China is finally reopening: what to expect
10 min read
From 8 January onwards, China will do away with all its quarantine requirements for inbound travellers, making it far more likely for people to travel abroad after almost three years of complete isolation. This would imply an influx of Chinese tourists around the globe on a ‘revenge-travelling spree’, and this has proven to be rather worrying for most of the other nations. Outbound tourists are also a cause for concern as countries now have to be wary that the return of travellers from China could spark a COVID resurgence in their own populations as well.
Nations are adopting entry restrictions
In early December, China scrapped almost all domestic COVID restrictions, and the result was the virus running wild and unchecked through its population. Almost 37 million people were affected on a single day in late December. Such a situation is alarming, thus as China is opening up, other nations elsewhere are imposing targeted restrictions as a preventive measure against new waves of COVID.
Australia, for instance, is starting a temporary measure which will commence on 5 January, requiring passengers departing mainland China, Hong Kong and Macau to have a negative COVID test taken within 48 hours before travelling to Australia. This is largely due to the lack of comprehensive information about the COVID situation within China. It appears that an abundance of caution is necessary in this post-pandemic era to prevent history from repeating. The United Kingdom has also introduced a requirement for negative COVID tests for all travellers arriving from China. The ruling requires anyone travelling to England from Mainland China for direct flights to take a pre-departure COVID test, to be checked by the airlines before departure. A host of other countries, including South Korean, Spain and many more, are all introducing travelling restrictions as a precautionary measure.
Problems with China’s reopening
The main reason for such precautions is the COVID situation within China. Mainland China’s swift rollback of many restrictions so suddenly has proven to be problematic as a new set of economic challenges surface.
The central government had announced last month that negative virus tests and health code checks were no longer needed to travel domestically. Subsequently, reports of locals falling ill surged, with clinics seeing 22,000 visits for fever, a number that is up 16 times from just a week before. There is also an extraordinary shortage of fever-reducing products and related medicines that factories can’t seem to keep up with. On top of the high demand, employees in warehouses or offices in different parts of China have tested positive for COVID, resulting in an extraordinary shortage of staff as well. This new era presents a set of challenges very much different from the pandemic when widespread COVID lockdowns meant supplies were merely stuck at different distribution points. Right now, supplies are actually running low.
Surging infections may very well offset the positive impact of easing, at least in the short run. The infection in the big cities is only the tip of the iceberg. Analysts are predicting this to be the beginning of a massive wave of COVID infections in China. Since the restrictions were withdrawn, China’s economy has been facing a downturn. Its service sector, in particular, is at its slowest pace since February 2020, as the virus has infiltrated major cities and prompted people to stay home and businesses to shut.
The official Manufacturing Purchasing Managers index fell to 47 this month from November’s 48. This is worse than an estimate made by economists in a Bloomberg survey. The non-manufacturing index measuring activity in the construction and services sector declined to 41.6 from 46.7 in November, lower than the consensus estimate of 45. Typically, a reading below 50 suggests contraction, while anything above is indicative of an expansion. Both readings were the lowest level since February 2020. The services PMI, a sub-index of the non-manufacturing gauge, fell to 39.4 from 45.1 in November, also the lowest reading since the same period in 2020, and the fourth consecutive month that it has contracted.
The declining December data reflects China’s state of economy as it undergoes an abrupt reversal of its long-standing zero COVID policy in the past year. This continuous spread of the infection is likely to create more crunches for the economy through the first quarter of 2023. The upcoming Lunar New Year holiday is also likely to create a travel rush that could potentially exacerbate the prevailing situation.
Before the changes from zero COVID were implemented, China’s economy was already in trouble because restrictions to stop the spread of infection slowed down economic growth and kept the nation cut off from the rest of the globe. The economy was expected to grow by just 3% in 2022 due to a continuing real estate slowdown, weak consumer demand, and falling foreign demand for Chinese exports.
Data for December revealed that economic activity slumped because of the surging cases that led people to stay at home and avoid shops, while factory production was capped. Some government operations were even disrupted. The COVID situation in China brought about a relatively large impact to enterprises, personnel on duty and logistics, leading to a drop in manufacturing and consumption. The output, new order and employment PMI indices for the manufacturing sector all showed faster contraction in December than in the month before. Another indicator of supply problems was a sub-index tracking suppliers’ delivery delays, which continued to decline.
That being said, there is still likely to be a rebound later this year, after a slower start in the first quarter. Growth is projected to pick up to 4.8% for the year and that is good news for China.
Light at the end of the tunnel
China’s leader Xi Jinping has acknowledged the tough challenges that remain in China’s fight against COVID, as well as the disharmony within the nation that led to the recent protests. In a New Year’s address, Xi stated that China is in a new phase of COVID control and has adapted after following a science-based and targeted approach, optimised to safeguard the lives of citizens and minimise economic costs.
Despite the many issues that China is currently facing, Xi believes that there is light at the end of the tunnel. He has emphasised that with extra effort, perseverance and solidarity, China would emerge a victor in the fight against COVID. Xi is wagering that an economic rebound in 2023 will help the nation through the shock of the reversal of zero COVID policy. Together with officials at a recent meeting at the 24-member Politburo, Xi has vowed to revive consumption and support the private sector.
China’s central bank pledged to support domestic demand and maintain “effective” growth of credit. According to the People’s Bank of China, monetary policy will focus on stabilising growth, employment, and prices, as well as promoting the expansion of domestic demand. The bank has also reaffirmed its commitment to supporting the real economy more strongly, maintaining essentially steady prices, and stepping up targeted stimulus for important sectors and industries hurt by the pandemic. Additionally, it pledged to support mergers and acquisitions in the real estate sector and provide the acceptable financing needs of the sector.
How does China’s reopening affect Singapore?
Singapore’s economy is already set for modest growth this year against a global economic slowdown, although China’s reopening may help to cushion the impact. According to preliminary estimates released by the Ministry of Trade and Industry (MTI) on Tuesday this week, the Republic’s gross domestic product (GDP) moderated to 3.8% in 2022 from the 7.6% recorded the year before as the economy recovered from the pandemic. Nonetheless, it was a slight improvement from the official forecast of approximately 3.5% in November last year. Fourth-quarter GDP came in at 2.2% year on year, while sequential growth was 0.2%, largely in line with what private-sector economists polled by Bloomberg were expecting.
For the first time since Q2 2020, the manufacturing sector experienced a year-on-year decline in Q4 while full-year growth was a lacklustre 2.6%, down from the previous year’s 13.2% expansion. In Q4, the services sector’s growth slowed to 4.1% year on year. Overall, the sector grew by 5% last year compared to the previous year, which was a little less than the 5.6% growth in 2021. In November, MTI also estimated the economy at a below-trend pace of between 0.5% and 2.5% in 2023, a forecast that shows signs of pessimism.
However, the reopening of China does present us a sliver of hope, offering a small lift. While the decline in manufacturing and regional trade activity is expected to be a drag this year, economists believe that the recovery in international travel and tourism is still very possible, especially at the pace China is relaxing its pandemic restrictions, including border controls. The continuous increase in air travel and tourists arrivals, as well as tourism-related industries like retail and food and beverage, may result in a sustainable recovery for Singapore’s services sector.
Given that China was Singapore’s top source of incoming travel from 2017 to 2019 prior to the pandemic, progressive reopening of China’s borders would bode well for Singapore’s services sector. However, as more nations, including Japan, South Korea and Malaysia, tightened border controls, concerns of new viral strains may contain the upside risk. Hence, it is not easy to forecast the boost that China’s reopening could bring us. Factors like flight availability, high air costs, country-specific restrictions on Chinese tourists, may very well limit the return of incoming tourists in the near future. Furthermore, with other nations imposing restrictions on Chinese travellers, Singapore’s welcoming stance might invite inhospitable treatments from these countries.
It would be beneficial for China to recover from its COVID issues in 2023, offsetting some of the downside risks this year. But it would be challenging to calculate the impact on growth at this point. Additionally, even with concerns that international economies would enter a recession this year, domestic businesses and consumers will still have to deal with high inflation and cost constraints. Even so, the local job market is likely to remain sustained despite some small softening.
Manufacturing has not historically been the main factor in determining local employment. As a result, a further slowdown in manufacturing growth would not have a significant impact. The services sector continues to be the main driver of the labour market, and China’s earlier COVID policy pivot should be beneficial. The tech and finance insurance industries could also see hiring and wage expectations taper in line with softening momentum after benefiting significantly last year.
Overall, it does look like China’s reopening is good news for the global economy. Nations around the world will be able to benefit from increased tourism and consumption. As for the hurdles we will have to go through at the start of this year, in Xi’s words, extra effort, perseverance and solidarity within each nation to contain the virus will bring us leaps and bounds ahead in this post-pandemic era.
A Trader’s view
What will happen to the market when there is a sudden surge of Chinese tourists? First, we have to take a look at the top few destinations that the Chinese tourists will visit. Japan came in second, so we can presume that there will be a demand for Japanese Yen.
Therefore, we will be looking into Japanese Yen and have an analysis of it. From a fundamental analysis point of view, the economics of demand and supply shows us that when there is a high demand for a certain product, it will cause the price to surge. So we could safely make the assumption that the Japanese Yen will have the chance to rise.
In the technical analysis part, we will be looking into 2 pairs; USDJPY and EURJPY to back up our claim above.
As we can see from the chart, USDJPY has already made a swing down and it seems like there is momentum to fall further. It also has crossed the Moving Average 50 indicator.
Now, it currently has broken the major support level of 131.5. Therefore, it seems likely that it will continue to fall further until the next support level of 126.5.
From the chart of EURJPY, we can also see that there is a momentum downward force since December 2022. It has reached a major support level of 137.5 and made a small rebound.
The short term trend is still bearish, and if the support level of 137.5 is broken, it will reach the next support level of 133.5.
Since both fundamentals and technical analysis share the same sentiments, we can conclude that the Japanese Yen stands a high chance of strengthening.
