While China has not fully reopened to the rest of the world and continues to grapple with coronavirus outbreaks, it has signalled a desire to reconnect after significantly easing restrictions following large protests. Those rules, enforced for nearly three years, caused massive economic disruptions and reduced demand for oil, gas and raw materials, as China is normally the largest importer of such commodities.
China’s gross domestic product grew 3.9% on the year in the third quarter, rebounding from a weak 0.4% in the second quarter. The economy has been hindered by not only Covid-19 but also a property collapse.
While much remains uncertain – the country still faces surging infections under a new 10-point playbook that abolishes strict lockdowns and excessive testing – China’s eventual acceptance of coexisting with the virus could lead to a rush of consumption and travel, analysts say.
The ripple effects would be felt worldwide after a year during which Russia’s invasion of Ukraine wreaked havoc in commodity markets and sent prices soaring, though recent weeks have been calmer.
Renewed economic activity could push China’s total energy demand up by 3.3 million barrels of oil equivalent per day in 2023, versus no growth this year, according to an S&P Global Commodity Insights report on next year’s energy outlook. That appetite would represent 47% of all global growth demand next year and would drive commodity prices higher, said Dan Klein, who oversees energy the market information company.
“China’s Covid policy is the most important fundamental factor for global demand in commodities and energy in 2023,” said Klein, “as its demand softness due to lockdowns in 2022 was a key safety valve for oil, gas and coal markets, while Europe scrambled to replace Russian energy.”
After this year’s round of vaccinations and growing public discontent over lockdowns, Klein said China’s Covid curbs would likely ease further in 2023 and that “imports of fossil fuels can be expected to increase again”.
Gary Ng, senior economist at Natixis, has similar expectations. He foresees a surge in international and domestic travel once China completely reopens, with a strong economic rebound that could push oil prices in the second quarter of 2023 up to US$100 per barrel, compared to around US$80 now amid a downtrend.
“China will definitely have an impact on global inflation if it opens up,” Ng told Nikkei Asia. “China has always been a big buyer of commodities.”
Some observers predict the housing market, which saw new home sales drop 25% over the first 10 months of 2022, could rebound slowly as demand returns. Looser coronavirus rules coupled with Beijing’s slew of measures to rescue the property market announced last month could boost buyer confidence.
But this could also have an inflationary effect.
“If there is a strong economic rebound, property construction might pick up, then prices for raw materials like steel, copper and other construction materials will also increase,” Ng said.
That would complicate the war on inflation waged by central banks around the world. The US Federal Reserve last Wednesday signalled it would deliver more interest rate hikes next year, arguing inflation has not been tamed.
China opening up “could interfere with supply chains ultimately, and that could push inflation up in the West”, Fed chair Jerome Powell said. However, he downplayed the risk, saying, “It doesn’t seem likely the overall net effect will be material to us.”
Jin Zhang, New York-based portfolio manager for Vontobel Asset Management, said that China’s efforts to diversify energy sourcing and ensure food supplies could help keep inflation “manageable” after the country reopens. Zhang said he is “not very worried” about potential inflation in China as he said Beijing “has been quite careful managing its macro situations”.
The efforts to diversify energy sources include creating an electric vehicle industry and procuring different types of energy from different countries, Zhang said, citing President Xi Jinping’s recent visit to the Middle East. China’s foreign ministry said in a statement that it is willing to strengthen coordination with Saudi Arabia on energy policy and exploration.
“I think the inflation situation should be manageable,” Zhang said.