Markets bullish as China eases Covid rules, but experts warn of danger ahead

Global stocks and the price of some key commodities rose on hopes that easing China’s strict zero-Covid measures would help lower inflation, although some experts have warned the country will not was not ready to live with the disease.

The Chinese government on Wednesday announced a major shift towards living with the virus. People with Covid-19 who have mild or no symptoms can self-quarantine at home, while officials have been instructed to stop initiating temporary lockdowns. The tests will no longer be compulsory for “interregional migrants”.

China’s economic growth will continue to accelerate with the implementation of recently announced anti-Covid adjustment measures, Premier Li Keqiang was quoted by state media as saying on Thursday.

U.S.-listed shares of Chinese companies rose, while Hong Kong’s Hang Seng stock index gained more than 3% on Thursday. The price of copper soared on the promise of increased demand from China, its biggest consumer. Analysts hope the easing of Covid measures will help restore global supply chains and, in turn, curb inflation.

“The realization that China is going to be back online and producing products will help bring inflation down and that’s a good thing. If inflation can come down, the Fed can pull out and take a break” , said Tim Ghriskey, chief investment strategist at Inverness Counsel in New York, referring to the recent series of interest rate hikes by the US Federal Reserve.

In a sign that global supply bottlenecks have already started to ease, the cost of transportation has fallen dramatically in recent months. In January, the cost of sending a single container from China to the United States was $20,000. In December, that cost was about $2,000.

Improved global supply chains have been aided by a reduction in global demand. US spending on manufactured goods has fallen over the past three quarters, according to the US Commerce Department, likely due to higher borrowing rates initiated by the US Federal Reserve.

US inflation fell from a peak of 9.1% in June to 7.7% in October, but remained well above the Fed’s 2% target.

As supply bottlenecks improve, the United States may be able to avoid a recession, U.S. Treasury Secretary Janet Yellen said Thursday.

The global reduction in demand for goods, coupled with China’s strict Covid policies, had a severe effect on Chinese manufacturing in November.

The value of the country’s exports fell 8.7% compared to the same period last year. Experts said restrictions, such as those that halted work at the world’s biggest iPhone factory in Zhengzhou last month, were responsible for much of the drop in Chinese exports.

China faces a “very complex problem” in adjusting its Covid policies, which have slowed growth, Yellen said. A positive change in the Covid situation in China could lead to a “recovery” of growth, she added.

The lifting of some Covid restrictions has revived demand for travel and some other services in China, but economists have warned that the promise of an economic recovery next year is uncertain, the country’s fragile health system country and low vaccination rates leaving it ill-prepared for a large wave of infections, which could trigger labor shortages and make consumers even more nervous.

“Compared to other developed countries, medical resources in China are somewhat insufficient,” said Nie Wen, a Shanghai-based economist at Hwabao Trust, which cut its China growth forecast for the first quarter of 2023 to 3. .5-4%, compared to 5% previously.

He cited a particular risk of Covid outbreaks when China celebrates the Lunar New Year holiday in January, a popular time to travel among the country’s 1.4 billion people.

Economists and analysts were confident that overall the reopening was more positive for growth.

“Lockdowns mean people can’t travel, can’t consume, can’t work,” said Rich Nuzum, chief global investment strategist at Mercer.

“It’s not human to put it that way, but the impact of the shutdowns on GDP is far greater than the impact on GDP of letting the virus spread.”

Some experts have warned that the reopening could lead to a spike in inflation, which could hit the global economy as well as China itself.

“The potential reopening could lead to inflationary challenges in China,” said Bruce Pang, chief economist at Jones Lang Lasalle.

As cases increase, “an increase in demand, in particular the acceleration of household consumption, and a short-term disruption of labor supply, production and supply chains supply,” could boost inflation, Pang said.

Reuters and Associated Press contributed to this report

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