China’s COVID reopening poses risks and opportunities

News that Beijing is finally scrapping its growth-killing “zero COVID” policy seems the equivalent of answered prayers for Asia. And it couldn’t come at a better moment for the South Korean and Japanese economies. 

Though the situations differ, a less locked down China alters the 2023 calculus for North Asia’s two other trade powerhouses. It should mean increased demand for vehicles made by Hyundai and Toyota, gadgets manufactured by Samsung and Sony, electrical machinery sold by Hitachi and LG and myriad other goods. 

The eventual return of Chinese tourism, meantime, would fill hotels, transport depots and shopping districts from Seoul to Tokyo and resort areas from Jeju to Okinawa.

But China’s reopening could just as easily go awry in ways that complicate Asia’s 2023. 

There’s a very real risk that China’s next few months will be wildly chaotic. One imponderable is how Chinese leader Xi Jinping might respond to the inevitable surge in infections. Will Xi have the confidence to deal with the economic and political fallout? Or will he revert to locking down entire metropolises in short order? 

Then there’s the potential inflationary fallout. As Chinese consumers move around and spend more freely, commodities prices -- oil in particular -- are sure to increase, too. 

Social unrest is another wildcard. China’s sudden lurch toward reopening was a direct response to the worst protests since students took to Tiananmen Square in 1989. And the Chinese masses know it. 

Having gotten a taste of power, the question is whether a bigger cohort of China’s 1.4 billion people will begin raising their voices. Another question: how tolerant might Xi’s Communist Party be if demonstrations grow in size and frequency.

Yet the specter of a Chinese rebound is well timed for Korea and Japan.

The U.S. economy, meantime, is confounding the skeptics betting on a recession in the biggest economy. While dangerously elevated, inflation is also trending lower. That means less aggressive tightening by the Federal Reserve in the months ahead.

As the two largest economic powers look set to expand in unison, it presents a rare opportunity for officials in Seoul and Tokyo to get their respective reform programs back on track. 

Since May, President Yoon Suk-yeol’s pledges to craft an economy based on “fairness and common sense” have fallen by the wayside. Challenges from inflation to labor strife to any number of political gaffes have Yoon’s approval ratings in the mid-30s. 

This lack of political capital could meet opportunity if China returns to economic-engine mode. Might Yoon harness a regional rebound to increase competitiveness and innovation? 

Yoon’s first seven months in power leave considerable room for doubt. If Yoon has a plan to increase wages, boost productivity, address record household debt and tame corporate excesses, he’s not saying. But who knows, maybe his government will locate the disruptive energy voters hoped he would introduce into a system crying out for change. 

The same with Japan’s Fumio Kishida. Now into the 14th month of a faltering premiership, Kishida’s economic report card doesn’t seem poised to improve very much. Again, surprises can always happen. But Kishida’s support rates are worse than Yoon’s — in the low 30s at best — at a moment when Japan faces recession talk and the worst inflation in 40 years. 

The threat of actual stagflation in 2023 is no longer a distant one. And yet Kishida is spending more time building up Japan’s military arsenal than its economic capabilities. There’s nothing wrong with Tokyo purchasing a sizable number of Tomahawk cruise missiles from the U.S. China’s military spending boom and North Korea’s provocations justify it.

But Kishida’s real battle is against economic complacency at a moment when China’s rise is speeding up the pace of change. If Kishida has a clear strategy to reduce red tape, catalyze a startup boom, increase productivity and empower women, he’s doing a dreadful job explaining it. 

For now, though, economists are at the drawing board busily revising upward gross domestic product forecasts. Economists at Goldman Sachs reckon that Hong Kong, Thailand and Singapore will get the biggest jolt from China’s reopening. The bank thinks Hong Kong’s GDP could surge to 7.6% in the months ahead, while Thailand accelerates to 2.9% and Singapore records growth of 1.2%. 

Economists at JPMorgan expect many Asian markets to experience something of a “bungee jump" dynamic in 2023. The idea is that GDP might drop initially as China’s infection rates surge before economic growth rebounds sharply.

Korea and Japan aren’t likely to see those kinds of gyrations on account of their scale. But for Seoul and Tokyo, the specter of growing Chinese and U.S. economies is a window of opportunity that neither Yoon nor Kishida can afford to waste. 

By William Pesek


William Pesek is an award-winning Tokyo-based journalist and author of Japanization: What the World Can Learn from Japan's Lost Decades. Previously, he was a columnist for Bloomberg and Barron’s.