How China's Inflation impacts global market

China's defined growth and its attributes

By Raed Alkhedr | @raedalkhedr | 9 May 2023

How China's Inflation impacts global markets
  • The PBOC expects GDP growth to rebound to 5.1% in 2023

  • China's consumer price index inflation rate has grown at a slower pace compared to the high inflation rates in the US and Europe since 2021

  • China's impact on global inflation has become a subject of market interest

With a GDP exceeding $17 trillion, China is currently the second-largest economy worldwide. Its remarkable economic progress in recent decades can be attributed to various factors, including its vast population and ample natural resources.

China has become a significant global player in trade, predominantly in manufacturing and exporting goods to other nations. The government's significant investment in technology and infrastructure has also contributed significantly to the country's economic growth.

Since the start of 2020, the COVID-19 pandemic and the continued implementation of tight monetary policies have had adverse effects on the Chinese economy. Furthermore, global inflation has also contributed to the challenges faced by the global economic recovery. Nonetheless, the Chinese economy has demonstrated remarkable resilience, managing to maintain a stable growth trajectory in the face of these obstacles.

In 2022, the combined worth of China's merchandise imports and exports amounted to 42.07 trillion yuan, registering a 7.7% growth from the previous year. This consistent performance for six consecutive years has upheld China's status as the world's leading trader of goods. This achievement speaks to the resilience and adaptability of the Chinese economy, emphasizing its crucial contribution to the global manufacturing and supply chain.

The role of the PBOC in supporting the Chinese economy

The People's Bank of China (PBOC) has been instrumental in the restoration and consistency of the Chinese economy. Despite the country's ongoing economic growth, the central bank recognizes that the recovery is not yet fully entrenched. The PBOC is dedicated to stabilizing growth, employment, and prices, boosting domestic demand, and sustaining loan growth at an appropriate and consistent level, ensuring that growth in money supply and overall financing remains aligned with nominal economic expansion.

A significant divergence in monetary policies can be observed between the US Federal Reserve and the People's Bank of China. While the US Federal Reserve has been increasing its monetary tightening measures by raising interest rates aggressively for over a year, the People's Bank of China appears to be comparatively relaxed about its monetary policies.

Growth in China

The People's Bank of China (PBOC) anticipates that China's GDP growth will rebound to 5.1% in 2023, compared to 3% in 2022. This recovery will be driven by the resurgence of demand, particularly in the services sector. Investment is expected to maintain its robustness, buoyed by steady but sustainable growth in infrastructure and industrial investment, along with gradual stability in real estate investment. Net exports are expected to have an impact on growth due to feeble external demand, accompanied by a moderate acceleration in import growth fueled by an upswing in domestic demand.

How China's Inflation impacts global markets?

As central banks across the globe implement tighter monetary policies to counteract surging prices, China's impact on global inflation has become a subject of market interest.

As the second-largest economy globally, China's role in contributing to the global supply shortage-induced inflationary pressures cannot be ignored. However, it is essential to note that domestic inflation in China could be higher than inflation in other countries, resulting in export price inflation. Under such conditions, export price inflation in China will translate into import price inflation for its trading partners.

China's consumer price index inflation rate has grown at a slower pace compared to the high inflation rates witnessed in the US and Europe since 2021.

Indeed, China is experiencing a significant deceleration in inflation growth, while many countries across the world are grappling with rising prices amid weak demand and increasing risk aversion.