Impact of China's Reopening on Global Economy: David Dollar / Senior Fellow, Brookings Institution

Hello and welcome to DEEPER LOOK from New York.

I'm Del Irani, it's great to have your company.

After three years of a strict zero-COVID policy, China has reopened its borders to the world.

The decision comes after mass street protests took place in China, late last year.

But while the reopening of the world's second-largest economy is expected to boost global economic growth, it's also likely to bring inflationary pressures,

adding to already record high prices of goods and services.

So what impact is China's reopening having on their economy?

And what is the knock-on effect to the Asian and global economy?

Joining me now to talk more about this is David Dollar, a leading expert on China's economy and US-China economic relations.

He's a senior fellow at the Brookings Institution.

From 2009 to 2013 he was the US Treasury's economic and financial emissary to China.

And he joins me now. Welcome to the program, David Dollar.

Great to have you with us.

I'm so happy to be here. Great to talk to you, Del.

So, David, what impact has China's reopening so far had on its own economy, but also the global economy?

What do we see?

Well, China had a very tough economic year in 2022, also just a lot of human tragedy.

You know, spread of the COVID disease and continuing lockdowns in their so-called zero tolerance policy.

So, it was a remarkable year in the sense that for the first time in decades, China grew less rapidly than the world economy.

So that was a very tough year for them.

And the people were demonstrating their unhappiness at the end of 2022.

And then, quite to my surprise, the government actually responded, almost without a plan.

They really eliminated the zero tolerance measures without really much of a plan.

So, it's a little bit chaotic, some spread of the disease.

I talked to friends and colleagues in Beijing.

And they'll say things like, "Well, half the office has COVID."

So, I think it's going to be an interesting transition and a difficult first couple months of 2023.

But then they should get through this.

And while the rest of the world is slowing down, they should be speeding up during 2023.

The Chinese government essentially responded to the mass street protests that we saw late last year, which, you know, is pretty unusual.

It's extremely unusual for Chinese citizens to go out to protest, so, you know, how are Chinese people feeling about the fact that things are open?

You know, people are going back to work?

What are they telling you?

Well, I think you're right, Del, that the demonstrations were remarkable and really just an indication of how unhappy the population, particularly urban middle class people were.

And I think it's very positive that the government responded to that and change course.

But they might have had a little bit better plan in place, but still, it's good they changed course.

I think, you know, this is the direction of the world.

I think, a lot of interesting little developments.

I believe this story that Chinese people were watching the World Cup, I know from my years there, they're avid soccer fans.

They're watching the World Cup.

They're seeing stadiums with 100,000 people out enjoying themselves.

And I think, you know, that just drove home to them that China was going a different direction than the rest of the world.

And now China is more or less following what the rest of the world is doing.

And I think there's a lot of happiness about that.

Though, as I said, the transition is going to be a little bit rough.

David, you know, during the pandemic, one of the biggest disruptions was, of course, to the global supply chain, because so much of global production comes from China,

it recovered became even more obvious during the pandemic.

What's, what's the story with that now?

I mean, have those supply chain pressures voluntarily eased?

And, you know, is it back to normal?

Yeah, I think that, you know, even before this recent change in policy, a lot of those supply chain bottlenecks had eased.

I'm impressed that supply chains held up as well as they did.

You know, I'm sitting in my home office outside of Washington and, you know, I ordered all kinds of stuff to make work and life more attractive and it arrived, you know, pretty quickly.

So, I know there been some supply chain bottlenecks on specific things, but I'm impressed at how well things have held up.

And then the evidence of the bottlenecks is definitely diminished.

Transit, transport costs, for example, what it costs to ship a container, you know, that's going back down toward a normal level.

So, I think supply chains are working pretty well.

And China, ending that zero tolerance policy, opening up, that can only lead to more improvement in supply chains.

Now, there's going to be a lot of pent-up Chinese demand.

So of course, there could be new bottlenecks that come more from the demand side, like, you know, everybody wants an electric vehicle, there may be a shortage of supply.

But yeah, that's just natural adjustment of the economy.

So, I don't think that's a problem.

Let's talk a little bit more about this pent-up demand.

Because when the COVID restrictions were lifted here in the US, and you know, in much of the Western world, we saw the effect of that pent-up demand.

And I guess the pent-up savings.

People had, you know, money saved because they weren't able to travel.

They weren't spending money on hospitality, dining.

And then suddenly, you know, we saw this huge surge of spending and influx of buying goods and travel.

Do we expect to see that?

Or are we already seeing the same trend emerging from China?

Right. So, this is a great question, Del.

The Central Bank of China, you know, just recently reported that the increase in bank deposits in 2022 was twice the level of the increase in bank deposits in 2021.

So, and, you know, everything in China is big so, you're talking about, you know, a vast amount of buying power.

Now, you know, Chinese people are not going to run out and spend all of that increase, but they're clearly spending a decent amount of it, including on travel.

So, this is their main Chinese holiday period, China's Spring Festival, probably not as many people are traveling as pre-COVID, but a lot more than last year,

and people are starting to go to restaurants and resume their normal life.

I just had my first large delegation of Chinese colleagues that I hosted here in Washington, friends from Peking University and other universities in China.

And it was really nice to see them in person after several years, where we only connected via ZOOM, essentially.

So, you're definitely going to get some surge.

And I don't think anybody can predict how much.

There certainly are analysts who are excited by the numbers that are, that I mentioned, you know, that doubling of the increase in household bank deposits,

but I don't think Chinese people are going to spend all that.

I think COVID is also reminded them, there's a lot of uncertainty in the world, there can be inconsistency in government policy.

And so, I think people are going to hang on to quite a bit of that.

But they only need to spend a decent fraction for that to have a big effect on the economy.

Do you in generally see this having a positive effect on economies in the Asia Pacific?

I mean, do we see some of this, you know, spending and prosperity trickling over to the rest of the region and their economies?

Yeah, definitely.

You know, this is kind of an interesting moment, the world economy is slowing down, primarily because of the advanced economies.

And you know, nobody can see the future.

So, this may turn out, you know, to not really be fully correct, but most analysts World Bank, IMF, they're forecasting a pretty sharp slowdown in the United States, in Europe,

less of a slowdown in Japan, but a slowdown.

And a lot of the developing world is slowing down.

Because they export commodities to those advanced economies.

China is countering the trend by accelerating, and much of the rest of developing Asia, being Southeast Asia, for example, or South Korea nearby.

They are also bucking this trend of decline, because China is going to be pulling a lot of them along.

So already, we see quite a few Chinese tourists quickly making plans over this holiday period to go to Thailand or Bali.

Not the same numbers as pre-COVID.

But a big increase over the last couple of years.

And so that's contributing to these regional economies.

David, what impact is China's reopening having on inflation?

How concerned should we be about inflationary pressures, and, you know, the prices of goods and services, particularly energy and commodities going up again?

I think it's basically good news that the China's recovering.

It's good for Chinese people, and it's good for the world economy.

So, I wouldn't worry too much about inflation.

You know, if the US avoids a recession, and if China accelerates, you know, more than we had expected, you know, that is going to create some inflationary pressure through energy prices in particular,

and food prices to a lesser extent.

But controlling inflation is primarily a monetary issue.

The US Federal Reserve is very determined to keep raising interest rates and getting inflation under control.

So, I would be happier to see strong growth in the global economy with a little bit inflationary pressure than the opposite.

And I'd hate to see inflation brought under control because we're all in recession.

What do you think about how the US government and even American companies, even the private sector, what do you think about how they are responding to China's reopening?

Do you think American companies are ready to go back and do business with China again?

I think American companies are somewhat confused, because they are getting a lot of messaging from the Biden administration about cutting ties with China.

But in fact, but if you actually look at the data, you know, the US had more trade with China last year than ever before.

You know, we had more imports from China in 2022, and more exports to China than ever before.

So, what trade war?

So basically, you definitely have some very specific high-tech sectors like semiconductors and telecommunication equipment where trade is way down.

And there is definitely a tech war.

But most trade is up.

And American companies, you know, they're seeing the slowdown of the US and Europe and Japan, which is a big chunk, a majority of the world economy slowing down.

And then they see China accelerating back toward a decent growth rate of 5% or so.

So naturally, American companies want to be involved in that.

But you know, they're also paying attention to the technology restrictions in the US policy.

So, I think it's a confusing moment for US companies.

What is your global outlook, I guess, or your forecast for, you know, not just the Chinese economy, the global economy as well?

I think, you know, we're going to have a pretty significant slowdown in the advanced economies.

And that's going to take the world growth rate to something around 2 or maybe a little bit below 2.

And not long ago, we were growing at 5, and that's a really big difference for the world.

For China, as I said, last year, they grew less rapidly than the world 2.7%.

I think the recovery we're talking about takes them up to about 4.5%, maybe a little bit better.

I hope the don't aspire for a lot higher.

Because of course, there are other things that are important besides growth.

There is environmental concerns, there's inflationary concerns.

What they would have to do to get up above 5, I think, would probably be detrimental to many other interests.

So, you know, I'm hoping we get a decent recovery in China, that limits the damage in the world economy, but things look pretty gloomy for the world economy.

In terms of your advice to major governments, and of course, business leaders as well.

What are some of the opportunities and challenges they should be looking for in the coming years?

Well, I think we have to accept this tech war between the China and the US.

But I hope it doesn't become a generalized trade war.

There's a lot of benefit in economic trade, investment in most sectors.

So, I hope we maintain an open world economy.

And we do not let this tech war develop into a real cold war.

What's your advice to, you know, Asian countries in particular?

Right. So, things are a little bit better for Asia Pacific than for the world as a whole partly because of the factors in China we've talked about.

You know, Asia has some important new trade agreements, relatively new, Regional Comprehensive Economic Partnership, and the Trans Pacific Partnership.

So, I think expanding and deepening the trade agreements and the trade liberalization in Asia Pacific, I think that's quite critical.

And then the inflation problem is not so serious throughout most of Asia Pacific.

So, I would focus on those; trade openness, trade investment openness, and we don't have as much that has to be done on the monetary side, because Asia is doing pretty well.

David Dollar, thank you so much for your time.

Pleasure to talk to you.

China's zero-COVID policy shielded it's 1.4 billion people from the coronavirus but also cut them off from the rest of the world.

Now that China is reopen - there are mixed implications for the rest of the world.

While it's likely to boost global growth, experts are warning caution as it could affect already very high prices of goods and services.

I'm Del Irani, thanks for your company.

I'll see you next time.