According to the Asian Development Bank’s latest “Asian Development Outlook”, as emerging Asian economies gear up for faster growth this year, the reopening of China could be a significant tailwind. Developing Asia, which includes the bank’s 46 regional members, excluding Japan, is projected to achieve GDP growth of 4.8% this year and the next, marking an improvement from last year’s 4.2%. The International Monetary Fund estimates the region to contribute to about 70% of the global growth this year, a substantial leap from previous years.
The COVID-19 pandemic took a heavy toll on global markets, leading to widespread disruptions, job losses, and uncertainties. In the early months of the pandemic, China, being the epicentre of the outbreak, faced devastating consequences as its economy came to a standstill. The stringent measures implemented to control the spread of the virus led to factory closures, disrupted supply chains, and plummeted consumer demand. However, as the country’s pandemic was brought under control, China initiated a gradual reopening significantly earlier than forecasted.
The first noticeable impact of China’s economic reopening on the global economy is felt through its role as a manufacturing and trading powerhouse. The resurgence of China’s manufacturing sector has had ripple effects worldwide. Many countries heavily rely on Chinese goods, components, and raw materials for their industries. As China restarted production, it played a vital role in supporting global supply chains, easing the shortage of critical goods, and stabilising prices. For example, numerous multinational companies that source products or parts from China for their manufacturing processes could restart their operations as China reopened its economy. This benefited these companies and positively affected smaller suppliers and local businesses in their supply chain networks worldwide. The smooth functioning of supply chains allowed these businesses to bounce back and meet pent-up consumer demand, which had been restrained during the pandemic.
According to the Asia Macro Outlook, Q2 2023, Economist Intelligence Unit, China’s reopening heralds a consumption-led recovery, which is expected to benefit tourism-reliant Asian economies as Chinese visitors return. The revival of Chinese outbound tourism is expected to gradually pick up steam in the latter half of 2023 and 2024, significantly benefitting economies like Hong Kong and Thailand, which relied heavily on mainland Chinese visitors before the pandemic. On the contrary, the benefit to Asian commodity producers from China’s reopening could be muted due to a tepid investment environment. Although China is the largest market for Australia’s and Indonesia’s exported commodities, the modest upgrades in forecasts for these countries suggest limited impacts from China’s reopening.
Furthermore, the road to recovery comes with its fair share of challenges and risks. Short-term monetary and fiscal policies must stay tight to control inflation and stabilise public debt. The region also needs an integrated policy response to manage global shocks and handle issues like the impact of the USA’s monetary policy tightening and supply chain disruptions linked to geoeconomic fragmentation. Besides, there are vulnerabilities in supply chains that heavily depend on a single country. Owing to the supply chain disruptions experienced during the pandemic, governments and businesses alike began exploring options for reshoring or nearshoring critical industries back to their home countries or closer to their primary markets. While this move may increase production costs to some extent, it would reduce the risk of future disruptions and provide more control over supply chain operations. Consequently, China’s reopening prompted a reassessment of global supply chain strategies, with companies seeking a balance between efficiency and resilience.
China’s reopening also serves as an essential driver for commodity prices. As the nation increases its industrial activity, demand for raw materials surges, impacting commodity-exporting countries positively. This heightened demand leads to a rise in commodity prices worldwide, influencing inflation rates and potentially affecting central bank policies. One notable example of this impact is seen in the global metals market. China is the world’s largest consumer of metals, and as its industries ramped production, demand for metals such as iron ore, copper, and aluminium soared. Consequently, commodity-exporting countries like Australia, Brazil, and Chile experienced significant economic benefits as they saw increased exports and higher revenues from these commodities.
However, the surge in commodity prices can also pose challenges to some economies, particularly those heavily dependent on imports. For instance, many Asian countries rely on China for their raw material needs, and rising commodity prices may increase their production costs, potentially leading to inflationary pressures and affecting overall economic stability.
Furthermore, the revival of China’s domestic consumption has sparked optimism among businesses globally. As the world’s most populous country, rising Chinese consumer spending stimulates global sales for various products and services. International brands that rely on China as a key market have witnessed their revenues rebound as the economy resumes growth.
The rapidly expanding Chinese middle class and increasing disposable income present a tremendous opportunity for businesses worldwide. Companies across diverse sectors, including luxury goods, technology, automotive, and healthcare, are eyeing the Chinese market with heightened interest. For instance, European luxury brands have seen a significant uptick in sales in China, with consumers eager to spend on luxury items post-pandemic.
This newfound optimism has also led to an uptick in foreign investments targeting the Chinese market, signalling a renewed interest in expansion and opportunities. As the Chinese government continues implementing market-oriented reforms and opening more sectors to foreign investment, international companies are positioning themselves to gain access to this massive consumer base.
However, with the opening of its economy, China also faces challenges that could have ripple effects on the global stage. One pressing concern is the emergence of new COVID-19 variants, which can disrupt the country’s recovery progress. Should China face new outbreaks, it may be forced to reinstate strict containment measures, affecting global supply chains and consumer demand. In such a scenario, businesses that heavily rely on China as a source of goods or a market for their products would experience significant setbacks. Another crucial aspect to consider is the evolving geopolitical landscape. China’s economic reopening has implications for its relationships with trading partners worldwide. Ongoing trade tensions and political disputes can lead to shifts in trade patterns and impact the global economy. The United States and China, the world’s two largest economies, have been embroiled in a prolonged trade war that has disrupted global trade and economic growth. While there have been efforts to ease tensions and negotiate a resolution, the relationship between the two economic giants remains delicate. As China seeks to strengthen its economic position, it faces scrutiny and competition from other countries that seek to preserve its economic interests.
Additionally, China’s Belt and Road Initiative (BRI), aimed at enhancing connectivity and infrastructure across Asia, Europe, and Africa, has raised concerns among some countries regarding its geopolitical intentions and debt sustainability for participating nations. The BRI’s massive infrastructure projects in developing countries have the potential to boost economic growth and development, but they also come with financial risks and concerns over transparency and accountability.
Furthermore, as China accelerates its economic rebound, it faces the challenge of balancing its growth with environmental concerns. Their industrial activity contributes to global climate change concerns as one of the world’s largest carbon emitters. China has made notable strides in promoting clean energy and adopting renewable technologies to address these environmental challenges. The country has invested heavily in solar, wind, and hydropower projects, significantly contributing to the global renewable energy market. As China transitions towards a low-carbon economy, it presents opportunities for international collaboration in green technology development and renewable energy projects.
However, as forecasted by the IMF, in the long term, the region faces the prospect of slowing growth, long considered the primary engine of regional and global growth. Anticipated challenges include unfavourable demographics and a productivity slowdown. To navigate these hurdles, the region should prioritise structural reforms that enhance long-term growth, such as innovation and digitalisation, alongside an accelerated transition to green energy.
China’s decision to reopen its economy has far-reaching consequences for the global financial landscape and presents opportunities and challenges for Asian economies. As the first major economy to emerge from the depths of the pandemic, China’s resurgence impacts global supply chains, commodity prices, and international business confidence. However, uncertainties such as potential COVID-19 outbreaks, geopolitical tensions, and environmental challenges underscore the need for caution and adaptability. As a new chapter unfolds in the world of international business, understanding and analysing the implications of China’s economic reopening will be paramount for a successful recovery and sustainable growth on a global scale. Meanwhile, policymakers must navigate the tightrope of inflation and public debt while preparing for a future of potentially slower growth from China. Balancing these factors will be vital to maximising the potential benefits of China’s reopening for the broader Asian economy.
Author- Tasfia Tahiat Umme
