China’s reopening isn’t all good news. Inflation could get a second wind

China’s swift reopening after nearly three years of strict coronavirus controls could provide a much-needed boost to global economic growth, but may also stoke inflation just as it has shown signs of falling back.

The revival of the world’s second largest economy — and its biggest consumer of commodities — threatens to push up global prices for fuel, industrial metals and food this year.

Since the beginning of January, prices for copper, aluminum and zinc have all had their best start to a year in 11 years, rallying by an average of 13%, analysts at Deutsche Bank told CNN, citing data from the London Metal Exchange. Tin, which is largely used to make electronics, has soared 30%, its biggest rise in 32 years.

“There’s a tremendous amount of pent-up demand that we do expect to come back to markets, specifically after Chinese New Year,” Nicky Shiels, head of metals strategy at precious metals trader MKS Pamp, told CNN. “Markets have rallied in anticipation of that,” she said.

It’s not just commodities that are rising on hopes for China’s recovery. Stocks in MSCI’s China index have risen 14% since the start of trading this year. Nasdaq’s Golden Dragon China index — which tracks Chinese companies listed in the United States — have climbed 19% over the same period.

There already signs that the economy is getting back on its feet. Bernard Arnault, chief executive of luxury retail group LVMH, (LVMHF) told analysts on Thursday that the rebound in visitors to stores in Macao, where Chinese tourists are now allowed to travel, had been “spectacular.”

Since last month, the Chinese government has been rapidly dismantling its strict zero-Covid policy following a wave of popular protests over the restrictions. The speed of the reopening, as well as indications that infections may have already peaked, has been surprising, analysts told CNN.

But metals like copper and aluminum are “not a very meaningful part of the overall inflation basket,” Daniel Major, metals and mining analyst at UBS, told CNN.

Yet, if global food and energy prices start rising again, that could feed through into higher consumer prices.

China’s reopening could bump up demand for agricultural goods, while the world is still in the grips of the worst food crisis in modern history. Futures prices for wheat, a dietary staple, are still 58% higher than they were in mid-2020, when prices started to rise steadily.

Chinese imports of soybeans, which its uses mostly to feed livestock, soared by 18% in December from the year before, possibly because buyers anticipated a rebound in demand at restaurants, Bill Weatherburn, a commodities economist at Capital Economics, said in a note earlier this month.

A surge in energy demand

China’s reopening is also expected to drive up demand for oil. The International Energy Agency said in a report last week that global demand could surge to an all-time high of 101.7 million barrels per day this year, with China accounting for almost half of that increase.

Caroline Bain, chief commodities economist at Capital Economics, told CNN that she expects oil prices to rise later this year as travel and consumption pick up.

The research group now expects the price of a barrel of Brent crude, the global oil benchmark, to rise to $95 a barrel by the end of the year, up from its previous estimate of $85. US gas prices have already climbed 40 cents a gallon in a month, partly because of the rise in crude prices since early December.

Rising oil prices could help push up global inflation — or at least keep it elevated — just when consumer price rises have shown signs of moderating, tempering hopes by businesses and investors that the world’s central banks may soon be done raising interest rates.

Markets expect the US Federal Reserve to hike the cost of borrowing by 25 basis points at its meeting next week, a more modest increase than the 50 basis point raise it approved last month.

People shopping in Guilin, Guangxi Province, China, on January 25.

China’s appetite for energy could prove especially difficult for Europe as the continent tries to refill its natural gas stores ahead of next winter with just a tiny fraction of the Russian imports it once relied on.

Europe’s benchmark natural gas prices have tumbled 84% since hitting their all-time high of €343 ($373) per megawatt hours in August. That trend could start to reverse if China competes with Europe for a fixed number of LNG cargoes from the United States and Qatar, the bloc’s biggest suppliers.

“The amount of LNG that [China] will be buying from the rest of the world will be higher than we have seen,” Christine Lagarde, president of the European Central Bank, told a panel at the World Economic Forum last week.

“There will be more inflationary pressure coming out of that added demand in commodities, and energy in particular,” she said, adding that the ECB plans to “stay the course” in raising interest rates to help tame inflation.

Too much hype?

Expectations of huge price jumps across the board may be overblown, however.

Demand for steel won’t pick up until the latter half of the year, according to Bain, as activity in China’s struggling property sector, which is a big consumer of the metal, is still depressed.

“I’m not convinced that demand out of China is going to drive prices [of gas and electricity] up by as much as people perhaps think they will,” Michael Hewsom, chief market analyst at CMC Markets, told CNN.

Hewsom added that China and India could import Russian natural gas at a discount, freeing up cargoes from other suppliers such as the United States to go to Europe.

Aerial photo taken on Jan 23, 2023 shows a large number of congested vehicles on an expressway in Huai 'an city, East China's Jiangsu province. It was the second day of the Chinese New Year, when people began to travel to visit their families and highways at all levels saw peak travel.

A surge in Chinese demand for energy, metals and food is also likely “to be partially offset by weak demand for Chinese manufactured goods exports in developed economies,” Capital Economics said in a note earlier this month.

China’s rebound is likely to be driven by “leisure [and] domestic consumption,” UBS’s Major said.

That means prices for steel and iron ore — metals commonly used in heavy industry — are less likely to see big gains compared to copper and aluminum, which are found in a range of domestic goods.

Ben May, director of global macro research at Oxford Economics, said in a Friday note that any rise in global inflation on the back of China’s revival may be “smaller than many people fear.”

That’s partly because China is reopening on its own, he added, unlike the United States and Europe, which unwound their pandemic restrictions at roughly the same time, creating heightened competition for goods.

— Michelle Toh, Philip Wang and Julia Horowitz contributed reporting.