Global events, including the Covid-19 pandemic, the war in Ukraine and one temporary closing of the Suez Canal, have resulted in a financial year foreseen by many as the start of a recession. Financial markets in 2022 were falling, and according to CNBC, the S&P 500 Value Index depreciated by 19.4% and the tech-heavy Nasdaq by -33.1%. Wall Street has hoped that the holiday spirit will result in increased consumer spending and investor optimism, resulting in a slight surge in stock prices. This has never happened, yet, Wall Street must not lose all its hope because China is about to reopen its economy.
China, one of the most populous countries, is changing its strict zero-Covid policies that restricted consumption, travel and trade. Beijing has decided to end mandatory quarantine for international travelers, which is seen as a move towards prioritizing future economic growth and the return to everyday life.
Many business people believe that China reopening its economy might result in an increase in global consumption and lower the costs of production. This can prevent the upcoming recession and surge western stock prices. After China reopened international travel, Fortune highlighted that the CSI 300, which tracks the 300 most extensive stocks in the Shanghai and Shenzhen Stock Exchanges, rose by 1.15%. Travel-related stocks across Asia also rapidly appreciated. These include Taiwan's Phoenix Tours International, Korea's Lotte Tour Development, and Japan Airlines, which appreciated by 10%, 7.7%, and 2.2%, respectively. This is a good sign that further easing measures may result in greater economic growth that will reach the US, UK, and EU regions.
However, China's new policies may also prove harmful to the major economies. Major monetary organizations, including the American Federal Reserve, The Bank of England, and the European Central Bank, have all increased their interest rates to prevent further increases in the price index. In the long run, If, as a result of China's opening, in 2023, central banks, and specifically the Fed, will be forced to continue increasing their interest rates, more than investors are expecting, it can result in American, British, and European stocks decreasing in value, and Chinese stocks appreciating.
European stakeholders will benefit from this policy change. Firstly, many luxury goods retailers are based in Europe, specifically in clothing, watch-making and the automotive industry. As Chinese customers greatly influence these fields, China's reopening may result in a spike increase in the stock values of companies in these fields. This can be supported by the almost 4% increase in the Swiss Richemont company's stock.
The increase in the demand for various goods due to the reopening of the Chinese economy should result in an increase in the price of goods. While energy prices have been relatively stabilized due to a moderate winter, there is a shortage in the energy supply. As such, the new Chinese demand will likely increase the price of energy and oil. In the long run, this may result in greater inflation, leading central banks to increase interest rates further, and consequently, resulting in a recession. Recently, Ofgem has announced that the energy price cap is set to rise to an annual level of £4,279 in January 2023. If the winter is tougher, energy prices are expected to rise even further, and with the aforementioned, this can result in an even more brutal recession.
To mitigate these effects, developed economies must keep energy prices at bay, by investing into renewable forms of energy, thus solving the energy crisis. For example, a government can incentivise citizens to install solar panels, increasing the supply of energy and thus preventing energy prices from increasing. Another solution is to invest in green sources of energy, increasing the supply of energy and decreasing the rise in energy prices, and thus inflation.
In the short run, some significant fields are already experiencing a surge in their stock prices due to China’s new policy. Reuters reports that the SXPP index increased by around 2.2% as base metal prices are higher due to the expectation that there will be a demand recovery from China. According to Reuters, China-exposed financials, including the insurer Prudential, have risen by 1.4%. In China, there has been an increase across equities, with Hong Kong’s Hang Seng index increasing by 10% in the last month. The S&P 500 has also increased by 4% in the previous week, which may be attributed to China’s policy as well.
China's decision to reopen its economy by loosening its zero-Covid policy can be a sign that the days where governments sacrificed the economy to fight covid are over. The reopening of the Chinese economy might significantly contribute to economic growth and prevent an upcoming recession. Alternatively, it may also be the case that this opening will lead to more covid cases or a sudden increase in prices, forcing central banks to increase interest rates, deepening the upcoming recession.
Nevertheless, from the way markets are reacting to China reopening its economy, it is likely to assume that China's new policies might help the west escape an upcoming recession. Businesses and investors should be on alert, and study this topic so that they can make well-informed decisions.