China reopening earlier than expected could hit supply chains in the near term, but boost growth in 2023 – CNBC

China reopening earlier than expected could hit supply chains in the near term, but boost growth in 2023 - CNBC

A traveler in protective gear at the Shanghai Hongqiao Railway Station in Shanghai, China, on Monday, Dec. 12, 2022. Photographer: Qilai Shen/Bloomberg via Getty Images

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The reopening of mainland China came faster than expected for investors, and Goldman Sachs warns it will lead to strains in the workforce and supply chains in the near term.

According to mobility data analyzed by Goldman Sachs economists, China is likely to see “weaker growth momentum during the accelerated ‘exit wave’ due to rising infections, temporary labor shortages and increased supply chain disruptions,” it said in a note. Tuesday.

“Amid the rapid reopening, the challenge to China’s medical system may have escalated significantly, especially for less developed interior and rural areas amid the upcoming Lunar New Year holiday,” Goldman economists including Lisheng Wang and Hui Shan wrote, adding that they expect mainland China’s daily new cases to peak in late December or early January.

On Saturday, Shanghai’s The Tesla factory has reportedly halted production as the company faced another wave of Covid cases within its Chinese workforce. Shares of the company fell more than 10% on Tuesday and continued to hover around 2022 lows.

Tesla’s Asian suppliers LG Chem in South Korea and China Contemporary Amperex technology fell more than 3% in Asia trading on Wednesday. from Japan Panasonic also decreased slightly.

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China’s manufacturing activity is expected to have contracted by December, when the National Bureau of Statistics releases its manufacturing purchasing managers’ index on Saturday, according to economists polled by Reuters.

Economists predict the reading will reach 48, below the 50-point mark that separates growth from contraction and is in line with previous month’s levels.

Short-term pressure on the medical system

Goldman Sachs added that the abrupt turn of China’s zero-Covid policy is creating headwinds for China’s healthcare system.

“We view the new guidelines as a major step toward full reopening, but we are cautious about the growing challenges facing China’s medical system in the near term,” the economists said in the note.

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Positive Outlook for GDP, Chinese Yuan

Despite shorter-term concerns about China’s reopening, economists have a rosy outlook for China’s long-term growth.

“Improved growth expectations in 2023 may outweigh adverse factors such as worsening trade balances for goods and services,” Goldman Sachs’ note said.

The economists added that the latest developments for reopening support the company’s earlier forecasts for China’s economy to grow by 5.2% in 2023, after growing 1.7% in the fourth quarter of 2022 year-on-year.

The latest outlook was revised in mid-December, when the full-year 2023 growth forecast was raised from an earlier forecast of 4.5%.

“While we are confident that growth will accelerate significantly upon reopening, significant uncertainties remain about the evolution of Covid, consumer behavior and policymaker responses, which in turn will affect the pace and extent of the recovery from determine China’s economy next year,” it said in the December 16 Note.

The company added that the country’s reopening measures are also positive for the onshore yuan, adding that it expects only marginal weakening in the currency over the coming year to maintain the level of 6.90 against the US dollar .

International travel will resume

Goldman Sachs economists said the latest measures are likely to boost growth in the surrounding region as travel normalizes.

In a December 11 note, economists said Hong Kong and Singapore are likely to benefit the most, with GDP rising by 2.7% and 1%, respectively – a halo effect of China’s reopening pushing its own final domestic demand up increases by 5 percentage points.

Taiwan, Australia and Malaysia will also give their economies a modest boost, of about 0.4 percentage point, the note said.

Travelers with luggage in Terminal 1 at Hong Kong International Airport on December 20, 2022 in Hong Kong, China. (Photo by Vernon Yuen/NurPhoto via Getty Images)

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Iris Pang, chief economist China at INGsaid she expects leisure travel to mainland China to resume around the Easter holiday.

“The positive impact of these easing measures should extend beyond international travelers,” Pang said in a note.

She said an increase in overall international travel flow will boost related industries such as airlines, hotel accommodations and catering.

“The easing could also reduce concerns about Covid among the general public, and gradually they would stop seeing Covid as a major threat – this should increase mobility within the country from the first quarter of 2023, and hence consumption .” she said.

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