China’s reopening ‘good news’ for growth – but could be inflationary, economists warn in Davos

DAVOS, Switzerland — China’s economic reopening may boost global growth, but business leaders and policymakers at the World Economic Forum this week are also a bit anxious about the potential inflationary impact.

China̵[ads1]7;s decision to welcome back tourists as well as to make it easier for those in the country to travel abroad has been one of the most discussed topics at the Davos gathering in the Swiss Alps.

Overall, this is seen as one of the most important economic events of 2023 and the business world is noticeably excited to enter into new agreements with the world’s second largest economy.

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

“[If] Chinese demand for other goods is starting to pick up, if that creates more pressure on commodity prices, for example natural gas, a big problem in Europe, if Chinese demand for natural gas increases, because their factories, their households require more electricity, then it is possible to put pressure on Europe because natural gas, they compete [in] the same liquefied natural gas markets,” Raghuram Rajan, former governor of the Reserve Bank of India, told CNBC.

“Then China’s opening [is] good news overall, but potentially the inflationary effect – there could be some,” he said.

The International Energy Agency has warned that European companies could face higher costs when looking to buy natural gas this year, as there will be more competition for the commodity. Inflation has been one of the biggest challenges facing European citizens over the past year, mainly driven by higher energy bills.

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

Felix Sutter, president of the Swiss-Chinese Chamber of Commerce said in the same panel that “Chinese energy needs and commodity needs will compete with the European needs, the global needs, so I see a relaxation of inflation right now, [but] we will see more pressure on inflation in the 3rd quarter.”

Some economists have warned that if this turns out to be the case, the US Federal Reserve may have to continue raising interest 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 up closer to where they were last spring, then that puts the progress we’ve seen on inflation into a much weaker position,” he said.

China recently reported a 3% growth rate for 2022, its second-lowest growth rate since 1976. Nevertheless, near-term data has raised expectations for a better-than-expected recovery with December retail sales and industrial production above consensus.

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

“The Chinese economy is going to be on fire, and it’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 natural impact on global growth, telling CNBC in Davos that he was “absolutely convinced” that China’s reopening will help the global economy.

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