The world’s next big inflation surprise is looming in China

Copper prices have surged above $9,000 a tonne and Chinese oil consumption is expected to hit a record this year. Air New Zealand adds flights to Shanghai. Shares in luxury retailer LVMH Moet Hennessy Louis Vuitton have rallied and Swatch Group said it could post record sales if China recovers. China’s reopening is set to even shorten Britain’s recession as spending-savvy tourists return.

Sudden exit

Certainly, China’s recovery will not be linear. The sudden exit from COVID Zero in the final weeks of 2022 triggered an immediate slump in activity. A lack of transparency about infection and death rates increases uncertainty about public health costs and the economic outlook. It’s also not clear that China has the pent-up demand seen in other major economies, given Beijing’s relatively dovish stimulus from the pandemic.

Other variables, from Russian oil price caps to weather in Europe, OPEC supply decisions and inventory levels at retailers, could all offset or amplify the impact of China’s reopening on global prices.

However, high-frequency data shows that China’s slump is already coming to an end and the COVID wave is fading. The number of patients in hospital emergency rooms is declining. Metros in big cities are filling up. And early signs from the Lunar New Year holidays show that travel and box office spending are significantly stronger than a year ago. Around 95.9 million trips were made by plane, train and car over the first four days of the celebrations.


Pan Mei from Liuzhou, a southwestern city in the Guangxi Autonomous Region, was one such traveler.

She visited Macau during the holidays with her husband, son and five other family members to meet with her eldest daughter, who is pursuing a master’s degree there. The family celebrated their new found freedom to travel, trying their luck at casinos and hanging out in malls.

“The pandemic has kept us within the borders of China for so long. It’s great that we can bring family members across borders again. For many of them, this is the first time in many years,” she said. “Now that travel is normalizing, we can travel more.”

Another wave of COVID – the wake of holiday travel and partying – seems inevitable. By the end of the first quarter, however, China’s 1.4 billion people are likely to have built resilience and adapted to living with the virus, given rising vaccination rates and natural immunity. Pandemic lockdowns and precautionary measures to avoid infection will no longer constrain the economy.

growth policy

Pro-growth policies for the all-important real estate and technology sectors add to the reasons for optimism.

Since August 2020, when property developers’ scrutiny showed Beijing was serious about squeezing the air out of the real estate bubble, real estate has gone from being the biggest contributor to China’s growth to a significant drag. In 2022, home sales fell 24 percent, investment shrank 10 percent, and prices stagnated. Now that Beijing is refocusing on restoring growth, funding has been turned on for developers and homebuyers alike.

Although the longer-term prospects for China’s overdeveloped and over-leveraged real estate sector remain bleak, the prospects for at least 2023 are slightly brighter. Bloomberg Economics is forecasting a 3 percent drop in investment, a much smaller drag on the economy than in 2022.

Even ailing entrepreneurs breathe a sigh of relief. Since November 2020, when fintech giant Ant Group’s IPO was called off, China’s flagship tech companies have faced massive fines and strict regulations. This crackdown came at a price when confidence collapsed. In October 2022, the Nasdaq Golden Dragon Index was down nearly 80 percent from its peak.

As with property, however, Beijing has decided that the near-term need to restore growth trumps the longer-term goal of curbing the power of giant corporations.


“If wealth does not grow, general prosperity will become a river without a source or a tree without roots,” said Vice Premier Liu He, using his appearance in Davos to pledge renewed support to entrepreneurs. Reflecting the shift, tech stocks have regained lost ground.

These shifts are why China’s growth prospects are suddenly improving and why policymakers are asking what this means for inflation.

Bank of Korea Governor Rhee Chang-yong said on January 13 that China’s reopening could push up oil prices. Fed Vice Chair Lael Brainard used a Jan. 19 speech to highlight uncertainty about the impact on inflation, particularly in commodities. European Central Bank President Christine Lagarde reiterated these concerns in Davos.

price pressure

Price pressure from China is likely to be transmitted through two channels. First, there is a risk of a negative supply shock as the first wave of COVID infections triggers a spate of absenteeism and factories struggle to keep operations running. The Purchasing Managers’ Index – a monthly survey of China’s manufacturing industry – shows that delivery times skyrocketed in late 2022. The risk here is a repeat, albeit to a much lesser extent, of the supply crises that triggered the first spike in pandemic inflation.

The second channel will be a positive demand shock as normal life resumes and shopping ramps up. China’s oil imports plummeted during the pandemic. Hopes of stronger demand as highways, train stations and airport terminals fill up have already helped lift oil prices from a low of $76 a barrel in early December to around $86 in late January.

Goldman Sachs veteran commodities analyst Jeff Currie said they could go as high as $105 or higher. Taken together, these shocks could add almost a percentage point to global inflation by the end of 2023, compared to a scenario in which China remains in lockdown.

For the US, the eurozone and the UK, Bloomberg Economics analysis points to an increase of about 0.7 percentage point – smaller than the global impact but still enough to keep the Fed, ECB and Bank of England longer in tightening mode than market expectations.

Uncertainties remain significant over both the trajectory of China’s recovery and other forces driving global prices. But the direction is clear. Back in the dark days of the 2008 global financial crisis, China’s stimulus was an undiminished plus for the rest of the world. In 2023, China’s reopening promises to be a mixed blessing.


The Market Recap Newsletter is a summary of the trading day. Get it every useday afternoon. The world’s next big inflation surprise is looming in China

Brian Lowry

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