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Markets optimistic as China eases Covid rules, but experts warn of danger ahead | China

Global shares and the price of some key commodities have risen on hopes that the easing of China’s strict zero-Covid measures would help to bring down inflation, even as some experts warned that the country was not prepared to live with the disease.

China’s government on Wednesday announced a significant shift towards living with the virus. People with Covid-19 who have mild or no symptoms can quarantine at home, while officials have been instructed to stop launching temporary lockdowns. Testing will no longer be required for “cross-regional migrants”.

China’s economic growth will keep picking up pace with the implementation of the newly announced anti-Covid adjustment measures, the premier, Li Keqiang, was quoted by state media as saying on Thursday.

US-listed shares of Chinese companies rose, while Hong Kong’s Hang Seng stock market index gained more than 3% on Thursday. The price of copper climbed on the promise of increased demand from China, its biggest consumer. Analysts hope that the easing of Covid measures will help restore global supply chains and, in turn, curb inflation.

“The realisation that China is going to be back online and producing product will help bring down inflation and that’s a good thing. If inflation can come down, the Fed can step aside and pause,” said Tim Ghriskey, chief investment strategist at Inverness Counsel in New York, referring to the US Federal Reserve’s recent run of interest rate hikes.

In signs that global supply bottlenecks have already begun to ease, the cost of shipping fell dramatically over recent months. In January, the cost of sending a single container from China to the US was $20,000. In December that cost was around $2,000.

The improvement in global supply chains was helped by a reduction in global demand. US spending on manufactured goods fell over the last three quarters, according to the US commerce department, likely due to the higher borrowing rates initiated by the US Federal Reserve.

US inflation fell from a peak of 9.1% in June to 7.7% in October, but remained far above the Fed’s target of 2%.

As supply bottlenecks improve, the US might be able to avoid a recession, the US treasury secretary, Janet Yellen, said on Thursday.

Worldwide reduction in demand for goods, coupled with China’s strict Covid policies, had a severe effect on Chinese manufacturing in November.

The value of the country’s exports fell 8.7%, compared with the same time last year. Experts said restrictions, such as those which disrupted work at the world’s biggest iPhone factory in Zhengzhou last month, were responsible for much of the decline in China’s exports.

China faces a “very complex problem” in adjusting its Covid policies, which have caused growth to slow, Yellen said. A positive change in China’s Covid situation could lead to a “pickup” in growth, she added.

The lifting of some Covid restrictions has revived demand for travel and some other services in China, but economists warned that the promise of economic recovery next year is not certain, with the country’s fragile healthcare system and low vaccination rates leaving it ill-prepared for a big wave of infections, which could spark labour shortages and make consumers even more skittish.

“Compared with other developed countries, medical resources in China are somewhat insufficient,” said Nie Wen, a Shanghai-based economist at Hwabao Trust, who has cut his China growth forecast for the first quarter of 2023 to 3.5-4%, from 5% previously.

He cited a particular risk of Covid outbreaks when China celebrates the lunar new year holiday in January, a popular time for travel among the country’s 1.4 billion people.

Economists and analysts were confident that overall, the reopening was more positive for growth.

“Lockdowns mean people can’t travel, people can’t consume, can’t work,” said Rich Nuzum, global chief investment strategist at Mercer.

“It’s not humane to say it that way, but the GDP impact of lockdowns is a lot bigger than the GDP impact of letting the virus run.”

Some experts warned that reopening could bring about a surge in inflation, which could hit the global economy as well as China itself.

“The potential reopening could bring inflationary challenges to China,” said Bruce Pang, chief economist at Jones Lang Lasalle.

As cases rise, “a surge in demand, especially the accelerating household consumption, and short-term disruption to labour supply, production and supply chains”, could drive inflation, Pang said.

Reuters and Associated Press contributed to this report

Read More: Markets optimistic as China eases Covid rules, but experts warn of danger ahead | China

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