World Awaits Effects of China’s Reduced COVID-19 Restrictions

With China’s move to abruptly loosen COVID-19 restrictions despite a surge in cases, analysts are watching for the impact on the global economy.

The country does not have a consistent vaccination effort nor transparent reporting of the scope of infections, leaving the details of any potential fall-out largely a mystery.

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The World Bank cut its China growth outlook based on factors including the end of strict containment measures, as well as the country’s shaky property sector. Other countries joined the pessimistic outlook, with Bank of Japan Governor Haruhiko Kuroda claiming the resurgence in COVID cases would put downward pressure on the global economy and Taiwan citing the steep decline in exports as a sign that this is already happening.

But, if China can adjust to its new COVID protocol, some analysts believe it can turn its domestic economy around, which would positively affect the global situation. Still, U.S. Treasury Secretary Janet Yellen called the transition to new guidelines a “very complex problem.”

Reopening what has been shut down in China’s aggressive zero-COVID conditions may prove difficult. "If you look forward six months to the exit of the COVID wave . . . we'll be getting to a point where China just like everyone else gets to live with COVID," Mike Gallagher, Director of Research at Continuum Economics, told Reuters. "The big strategic play is towards reopening. It is just going to be very bumpy."

As restrictions loosen, Chinese workers may become sick in large numbers, once again disrupting supply chains and restarting inflation just as it seems to be leveling off. But inflationary pressures may be canceled out if global demand for China’s commodities declines.

"It's hard to say . . . how those two will offset each other," Fed Chair Jerome Powell told reporters last week after the U.S. central bank's latest interest rate hike, Reuters reported. "It's a risky situation," he said while adding it "doesn't seem like it's likely to have a material overall effect on us."

The year-old New York Fed's Global Supply Chain Pressure Index crept higher in October and November as global supply chain bottlenecks eased through most of 2022. And, some analysts believe that other economies have compensated for the loss in Chinese goods by manufacturing their own, limiting the effects of any future disruptions in the chain.