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December 15th, 2022

China is Reopening After Pandemic: What Does This Mean for the Markets?

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Todd C. from Alexandria, VA asks: Hello Mitch, I’m wondering about the economic effects of China reopening. Reopening quickly seems to cause problems, supply chain, inflation, and otherwise. I’m also wondering about the price of oil. Thanks for taking the time to respond.

Mitch’s Response:

Thank you for your email and happy to take the time to respond!

China’s zero-Covid experiment appears to be concluding, and after years of heavy-handed restrictions and rolling lockdowns that sometimes, confined millions to their homes for months at a time. China’s policies resulted in lower cases and deaths than other countries, but came at quite an economic cost. 2022 GDP growth is expected to come in at 3.3%, which is significantly lower than the 5.5% official target for the year.1

The economic pain has been acute as of late. China’s exports have fallen for two consecutive months, with shipments plummeting -8.7% in November. Imports also fell by double digits in November, marketing the weakest month since the onset of the pandemic. Youth unemployment stands above 20%.

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Frustration among citizens led to mass protests, and reportedly a letter from Foxconn’s CEO Terry Gou urging the government to adjust the zero-Covid policy. In response, China is now scrapping rules for mass testing, ending mandatory hospitalization for people who test positive, and reconfiguring how lockdowns are imposed, among other changes.

This reopening has filtered through as a short-term positive for China’s markets – the renminbi currency has posted its strongest five-month gain against the dollar since 1994, and Chinese stocks have bounced approximately 10%.

One of the lessons we’ve taken away from these Covid-19 years is that it is easy to shut down an economy and impose restrictions, but it’s not as easy to reopen and quickly achieve a balance between supply and demand. In the case of the U.S., consumers were armed with stimulus checks and demand surged back, but rolling shutdowns across the world and a shift in spending from services to goods upended supply chains. Shortages and eventually, inflation, followed.

I think the China reopening story could be different. For one, China has not sent out stimulus checks or increased fiscal stimulus much at all over the past year, so households are not armed with excess savings they’re ready to take out to the stores, which means a goods supply shortage isn’t likely. On the services side, a high youth unemployment rate should mitigate the labor shortages we experienced in the U.S.

There is also the simple fact that China is not likely to reopen as swiftly as the rest of the world did. The state still has broad authority to establish rules and restrictions, and rising cases and hospitalizations heading into the winter may mean this reopening will be more cautious than full-fledged.

Finally, China is reopening to a world where demand is slowing and financial conditions are being tightened by global central banks, which may neutralize the potential impact on oil and other commodity prices. I would expect to see a bit more upward pressure on oil as transportation demand and factories operating at full capacity return to China, but I do not think the global economy is at a point in the cycle where price pressures will mount quickly.

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Disclosure

1 Wall Street Journal. December 7, 2022. https://www.wsj.com/articles/what-chinas-covid-19-reopening-means-for-markets-11670422173

2 ZIM may amend or rescind the guide “Helping You Manage Market Volatility” for any reason and at ZIM’s discretion.

3 ZIM may amend or rescind the guide “Helping You Manage Market Volatility” for any reason and at ZIM’s discretion.

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