China’s reopening could boost global economy, but also raise challenges

China’s rapid reopening after three years of rigid coronavirus controls may provide a much-needed boost to global economic growth, but it may also fuel inflation, just as prices show curfew signs.

The renaissance of the second largest economy in the world – the largest consumer of commodities – threatens to raise global fuel prices, industrial targets and food this year.

Since the beginning of January, the prices of copper, aluminum and zinc have had their best start of the year in 11 years, rising by an average of 13%, analysts from Deutsche Bank said. CNN, quoting data from the London Metal Exchange. The tin, widely used to make electronics, rose 30%, its biggest increase in 32 years.

“There is a huge amount of pent-up demand that we expect to return to the markets, specifically after the Ano Novo Chinês”, falou à CNN Nicky Shiels, Head of Metal Strategy at MKS Pamp Precious Metal Trading. “The markets will recover in anticipation of this”.

It’s not just the commodities that are raising China’s recovery hopes. The shares of the MSCI China Index will rise 14% since the start of trading this year. The Nasdaq Golden Dragon China index – which tracks Chinese companies listed in the United States – rose 19% in the same period.

There are signs that the economy is recovering. Bernard Arnault, executive-chef of the LVMH luxury jewelry group, told analysts at the quinta-feira that the recovery of two visitors to the shops in Macau, where Chinese tourists can now travel, was “spectacular”.

Since last month, the Chinese government has been rapidly dismantling its rigid Covid-zero policy, followed by a wave of popular protests against the restrictions. The speed of reopening, as well as indications that infections may not have reached or peaked, are surprising, analysts say to CNN.

More metals such as copper and aluminum “are not a very significant part of the general basket of inflation,” says Daniel Major, a metals and mining analyst at UBS, to CNN.

However, if global food and energy prices start to rise again, this may be reflected in higher consumer prices.

The reopening of China may increase demand for agricultural products, as the world still faces the worst food crisis in modern history. Future prices for wheat, a staple food, are still 58% higher than they were in mid-2020, when prices began to rise steadily.

Chinese imports of soybeans, used mainly for food or livestock, will increase 18% in December compared to the previous year, possibly because buyers anticipate a recovery in demand in restaurants, said Bill Weatherburn, commodities economist at Capital Economics, in a previous note. this month.

Increase in demand for energy

The reopening of China should also increase demand for oil. The International Energy Agency reported in a report last week that global demand could reach an all-time high of 101.7 million neighborhoods per day this year, with China responding for the target increase.

Caroline Bain, Chief Commodity Economist at Capital Economics, falou à CNN that he expects oil prices to rise further this year, as travel and consumption increase.

The research group now expects the price of a barrel of Brent oil, the global benchmark for oil, to rise to US$95 a barrel by the end of the year, above the previous estimate of US$85. Gasoline prices in the United States It will go up 40 cents per gallon in one month, partly due to the increase in crude oil prices since the beginning of December.

The increase in two oil prices can help to increase global inflation – or at least keep it high – just when the two increases in consumer prices show signs of moderation, countering the hopes of companies and investors that the world’s central banks can I will soon stop increasing the juros taxes.

Markets expect the US Federal Reserve to raise or pay two loans by 25 basis points at its meeting next week, a more modest increase than the 50 basis point approved last month.

China’s appetite for energy may be especially difficult for Europe, as the continent tries to replenish its natural gas stocks before next winter with just a small fraction of the Russian imports on which it has depended.

Benchmark prices for natural gas in Europe have fallen 84% since reaching the all-time record of 343 euros (US$373) per megawatt/hour in August. This trend could begin to reverse if China competes with Europe for a fixed number of LNG cargoes from the United States and Qatar, the biggest suppliers of the block.

“The amount of LNG that [a China] The purchase of the rest of the world will be greater than what we have seen”, said Christine Lagarde, president of the European Central Bank, on a panel at the World Economic Forum last week.

“There will be more inflationary pressure as a result of the additional demand for commodities and energy in particular,” she says, adding that the ECB plans to “maintain the course” of increasing tax rates to help tame inflation.

Am I exaggerating?

Expectations of large price jumps may generally be exaggerated, but not so much.

The demand per year will not increase until the second half of the year, second to Bain, since the activity in the real estate sector of China, which is a large consumer of metal, is still depressed.

“I am not convinced that the demand from China will increase the prices [do gás e da eletricidade] as much as people may think so”, says Michael Hewsom, chief market analyst at CMC Markets, à CNN.

Hewsom added that China and India could import Russian natural gas at a discount, freeing up cargoes from other suppliers, such as the United States, to go to Europe.

An increase in Chinese demand for energy, metals and food should also “be partially offset by the weak demand for Chinese exports of manufactured products in developed economies”, highlights Capital Economics in a note at the beginning of this month.

The recovery of China will probably be boosted by “lazer [e] domestic consumption”, falou Major do UBS.

This means that the prices of year and iron ore – commonly used in heavy industry – are less likely to reap big profits compared to copper and aluminum, found in a variety of household products.

Ben May, director of global macro research at Oxford Economics, said in a note at the sixth fair that any rise in global inflation after China’s renaissance may be “less than many people fear.”

This is happening in part because China is reopening on its own, in addition to the United States and Europe, which will reduce their pandemic restrictions at the same time, creating fierce competition for products.