China Reopens and scraps quarantine. But there are risks

China will scrap quarantine requirements for inbound travelers. This is a step away from China’s stringent covid policies. However, there are risks and a surge in illnesses seems inevitable.

The precise catalyst for the move could be severalfold. It could be that Xi Jinping regarded his position as now sufficiently secure to take the risky step of adjusting covid policy. It might also reflect China’s growth headwinds and a desire to return to more ordinary economic growth. Finally, it might simply be due to public disquiet and a desire to manage public mood.

The move has benefits for financial markets. Restoring supply chains will mitigate inflation in the medium term. It will also generate more global economic growth. The move also has direct benefits for China’s economy, flowing from increased demand for goods and services.

The reopening comes with risks, however. The reopening could be immediately inflationary. Oil prices surged on the news, reflecting the likely increase in oil demand. By contrast, supply chain benefits will take time due to logistical issues. Thus, inflation pressures will likely persist.

There are also risks of further lockdowns. Further, while the reopening is a shift away from zero covid, it will likely cause a significant increase in illness, putting more pressure on ICUs. This has already manifested in funeral companies’ stock prices surging. Therefore, it is too early to assume China’s economy will immediately return to normal.