Guys,
As you more than likely know by now the Chinese government decided to go from zero Covid lockdowns to fully opening their country over the last week or so.
We had expected the Chinese to reopen their economy but I did not expect them to basically just rip the band-aid off in one fell swoop.
I am not sure why they decided to lift the lockdowns so quickly but this is what they have done.
There are several outcomes that we need to consider as the pace and success or failure of the lockdowns will affect the Chinese economic recovery along with oil and metal demand. Recall that China is the largest importer of oil, copper, and other raw materials.
It will be difficult to actually know what is happening as I expect that the Chinese government will be less than forthright in reporting negative news.
Anecdotally we are hearing that the virus is sweeping through the population and many people are off work sick. At this point, the virus has attenuated to the point that for most people contracting Covid is a head cold or mild flu. No doubt there will be deaths as every population has people that are more susceptible to negative outcomes. Also, consider the law of large numbers and there are 1.3 billion Chinese.
We are already seeing wide-ranging news articles that vary in their reporting based on where they come from and their political bent:
China Says No New Covid Deaths Reported After Changing Criteria
China’s COVID disaster shows why Americans must reconsider doing business with it
Here is how I am looking at this. As the virus rips through the population they will reach herd immunity in 6-8 weeks. This seems to be typical if one looks at other countries’ experiences. I caveat this with the fact that we saw three and four waves of Covid in the rest of the world as we did not lockdown like China.
Through these waves of infection, we were able to confer natural immunity to higher and higher numbers of the population. I think there is a risk that because the Chinese had the lockdowns they are going to see the potential to have really big numbers of deaths all at one time.
The other side of the coin is that the Chinese government is not stupid so maybe they have calculated that the country goes through a couple of months of the sniffles and they can absorb all of the bad news in one fell swoop.
This would be the positive case and as people get the virus and then recover the fact that they have been locked up for three years could lead to a big spending spree as people do what everybody else did after they were released from lockdowns and the virus became endemic, spend money and travel.
Recall that Chinese New Year is in a few weeks and this is a time when a large part of the country travels internally to see relatives.
I am tracking Chinese internal airline flights as one tool to determine how things are really opening up. You can check out the tool at this link.
If things go well then we can expect increased commodity demand as the economy cranks back up. This could be on the order of 2.5-3 million barrels of demand that could return, for example.
It is also a possibility that this was a panic decision by the Chinese government due to the protests and millions of people actually die from the re-opening and the government has to re-lockdown the economy and deal with a pissed-off population.
Either way, we will know over the next month or so.
We shall see. My expectations for oil and commodities in 2023 hinge mightily on this re-opening goes in China.
Merry Christmas and a Happy New Year to you all. Expect more emails in the New Year as I am now positioned to increase my content output.