China's rebound will not be universal cure for growth malaise

Just when growth in much of the world is beginning to buckle, weighed down by soaring interest rates and plunging trade, China's economy is revving up to save the day.

It is an attractive notion but in reality, the impact of China's impending growth rebound is going to be uneven at best -- supporting growth for some economies, but complicating recovery elsewhere.

After a challenging year, China is poised for a powerful rebound. As elsewhere, the dismantling of virus control restrictions and easing infection rates are bound to unleash pent-up household demand. Travel, hospitality and other services are set to drive recovery in the coming months and quarters.

A second engine is also ready to fire up: Housing construction in China will receive a jolt as financial reins on developers are loosened.

Few would dispute that this will drive demand for much of the year, resuscitating Chinese growth that fell in 2022 to one of the lowest rates seen in decades. A powerful cyclical recovery is in store, even if longer-term structural challenges, including adverse demographics and elevated debt, remain.

What is more debatable is the impact this will have on neighboring economies and those further afield.

The turnaround in growth in the world's second-largest economy is bound to be a positive, filling the void in demand left by sputtering activity elsewhere. But despite all the headlines, the truth is that China's recovery will, at best, have an uneven impact beyond its borders.

Start with the nature of China's recovery. A reviving services sector offers good news for local businesses and jobseekers, especially the young. But the lift to economic activity will be largely domestic, with households splurging on visits to restaurants, cinemas, amusement parks and hotels.

At the same time, like consumers elsewhere, they will cut back on items that helped them through the dark days of the pandemic, from electronics and cars to toys and furniture.

China's rebound will thus have a far shallower impact on, say, manufacturers in Japan, Vietnam or Germany than a broader recovery -- that would spur spending by households on goods and by local companies on investment -- would entail.

While Thai farmers may still export more dragon fruit and durian to China, and more Chinese might buy French-made handbags and South Korean lotions, this will fall far short of being enough to lift entire economies out of their growth slumps.

Better news is that overseas travel by Chinese tourists will help strengthen demand elsewhere. In 2019, Chinese took some 155 million trips abroad, filling hotels and airline lounges, not to mention beaches and shopping malls, across the region and beyond. Even a partial return this year would jolt back to life an industry that has suffered disproportionately in recent years.

But even so, the economic impact will be uneven.

Thailand and Hong Kong stand to benefit, with spending by Chinese travelers likely to rise to several percentage points of gross domestic product this year. Malaysia and Singapore will also receive sizable boosts.

By contrast, as welcome as Chinese travelers will be for the local tourism sectors of Japan and South Korea, their impact will be measured in a few tenths of a percentage point of GDP, hardly enough to offset the impact of slowing exports. Further afield, whether in France, the U.S., or Canada, a surge in Chinese visitors will hardly be enough to push the needle on GDP growth.

Then there is the commodity channel. As the world's largest consumer of many raw materials, accelerating growth in China will inevitably bolster prices -- just when the world is hoping for an inflation reprieve.

So far, the cost of most commodities has stayed well below last year's geopolitical-driven highs. But even if this year does not see a return to those lofty levels, raw materials will remain dear.

That will be welcome news for exporters like Indonesia and Australia and for economies in Africa and Latin America that thrive when shipment values for iron ore, palm oil and copper soar.

However, countries that largely import commodities, including energy, will see last year's price pinch persist, sapping purchasing power further while keeping central bankers on the defensive. Already, the world is grappling with sticky price pressures, and the China-driven lift to commodity prices may well necessitate tight monetary policy for much longer than hoped.

Take India. Its economy has come through the pandemic in remarkably resilient shape. However, rising interest rates and a reliance on commodity imports are now slowing growth. True, it is still ticking along at a remarkable pace, but it is decelerating nonetheless.

Here, the rebound in China's growth will prove more challenging: Import costs for pricey raw materials will remain elevated, and neither the number of Chinese tourists nor the volume of goods being exported to China will suffice to fully offset the drag.

China's recovery thus will not be the cure for all that ails the world's economies. Though it is the world's second-largest economy, China absorbs only two-thirds as much of Asia's exports as the U.S. or Europe. For all its size, China's rebound cannot fully offset the drag from faltering growth elsewhere. A soothing balm, yes; a magic pill, no.

Source: Nikkei Asia