It’s the great economic gamble on China: When will the Chinese government scrap its zero-tolerance approach to Covid-19?
Companies and manufacturers are concerned about their profits, while the financial markets are uncertain. World leaders and policymakers estimate Beijing’s moves as part of their own growth calculations, given China’s central role in the global economy.
The answer comes down to one man: the country’s supreme leader, Xi Jinping. His word is all the more sacred since he secured a precedent-defying third term at the Communist Party Congress late last month, where he piled his leadership with loyalists and set an agenda that shook global assumptions about the trajectory of the world’s second-largest largest economy.
The lack of insight into his thinking has left the world trying to guess whether even the smallest signals could indicate that the government is fine-tuning its ‘zero covid’ policy to limit the damage to the economy. After the congress, China’s financial markets took a dramatic plunge amid concerns over Mr Xi’s power play. Soon after, speculation about easing Covid restrictions soared them.
Every day seems to bring new disparate data points for the markets to process. Low health officials are pushing for less drastic enforcement of existing measures, while top officials reiterate that they are staying on track.
The authorities face a dilemma. Nationally, daily cases are at a six-month high, with China reporting more than 8,100 new infections per day. Under the usual playbook, officials are resorting to longer lockdowns and expensive mass testing to try to stop the spread.
And in China, nothing will be certain until Mr Xi stops trumpeting “zero Covid” or clearly articulates the country is changing direction.
In a world ravaged by war in Ukraine, skyrocketing inflation and mounting fears of a global recession, China could have been a bright spot for growth. While most countries experienced widespread infections and mass deaths in the first year of the pandemic, China largely kept the virus under control with rapid lockdowns and quarantines, and the economy thrived relative to the rest of the world.
As new Covid variants have been shown to be milder and vaccines have become more widespread, the rest of the world has moved away from strict policies. China has stuck with the same heavy-handed approach, feared a large number of deaths could result from a policy change, and has been reluctant to import more potent foreign vaccines.
With each new outbreak and contagious strain of Covid-19, uncertainty grows about how and when Mr Xi will dismantle his pandemic policy.
“China has this boot on the neck of economic activity, and we’re past the point where the boot made sense,” said Jude Blanchette, a China expert at the Center for Strategic and International Studies. “The problem is that the most authoritative voice keeps repeating that there is no change.”
Easing Covid policy is important for the economy. People stay at home for fear of crossing an infected person and being sent into a long quarantine under heavy guard. China continues to isolate not only the sick with Covid, but everyone who has come into contact with them. Many shops and eateries are closed.
The world’s largest iPhone manufacturing complex in the north-central Chinese city of Zhengzhou went into lockdown in mid-October and again this month. Some workers fled the 200,000 worker facility with stories of food shortages flooding the internet. Apple warned this week that sales are falling short of expectations due to the drastic measures.
The warning, and the latest Covid situation in China, was described by one analyst as “an absolute blow” to the company ahead of the major holiday season.
The Chinese financial markets sometimes seem disconnected from reality. Investors hoping for a change in policy plunge into all information, often rumors or thin sources, and send the markets on a roller coaster ride.
Rosy reports from Wall Street banks, pointing to the possibility for rewards when China opens, have also helped fuel rallies. A Goldman Sachs report this week predicted that Chinese stocks could rise 20 percent “at (and before) reopening” of the pandemic.
Investors often seize on official signals, even if the Chinese government doesn’t really reveal much. At a press conference last Saturday in Beijing, for example, senior health officials said they were “unshakable” committed to a zero-covid policy, but within reasonable limits.
While much of the country remains committed to the zero-covid strategy, there are signs that the approach is reaching its limits. Financial pressure is mounting on local governments that are running out of money to pay for Covid control measures such as mass testing. Social costs are also increasing as more and more people are trapped in prolonged lockdowns, their anger, frustration and discontent slipping through internet censorship.
Authorities have quietly responded to some of the excesses, including reining in neighborhood watchmen who resort to violence to enforce the restrictions. Police in a community in Shandong province said on Tuesday that seven guards had been detained there for beating and dragging people, in a statement that quickly went viral on the Chinese internet and was not censored.
Officials are also hinting that they might consider a new approach if medical advances could ease pressure on China’s health care system.
The city of Shanghai has recently started offering a new inhaled Covid-19 vaccine developed by Chinese pharmaceutical group CanSino Biologics, which officials have said could significantly improve immunity and appeal to a segment of the population that has yet to hesitating to get vaccines. More than a dozen cities are expected to offer the vaccine soon.
Two Chinese pharmaceutical companies are about to get approval for mRNA vaccines based on technology first developed and approved in the United States. China has also made progress in establishing distribution agreements with foreign pharmaceutical companies and developing and acquiring Covid treatments, including a homegrown antiviral pill.
Citing such developments, Zeng Guang, a former chief epidemiologist at China’s Center for Disease Control and Prevention, told investors last week that the conditions for China to open up and ease its policies were improving. His comments, made at a private investor event hosted by Citigroup, quickly spread online and sparked a surge in financial markets. A Citi spokesperson declined to comment.
It’s hard for investors to say whether these small signals will translate into a broader relaxation of Covid controls, said Richard Harris, the chief executive of Port Shelter Investment Management in Hong Kong.
“They are trying to play both sides at the same time without giving in to the central cause, which is a Covid zero policy,” he said.
Many investors sit on the sidelines waiting for more concrete evidence.
Winston Feng, the portfolio manager at MassAve Global, said he was looking at how authorities in the southern city of Guangzhou are coping with a sudden spike in cases in recent days. Last year, officials responded to relatively few cases with severe restrictions on people’s movement, sending robotic trucks with food to the districts that had been shut down. This time, he said, officials have launched massive testing requirements, but so far have avoided a citywide lockdown.
“The nuance here is how many of those experiments are being conducted now,” Mr Feng said, adding that he expected China to take minor steps to reopen, but also impose new restrictions if necessary to control local outbreaks.
“There will be times,” he said, “when you feel like you’re taking two steps forward and one step back.”
