Global economy makes bet that China can handle COVID-19

Those who believe the world economy can avoid the hardest of landings next year are watching China closely to see whether its move to loosen pandemic restrictions will help that scenario come about or end up wrecking it.

The knock-on effects of ditching "zero-COVID" remain highly uncertain given China's patchy vaccine coverage, fragile health structures and the lack of clarity about the real extent of infections as COVID-19 cases start to surge.

The World Bank on Tuesday cut its China growth outlook for this year and next, listing the impact of the abrupt loosening of strict COVID-19 containment measures alongside other factors including its shaky property sector.

Bank of Japan Governor Haruhiko Kuroda cited the resurgence of virus cases in China as putting downward pressure on the global economy, while Taiwan listed the spread of COVID-19 in China as one big uncertainty facing its economy.

Yet the consensus view remains that if China can get a grip on what U.S. Treasury Secretary Janet Yellen this month called the "very complex problem" of switching its COVID-19 stance, this would boost both its domestic economy and the global one.

That would in turn bolster the belief of policymakers in Group of Seven (G7) countries that their interest rate hikes will end up taming inflation and that any recessions that result will be relatively shallow and shortlived.

"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," said Mike Gallagher, director of research at Continuum Economics.

One such bump could be if global supply chains are disrupted again as Chinese workers start to fall sick in large numbers, reigniting inflation elsewhere just as central bankers see signs it has finally started to peak.

But equally, those inflationary pressures could be canceled out if China's woes led to softer global demand for commodities.

"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.