Ecoinometrics - Inflation and the end of zero-COVID in China

Is China going to relax its zero-COVID policy? And is it bad news for inflation?

The 20th National Congress of the Chinese Communist Party just concluded without much surprise. Xi Jinping will continue to lead China for at least 5 years, more likely 10 years. And the emphasis seems to be shifting more on security and control rather than economic growth. 

Regardless of that some people are suggesting now that the congress is closed China could start to relax or simply abandon its zero-COVID policy. No more citywide lockdowns. No more travel restrictions. This policy change would simply amount to a full re-opening of China.

The question is: will this have a tailwind effect on global inflation?

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Inflation and the end of zero-COVID in China

Let me preface this by saying that I am no Bill Bishop when it comes to analyzing what’s going on in China.

And when it comes to data it is getting harder every year to get anything solid out on the subject. As the Financial Times reported recently, over the past 10 years China has discontinued 75% of its publicly available metrics. 

That is to say, it is not particularly easy to figure out in advance what the economic policies of China will be and how the economy is currently doing at any given time.

But since China is such a major economic player on the global scene we’ll have to try anyway.

First of all, if you are not aware, since the start of the pandemic in 2020 China has been implementing a zero-COVID policy. What that means in practice is that as soon as single digits amount of COVID cases popup somewhere everything has to stop, lockdowns are put in place and everybody gets tested until there are no more cases.

As you can imagine this kind of policy is very tough on the economy on several fronts:

• China’s industrial production and exports are impaired. That’s the cost of closing major ports like Shanghai for weeks at a time.

• The local economy also hurts. If going to the movies or the restaurant can result in you getting locked down for weeks you think twice about doing non-essential activities. 

So over the past couple of weeks I’ve seen the following thesis pop up:

• After the National Congress of the CCP, Xi Jinping will announce the end of the zero-COVID policy.

• Chinese demand for commodities such as crude oil will jump because of that.

• This could trigger a second wave of global inflation.

There are variations on this theme but overall that’s the same idea.

That thesis got me a little bit curious. Right now most people believe inflation is a one way street. There are disagreements of how low it can get, but the consensus is that it is heading lower and that an upcoming recession will help with that.

What if we are heading for a persistently high inflation though?