China’s desperate attempts to continue suppressing COVID-19 long after the rest of the world had opted to live with the virus also smothered the country’s economy.
As a result, while many other countries — including Australia — have been dealing with an inflation crisis, China’s inflation has remained below 3 per cent for the past three years.
But now that Beijing has finally scrapped its COVID-zero policy, China’s economy is expected to begin revving back up again.
Analysts say that will have ramifications for Australia — both good and bad — and could exacerbate our cost-of-living issues.
‘An upside surprise’
The Reserve Bank of Australia last week announced the latest in a stinging string of increases in the cash rate that have seen interest rates climb faster than at any time since the 1990s.
It’s hoped the relatively high interest rates will curb consumer spending and in turn push down the inflation rate, which the ABS last month said was at 7.8 per cent.
While many Australians might envy China’s low inflation, Monash University economics professor Shi Heling said Beijing’s economists would like to see it pick up a bit.
Some say the People’s Bank of China might even cut interests rate in the short term.
“When there is no-one buying in an economy, of course the prices wouldn’t go up,” Professor Shi said.
“Such a low inflation rate for China is not a good thing.
“There won’t be a push for production without people buying, and the economy won’t be able to grow either.”
Mark Thirlwell, chief economist at the Australian Institute of Company Directors, told the ABC he was expecting China to make a quick rebound.
“As the economy reopens, all of that suppressed demand from last year will come springing back,” he said.
“If you look at the official IMF [International Monetary Fund] forecasts for China, it sees growth going from a very weak 3 per cent last year to more than 5 per cent this year.
“Most people’s forecasts assume that we get a stronger Chinese economy.”
Mr Thirlwell said growth this year was expected to be relatively weak across the world economy and a rebound in China would represent a positive “upside surprise”.
“Particularly in the advanced countries, including here in Australia, with the RBA increasing interest rates to try and slow inflation,” he said.
ANZ’s Greater China chief economist Raymond Yeung said he was cautiously optimistic about China’s economy.
However, Mr Yeung said Chinese consumer spending had not yet fully recovered, with activity during the Lunar New Year travel period at only 70 per cent of its 2019 level.
Pressure on fuel and services
NAB senior economist Brody Viney said Australia’s ongoing elevated inflation reflected a range of factors, including resilient global and domestic demand, a tight labour market, strengthening wage growth and high energy prices and rents.
However, the inflation rate is projected to decline gradually over the next couple of years with the RBA maintaining its target of 2 to 3 per cent.
The end of COVID-zero will likely help by allowing China’s manufacturing industry to get back to normal, reducing the cost to produce goods.
“We have already seen considerable improvement in global supply chains over the past six months or so and as this flows through to Australia we expect it will contribute to easing goods’ price inflation here over the next year,” Mr Viney said.
However, Mr Viney said Chinese growth created some uncertainty for Australia as increasing consumer demand in China could put pressure back on the supply chain.
The rebound in domestic and international travel by Chinese tourists would also put upward pressure on fuel prices, he said.
ANZ senior economist Felicity Emmett shared the view that increased demand from Chinese consumers could push prices up in Australia.
“On balance when you’re looking at the increase in demand that’s coming from the reopening compared to the relief on the supply side, overall we’re going to see a lift in demand and inflationary pressures,” she said.
The influx of international students and rising rents
Another side effect of China’s reopening is more international students returning to study in Australia, which is expected to put further pressure on the already tight rental market and work against the Reserve Bank’s goal of reducing consumer spending.
And the Chinese government’s decision last month to stop recognising degrees earned through studying remotely is expected to turbocharge the issue.
David Zhang, an international student from China who is studying in Adelaide, makes extra cash by going to rental open houses for fellow international students who are still overseas.
Mr Zhang said he was surprised by the recent surge in demand for his help.
“I’ve put up the advertisement for over six months but only since December, a lot of people started to come to me,” he said.
“It feels to me the price [of rents] was up again lately.”
Mr Zhang himself has been affected by the tight rental market.
After living in a city apartment for a year, he is about to move into a 100-year-old inner-suburb townhouse to save money on rent.
“[My apartment] went from $450 a month last February to $650 for a one-bedroom apartment in my building,” he said. “It’s just crazy.”
NAB’s Brody Viney said the impact on the rental market would be medium- to long-term
“High advertised rent prices take time to flow through to CPI, so this is likely to be a sustained source of inflationary pressure in Australia for some time,” he said.
ANZ’s Felicity Emmett said housing was not the only market category the increasing number of visitors would affect.
“More broadly, it’s general services prices,” she said.
“As Chinese students and travellers are out in the economy, they’re going to restaurants. They’re going to take-away places.
“All of that adds to the demand for workers in those sectors.”
