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Economists in Davos warn China is reopening “good news” for growth – but it could be inflationary

by SuperiorInvest

The reopening of China was one of the most discussed topics at the World Economic Forum in Davos.

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DAVOS, Switzerland — The reopening of China’s economy could boost global growth, but business leaders and policymakers at the World Economic Forum this week are also a bit concerned about its potential inflationary impact.

China’s decision to welcome back tourists and make it easier for those in the country to travel abroad was one of the most discussed topics at the Davos meeting in the Swiss Alps.

Overall, it is seen as one of the most important economic events of 2023, and the business community is visibly excited about striking new deals with the world’s second largest economy.

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

“[If] China’s demand for other goods will start to increase, if that puts more pressure on commodity prices, for example natural gas, a big problem in Europe, if China’s demand for natural gas increases because factories, their households demand more electricity, then it will put pressure on Europe, because they compete for natural gas [in] the same markets for liquefied natural gas,” Raghuram Rajan, former governor of the Reserve Bank of India, told CNBC.

“So China is opening up [is] good news overall, but potentially an inflationary impact – there may be some,” he said.

The International Energy Agency has warned that European companies may face higher costs when buying natural gas this year as there will be more competition for the commodity. Inflation has been one of the biggest challenges for European citizens over the past year, mostly caused by higher energy bills.

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

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

Some economists have warned that if that proves to be the case, the US central bank may have to raise rates further. “In our view … a stronger China increases the chances of a stubbornly hawkish Fed,” Tavis McCourt, institutional equity strategist at Raymond James, said in his 2023 outlook.

“With China, we need more of everything – if that drives enough demand to get commodity prices back closer to where they were last spring, then the progress we’ve seen on inflation will be much weaker. position,” he said.

The second half of the year will be better as China surprises on the upside: Standard Chartered

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

Standard Chartered Chairman José Viñals told CNBC this week in Davos that China will have a very good year and surprise on the upside.

“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 inherent impact on global growth, telling CNBC in Davos that he is “absolutely convinced” China’s reopening will help the global economy.

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

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