You probably noticed that the past year was mainly dominated by the sky-high inflation that appeared all over the world. As a result, central banks had to raise interest rates, but at the expense of the prices of risk assets such as Bitcoin. The reopening of the Chinese economy has now started and according to many economists, this may well be the solution to inflation.
Cooling down inflation
The big question, of course, is how those economists envision this. After all, in general, reopening an economy means that demand for products increases and that puts upward pressure on prices. In that respect, you would say that the reopening of China after the COVID-19 lockdowns will cause inflation to rise further.
Robin Xing, an expert on China’s economy at Morgan Stanley, explains that reopening China could push down global inflation. This leads to according to Xing namely for the standardization of global production chains (supply chains).
Last year many Western economies saw the highest inflation in 40 years due to high energy and food prices. Those prices skyrocketed against a backdrop of geopolitical tensions, a pandemic, and fiscal and monetary stimulus from many countries.
It is striking that the Chinese government has managed to keep inflation at 2 percent in 2022, even though the country has a target of 3 percent. For the coming year, Xing also expects that inflation will not be a problem for China.
No inflationary pressure
Due to China’s reopening, there are some concerns about the possible return of inflation. However, if you ask Xing, those concerns are unfounded. It is true that the reopening of China means that there will be more demand for raw materials, but on the other hand, that demand in Western countries is currently falling away.
In that respect, Xing does not expect that we will use more raw materials and that consumption will not exceed a certain limit. “That means China’s reopening will not boost commodity inflation, especially as the United States and Europe suffer from weak demand this year,” Xing said.
If Xing is right and China’s reopening causes inflation to fall globally, as the world’s factory is reopened, then that could have a positive effect on Bitcoin. Ultimately, high inflation is now driving central banks to raise interest rates. As soon as that falls away, the party can probably start again.