After nearly three years, China ended its zero-Covid policy, opening sea and land crossings with Hong Kong.
As reported by Reuters, China braced for a "new phase" in its battle against Covid-19 on January 9 after Beijing dropped pandemic border controls in the latest easing of curbs that have let the virus loose on its 1.4 billion population.
This development boosted market sentiment since China is the world's second-largest economy and is known as the world's growth engine.
Chinese manufacturing activity witnessed a contraction for a fifth straight month in December, amid rising Covid-19 cases in the country. This is expected to change now.
Why is China important to the world?
The Asian country is one of the most important pillars of the global economy. It is the second largest and one of the fastest growing economies. China's economy is said to be of a size of around $18 trillion in 2022.
China is important to the world because it is a hub of manufacturing due to cheap labour costs, a strong business ecosystem and low regulatory hindrances.
According to the Director of the World Bank’s Prospects Group, Ayhan Kose, China is critical among emerging market developing economies.
"There is a major Covid outbreak in China that will have in the near term negative effects. These negative effects will affect the rest of the world. If you take out China, emerging market developing economies growth will slow from 3.5 percent last year to 2.7 percent this year," said Kose.
What does China's reopening mean for the world?
The reopening of China will give a boost to consumer demand and as a result manufacturing of goods may trigger a rebound in commodity prices.
As Mint reported earlier, Morgan Stanley expects some upside to inflation in the rest of Asia as China reopened its economy after nearly three years.
The recovery in China will mean higher demand for oil. China's oil demand is currently one million barrels per day, below 2020-21 levels, held back by lockdowns and other restrictions. After January-March of 2023, Morgan Stanley expects the country's oil demand to start recovering, which it said would impart some upward pressure on crude oil prices, the Mint report said.
"Reopening of China would be positive for global economic growth as it would revive demand and boost commodity prices. Metal demand and pricing which had taken a hit would see a rebound globally," said Sneha Poddar, AVP Research, Broking and Distribution, Motilal Oswal Financial Services.
The likely impact on the Indian market
The China factor is going to push oil prices higher which is a negative for the Indian economy and the market.
"Reopening of china completely could lead to a significant recovery in oil prices which could impact the external economic parameters of India. One should remain alerted on oil prices and if they spurt substantially beyond $120 a barrel, then the outlook for Indian equities would be quite pessimistic in 2023," said G Chokkalingam, Founder & Head of Research at Equinomics Research & Advisory.
Besides, after the opening of the economy, there are risks that the inflow of foreign funds will get diverted to China.
However, analysts believe India's strong economic outlook may cap the outflow of foreign funds.
"India’s fast GDP growth and even IMF calling India as a bright spot at present would ensure that India does compete seriously on fund flows with China," said Chokkalingam.
Deepak Jasani, Head of Retail Research at HDFC Securities, believes the reopening of China's economy may not be a smooth affair and it could take the first quarter of this year.
But the reopening will have multiple effects on India.
"One, if the Covid infection rates in China do not shoot up, the opening up could result in easing of supply bottlenecks and consequent fall in inflation globally (although demand rise from China could see commodity prices rising for some time). This could also mean that the exports from India to China (of engineering goods, petroleum products, marine products, metals, organic chemicals, cotton, tea, non-basmati rice etc) that had slowed down could see some resurrection," said Jasani.
On the other hand, Jasani said, “Some funds could get reallocated to China.” This process could, however, be gradual and depend on the progress of the reopening and of the economic growth in China.
Jasani said as long as India Inc. delivers reasonable earnings growth, foreigners won’t be able to ignore the country where domestic investors have become more impactful in determining the overall trend of the markets.
Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.
