Since December, China has moved expeditiously to remove zero-Covid restrictions. Its authorities have also shifted to an easier regulatory stance on the consumer technology and property sectors. Fiscal policy will remain supportive, but should be more targeted at consumers rather than infrastructure this year.
With these positive macro drivers in place, I remain bullish on China’s economic recovery. I expect the pick-up to be more consumption- and services-intensive to start, reflecting pent-up demand and supported by a high stock of excess savings. Regulatory easing will take some time to feed through to an improvement in housing sales, construction and employment, and will likely be more evident in the second half of the year.
My first chart tracks how mobility has rebounded in China’s two biggest cities – and increased travel goes hand in hand with more consumption. Travel on Beijing and Shanghai’s subway networks was already surging at the end of last year; now that the Lunar New Year holiday is over, mobility has already surpassed its 2022 highs.
How will this affect the 10-nation group of southeast Asian economies known as ASEAN?
My second chart, which tracks exports from Asian countries excluding China, gives a sense of the “old normal” and just how much the zero-Covid era depressed trade. As such, it also gives a sense of potential for the bounceback.
Through 2021 and 2022, exports to China slowed much more than exports to the rest of the world. For much of the previous decade, the reverse was the case: exports to China were growing more quickly.
China’s reopening is most positive for export-oriented economies, such as Singapore, Malaysia and Vietnam, and tourism-oriented countries such as Thailand.
More domestically oriented economies, such as Indonesia and the Philippines, will see less of a direct benefit.
But it will still be a positive environment for these nations. Chinese growth should support global risk appetite and sentiment, providing a lid on US dollar strength in 2023. That tends to be positive for emerging markets such as ASEAN.
There are three key spillover channels to watch in ASEAN countries.
The flow of goods
Direct exposure to Chinese domestic consumption is highest in Vietnam, at about 4 percent of GDP, followed by about 3 percent for Singapore and Malaysia and slightly under 3 percent for Thailand.
This can be seen in our third chart below, which strips out the impact of re-exports from China to third markets such as the US and is thus a much cleaner measure of net exposure.
These exported goods include consumer electronics as well as agricultural products from nations like Malaysia and Thailand: durians, palm oil and prepared foods.
Exports of textiles, handbags and cosmetic products could also improve. This helps Vietnam (as well as South Korea, within Asia more broadly).
The flow of people
This is where Thailand is the key beneficiary. Chinese visitors will boost the nation’s tourism recovery and current account in 2023. But business travelers are coming back, as well.
As our fourth chart shows, pre-pandemic, Thailand led ASEAN nations in terms of the importance of Chinese tourism, followed by Singapore, Malaysia and the Philippines.
As our next chart shows, Thailand’s tourism sector rebounded strongly in 2022, having received around 11 million foreign tourist arrivals, up from just 400,000 in 2021. This year, that could more than double to more than 25 million, with the government predicting at least 5 million visitors from China in 2023. (That’s still around half of pre-pandemic levels.)
From a macro perspective, this implies that Thailand’s current account will flip easily from a deficit last year to a surplus, even after accounting for slower export demand from the US. This will likely support outperformance of the Thai baht through 2023.
The flow of funds
The positive spillovers from in-person contact go beyond just tourism. Chinese entrepreneurs and investors will be doing business as they resume traveling.
This is most positive for Singapore, the region’s financial hub, as the next chart shows. Its real-estate and wealth-management sectors look set to benefit should Chinese investors seek to diversify their investment portfolios.
More broadly, business travel should result in positive spillovers to the flow of funds in the region.
Chinese overseas direct investment in ASEAN manufacturing and technology has been picking up strongly for five years, as our seventh chart shows. Southeast Asian nations have become more important destinations for China’s direct investment flows, both within Asia and on a global basis. China’s reopening should reinforce these trends.
Watch out for inflation risk
It's not my base case, but there is the potential for commodities to jump should a sharp Chinese economic rebound spill over into global energy prices and reignite fears over inflation.
So far, oil prices have come down from their highs in 2022, as our eighth and final chart shows. The supply shock faded and was coupled with weaker demand from key developed markets.
My base case is that China’s recovery will be more consumption and service-sector intensive this time round, and hence the knock-on impact to global oil markets will likely be more manageable. In addition, oil demand growth from key developed markets is likely to remain subdued in 2023.