As financial markets struggle to recover from a slump in 2022, China is set to reopen its borders in days, which analysts warn could bring another wave of shocks to financial markets.
Analysts said China’s reopening of its borders could lead to renewed inflationary pressures around the world at a time when price growth in the U.S. and parts of Europe has slowed, and even strategists who countered the view warned of a short-lived blip in financial markets. A wave of panic has sprung up as investors and traders see a repeat of last year’s wild market swings.
“Everyone is talking about China, which is a big focus for many parts of the financial markets,” said Marc Chandler, chief market strategist at Bannockburn Global Forex. I don’t think the Fed is going to fight the inflation challenge and drive up oil prices, but there’s a potential for panic when China reopens.”
Performance-wise, inflation expectations and rising oil prices could make investors feel like a repeat of the 2021 inflation scare, but another round of losses in stocks and bonds this year is less likely because of the lackluster supply chain, he said. Inflation has a greater impact on Fed policymakers and interest rate expectations than commodity inflation, which is more directly affected by China.
Considering that China is the world’s largest importer of crude oil, Chandler said that commodity currencies such as the Australian dollar, South African rand and Brazilian real will be the biggest beneficiaries when oil prices approach $100 a barrel as they did last year.
As the clock ticks into the new year, fears over China’s reopening have yet to surface in financial markets, even as oil prices have fallen sharply due to a surge in cases in the Asian country.
Monetary Policy Analytics economist Derek Tang said that the impact of China’s reopening has not yet been reflected in the market. Traders expect the federal funds rate to peak at around 4.9% before the Fed starts cutting interest rates. Screw it up and force the Fed to restart rate hikes in line with China, with other major central banks following suit.
“The reason may be that China unleashes huge demand but relatively little supply to the global economy, which could push up global inflation,” Tang said, adding that cities such as Shanghai and Beijing struggled to find enough manpower to produce low-priced goods , is another challenge that the central banks of Western countries must face.
Tang said that the stock market may react in a very volatile way this year, and the squeeze on corporate profits is also a big problem. Rising interest rates will weigh on corporate profits, which in turn will have an impact on corporate valuations.