China's consumers are out of lockdown, and ready to spend. Photo / Getty Images
One of the world’s most powerful economic forces is expected to roar back into life this year, with huge implications for the New Zealand economy.
The Chinese consumer is out of lockdown, and ready to spend.
That has the world’s economists recalibrating their forecasts for global growth.
It’s a complicated equation as the return of the Chinese consumer comes at the same time as central banks in the West are lifting interest rates with a view to slowing growth and curbing inflation.
More Chinese demand means higher prices for key commodities like oil and gas. It could also drive up food prices - although that comes with an upside for New Zealand’s export-led economy.
The long, extended Covid lockdown saw Chinese consumer spending slump in 2021 and 2022.
In 2022, the giant nation experienced one of its slowest years of economic growth in decades, with GDP growth of just 3 per cent. While manufacturing held up reasonably well, retail sales slumped.
The sudden reopening last year and the accompanying wave of Covid infections also prompted fears of widespread economic disruption.
But it hasn’t panned out that way.
While tightly controlled official information means the true human cost may never be known - few in the West believe China’s official death toll is still less than 90,000 - the transition back to economic freedom has been smoother than expected.
Beijing-based Xu Sitao, Deloitte’s chief economist for China, says the decision to end the zero-Covid policy has resulted in the rapid return of confidence and much-improved investor sentiment.
“It had been a much smoother than expected reopening. So far I’d say it has almost been a non-event - so I anticipate the economy to grow at 5 per cent - my previous forecast was for the economy to grow at 4.5 per cent,” he says.
Xu sees upside risk to that outlook and others have forecast growth to go even higher.
In an overview of the economic outlook published this week, Bloomberg News noted that China’s economy rebounded sharply in February after the long New Year holiday.
Bloomberg Economics forecasts GDP to rise by 5.8 per cent in 2023, and the International Monetary Fund is forecasting growth at 5.2 per cent.
While other economies - including New Zealand - have seen big spending rebounds after periods of lockdown, China’s is arriving later and with more force than any other country.
“Lockdown was traumatic,” Xu says. “It would be wrong just to dismiss that. But Chinese people are pragmatic. They have moved on ... so Covid is like yesterday’s news.”
Chinese New Year saw the economy back at around 90 per cent of pre-pandemic levels, he says.
Everyone came back to the office after the New Year holidays, he says, something that was far from certain.
Travel, dining out, and other experience-related spending were all booming.
“The demand for overseas travel is exceedingly strong,” Xu says. In fact, the only thing holding it back was the administrative process. The visa application process had become “a huge bottleneck”, he says.
But as officials worked to get through the backlog, Xu expects New Zealand should see arrivals from China grow rapidly through the year.
Hong Kong-based bank HSBC also sees China’s economy rebounding, with strength from the second quarter of 2023. It expects consumer demand to spike as the phenomenon dubbed “revenge spending” kicks in.
In Auckland last month, HSBC Asia chief economist Fred Neumann said it was a similar process to what happened elsewhere in the world - just on a much larger scale.
He also forecasts GDP growth to hit 5 per cent.
“The last two and a half months have been tough in China from a healthcare perspective because we’ve seen many people of course contract Covid-19 and we’ve seen a super spike essentially in that country,” he says.
“The good news is that that wave is abating. Now we see an uptick, for example, in service demand. It suggests that people are venturing out again and have the confidence to go out to cinemas, to travel internally.
“And that suggests that over the course of this year, we’ll see consumer spending accelerate.”
While it is going to be similar to what we saw in places such as New Zealand or elsewhere around the world, there’s a second driving factor in China, says Neumann. That is an expected turnaround in the housing market.
The property market was hit hard during the Covid lockdown. Chinese National Bureau of Statistics figures show that new home sales fell 28.3 per cent in 2022.
In response, Beijing has loosened credit rules and implemented new policies with much more support being offered to developers and the real estate sector in general, Neumann says.
“So, apart from the recovery in consumer spending, we are also expecting a really strong recovery in the housing market, which will drive the Chinese economy as well.”
That provided conditions for reasonably strong growth, at or above 5 per cent on average, for this year.
That would represent “quite a stimulatory effect coming off the suppressed economic activity of the last year”, he says.
“When consumer spending accelerates, we know from past cycles, that also transmits into greater demand for imported food, partly because in China as incomes increase and consumer confidence improves, people tend to demand sort of higher-quality food or imported food items.”
That means that China’s consumer rebound will also transmit into greater demand for exports from New Zealand, he says.
Of course, a surge in Chinese consumption that drives up commodity prices is also likely to be inflationary.
That has worried economists around the world, with expectations that we could be in for a spike in oil prices and other products.
But Neumann doesn’t think New Zealand should worry too much about that. “We can’t have it all,” he says. “There’s a natural offset here and generally, we’d probably put New Zealand into the column of an economy that benefits from China’s rebound, rather than being hurt by it, because of that commodity export angle.”
Global food markets were already experiencing tight supply and commodity prices were already elevated, which was good for New Zealand in the long term.
“China kind of adds a cherry on top, if you will, when it comes to rising food prices, and export prices for New Zealand,” Neumann says.
The inflation issue is complex, says Deloitte’s Xu.
The primary question is the US economy and interest rate, which is still likely to be the biggest influence on global inflation this year, he says.
It is still too early to say how that plays out or how high US rates will go, because the US labour market is so strong, he says.
But there is an issue around China’s reopening and its global impact.
“To what extent will it push up crude oil prices, is again not that straightforward. But in general, I would assume that certain commodities would do well, for example, iron ore, coking coal and copper.”
Soft commodities - like dairy - tend to be driven by longer cycles, says Xu.
But from a New Zealand perspective, dairy and other agricultural products would certainly be in demand and all of this would put upward pressure on inflation.
But we should also look at China’s impact on the supply chain, says Xu. The return to normal service might help put downward pressure on some prices.
“Last year a number of economies that were relying on exports to China were not doing particularly well, due to China drag,” Xu says.
“China’s reopening should turn the drag into a push this year. So the impact on inflation might be negative because of the improved supply chain.”
Neumann says the strength of Chinese manufacturing and the way it has functioned through the lockdowns means there should be limited change - in either direction.
“China has been remarkable in that it maintained a fairly elevated level of production right through the pandemic and even some of the lockdowns of last year.
“The reopening of the Chinese economy itself will not lead to a dramatic change in manufacturing prices, both on the downside and on the upside, because supply chains worked reasonably well.”
So we might not see much of a change in inflation’s trajectory on the manufacturing goods side, he says.
“That probably just keeps ticking along and that really is driven more by global demand for electronics, for example, global demand for all types of goods that China exports rather than China’s own domestic Covid-19 restrictions or lack thereof.”
China’s inflationary impulse would transmit itself primarily through commodities on the manufacturing goods side.
“It’s going to be a more manageable process,” Neumann says.
Locally, ASB senior economist Kim Mundy recently looked at the impact of China’s reopening and concluded that we shouldn’t expect it to be “a silver bullet”.
China was the biggest buyer of New Zealand’s goods exports and the third-largest buyer of our services exports, she says.
At the end of 2021, New Zealand’s annual exports to China totalled $21.45 billion.
“Therefore, it stands to reason that a rebound in China’s economic growth over 2023 will benefit our economy.”
However, the implications are more nuanced than they might initially appear, she says.
For example, there is a risk that China’s demand for dairy products might lag its economic recovery and not result in a significant change, she says.
“Given strong production growth and disrupted consumption patterns over 2022, China’s milk powder inventories are at historic highs.
“Although China is likely to buy some product, given the relatively low price, high inventories are likely to limit how much milk powder China buys. As a result, demand for additional milk powder is unlikely to increase in line with a rebound in Chinese consumption.”
The degree to which Chinese demand for New Zealand goods increases would also depend on the composition of economic growth.
A consumption-driven rebound would bode well for demand for New Zealand’s food-oriented commodity exports, Mundy says.
However, New Zealand’s export mix doesn’t stand to benefit as strongly if growth is investment-led.
Bloomberg has reported that Chinese officials are considering a record-high quota for issues of local government special bonds in 2023.
Special bonds are the way in which Chinese local authorities finance infrastructure investments.
“As such, Australia could see the benefits sooner than New Zealand,” Mundy says.
However, the end of China’s zero-Covid policy is “undoubtedly a positive development for New Zealand’s economy,” she says.
“Key commodity and tourism exports will be higher than otherwise.”
However, widespread weakness in New Zealand’s other major export markets would temper the positive influence of China’s reopening.
Ultimately, China’s economic rebound in 2023 can alleviate New Zealand’s woes at the margin, but it can’t change our fortunes all by itself.
“As a result, we retain our view that the New Zealand economy will fall into recession this year.”
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