Asia Economics Analyst
The timing, path, and impact of China reopening
Stringent Covid restrictions amid the Omicron variant have led to frequent locallockdowns and weighed on China’s economic activity this year.
Some market participants expect a material easing in Covid policy afterOctober’s 20th Party Congress. But a review of key health and political considerations mentioned by policymakers suggests to us that a reopening will probably be delayed until at least Q2 2023, and implemented gradually to the extent possible.
We estimate the current level of restrictions is suppressing the level of GDP in China by 4-5%. Much of this could be recovered on a full reopening, though the experience of other economies suggests some permanent output loss as well.
With our assumption of a Q2 reopening and an ensuing Covid wave, the biggest growth boost would likely occur from mid-2023 to mid-2024.
Reopening would weaken the current account, boost inflationary pressures,encourage at least mild normalization of macro policy, and likely lead to a ‘risk on’ response in Chinese financial markets and a modest strengthening in the CNY. It would boost oil demand and also be positive for regional currencies and equities,in all likelihood