous level. position,” he said.

The second half of the year will be better with China surprising on the upside: Standard Chartered

China recently reported a 3% growth rate for 2022, its second slowest growth rate since 1976. However, short-term data has raised expectations of a better-than-expected recovery with December retail sales and industrial production above consensus.

Standard Chartered chairman José Vinals told CNBC in Davos this week that China will have a very good year and will surprise on the upside.

“The Chinese economy is going to catch fire and that’s going to be very, very important for the rest of the world,” he said.

Meanwhile, Rio Tinto CEO Jakob Stausholm also sounded positive about China’s economy and its natural impact on global growth, telling CNBC in Davos that he was “absolutely convinced” that China’s reopening will help the global economy.

— Arjun Kharpal and Jihye Lee of CNBC contributed to this article.