China’s reopening is ‘good news’ for growth – but could lead to inflation, economists warn in Davos

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 opening may boost global growth, but business leaders and policymakers at the World Economic Forum this week are also a little worried about its potential inflationary impact.

China’s decision to welcome tourists again, as well as make it easier for those at home to travel abroad, was one of the most discussed topics at the Davos meeting in the Swiss Alps.

It is widely considered to be one of the most important economic events of 2023 and the business community is visibly excited about making new deals with the world’s second largest economy.

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

“[If] Chinese demand for other commodities starts to increase, if this creates more pressure on commodity prices, for example natural gas, a big problem in Europe, if Chinese demand for natural gas increases because factories, their households require more electricity, then this will continue to put pressure on Europe because natural gas, they compete [in] the same LNG markets,” Raghuram Rajan, former central bank governor of the Reserve Bank of India, told CNBC.

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

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 raw material. Inflation has been one of the biggest challenges for European citizens over the past year, driven mostly by higher energy bills.

Speaking on a panel moderated by CNBC, Satish Shankar, managing partner for APAC at consultancy Bain & Company, said: “I think the opening up of China will therefore increase global energy consumption, that may cause some inflation.”

Felix Sutter, president of the Swiss-Chinese Chamber of Commerce, told the same panel that “China’s energy needs and raw material needs will compete with European needs, global needs, so I see a relaxation of inflation right now, [but] we will see more pressure on inflation in Q3.”

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

“With China, we need more of everything – if that stimulates enough demand to get commodity prices back closer to where they were in the spring of last year, then that puts the progress we’re seeing in terms of inflation in a much weaker position,” he said.

China’s reopening is ‘good news’ for growth – but could lead to inflation, economists warn in Davos

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

Standard Chartered Chairman Jose Viñales told CNBC in Davos this week that China will have a very good year and surprise from an upside perspective.

“The Chinese economy is going to be on 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” China’s reopening would help the global economy.

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

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