The Chinese central government will have to decide which way it will go very soon. Will the administration relax the corona restrictions, or will it stick strictly to the line and suppress the Chinese protests. That’s what he says Danish Bank chief analyst Minna Kuusisto.
“A positive alternative for the market and the economy is to loosen the restrictions. Opening up would support the economy, even if the price is an increase in infections and deaths. The threat is then also the acceleration of global inflation,” says Kuusisto.
Danske’s forecast for the next few years, announced on Monday, also states that China’s rapid recovery could raise the prices of raw materials globally. That would be an additional fuel for inflation.
China’s health care would also be tested in the coming winter.
According to Kuusisto, the violent suppression of protests against the corona restrictions would instead increase political uncertainty. And China’s economy will not recover as long as the strict line continues.
It would prolong the period of China’s current, anemic growth, Danske’s forecast states.
Kuusisto considers the situation in China to be exciting and exceptional. Nothing like it has been seen since 1989.
Usually in China there is a protest against the local government. Now people who are tired of the strict corona restrictions are showing their opinion, as well as the president Xi Jinping against.
“The bigger the protests now grow, the more pressure is created on the central administration to react one way or the other. We have to decide very soon, because we don’t want the protests to grow uncontrollably,” says Kuusisto.
China’s strict line would darken the euro area’s prospects even more
On Monday, Asian stock markets reacted to the protests with a clear decline. However, the decline in European stock markets remained moderate.
“Even more dramatic one-day changes have been seen in the market this year, although China has definitely been the dominant theme of the day. For example, the euro has been surprisingly strong against the dollar today, although usually the euro weakens in such a situation,” says Kuusisto.
In Europe, the market has been supported in recent weeks by the fact that the biggest interest rate hikes by central banks are already expected to be behind us.
“In Europe, inflation and the central bank theme dominate the market. If the inflation figure coming from the euro area this week is surprisingly high, the market reaction will probably be negative,” Kuusisto estimates.
In any case, Danske predicts that Europe will face a period of high inflation and low economic growth lasting a couple of years. According to the bank, next year the GDP of the euro area would decrease by 0.9 percent. 2024 would still be a year of zero growth.
If, on top of this, China continues on the path of restrictions, the market will experience more downward pressure, according to Kuusisto.
“If China were to surprise and loosen restrictions instead, it could bring temporary relief to the rather gloomy overall picture of the economy. If, on the other hand, it would accelerate inflation, there are no terribly good scenarios,” Kuusisto commented.
For the Chinese economy, Danske predicts a growth of around five percent in the next two years.