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China's reopening

China underwent one of the world’s longest, and strictest, COVID management policies. Snap lockdowns of entire cities weakened consumer spending and disrupted supply chains were key features of the Chinese economy in 2022. This saw China’s economy grow by only 3% in 2022 – it’s worst performance in nearly half a century.  

The abrupt end of China’s zero COVID policy was announced in December, and after 1,016 days China re-opened their borders to the world on the 8th of January. Already, this reopening has shifted the dial on global economic sentiment. The Economist magazine says that “China’s reopening will be the biggest economic event of 2023”. The IMF’s latest World Economic Outlook paints the outlook as ‘less gloomy’ than previously forecast, largely thanks to China’s sudden reopening.

China is expected to be a significant engine of global economic growth in 2023 and 2024. China and India alone are expected to account for around half of global growth this year, versus just a tenth for the US and Euro area combined.  

Chart: Contributions to world GDP growth  

Source: IMF, World Economic Outlook January update

For those in China, the end of restrictions was timed with the Lunar New Year. For many, this was the first time in three years they could travel for the festive season, which saw a large uplift in domestic travel. More than 520 million trips were made by road, rail, water or air in the first 13 days of the Lunar New Year travel period. Though below 2019 levels, this is significantly higher than the 351 million trips made at the same time last year, and more than double the trips made in 2021.  

Importantly though, consumer spending figures during the Lunar New Year period are already looking up. This is a much-needed boost for China after December retail figures contracted 1.8%, marking the third consecutive monthly decline. Box office tickets and searches for travel improved, signalling the start of a consumer bounce back over 2023 as savings loaded consumers return to old spending habits.  

The rest of the world is also gearing up for China’s reopening. At an otherwise very difficult time for the global economy, the global outlook is supported by a re-engaged China. With no more restrictions, there is the potential for supply chain disruptions to ease considerably over the year.  

With increasing demand and momentum in China comes a risk to global inflation. Oil and iron ore prices have increased in response to China’s reopening, potentially pushing up prices for a range of other key commodities, including metals and food.

This might be good news for Australian exports, but it could also be a challenge to the dominant economic theme of late 2022 – bringing runaway inflation under control. Central banks have been hiking rates sharply, and our own RBA has entered 2023 with a renewed aggression in fighting inflation. This is perhaps influenced by the potential for China’s reopening to support economic growth, and therefore sustain inflationary pressure.

Last week’s RBA Statement on Monetary Policy noted “the earlier opening of the Chinese economy…is supporting Australia’s terms of trade and national income”.

China’s reopening will also have important implications for two key exports: international education and tourism. Australia was a popular destination for both pre-COVID, with 1.4 million short term visitors from China in 2019 (an average of 120,000 per month) and 212,000 Chinese students in 2019.

COVID border closures hit tourism particularly hard with only 9,000 short term visitor arrivals from China in November 2022, only a sliver of the pre-COVID monthly average. International student numbers fell to 155,000 in 2022 as pre-COVID students finished their courses and fewer new students replaced them. 

Both exports are expected to have big upsides in 2023, though the timing of this resurgence is unclear.  China is facing long delays in processing passports and visas as well as sky rocketing flight prices. These are  both globally competitive markets, as other countries vie for the same boost to education and tourism as Australia.

This blog was co-authored by Michelle Shi, an Analyst in the Deloitte Access Economics team.