Why what comes after China abandons ‘zero-Covid’ policy is worryingly unclear

Those with cursory knowledge of the predicament facing China have reason to be concerned
The lack of a credible exit plan and the uncertain path of the virus make it hard to predict what China will look like after ‘zero Covid’

Nicholas Spiro

Published: 3:08pm, 8 Dec 2022

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When it comes to Beijing’s plan to relax pandemic-related restrictions after nearly three years of taking a zero-tolerance approach to Covid-19, the verdict from financial markets is increasingly clear. Even some of the most sceptical analysts believe the government has thrown in the towel.

Nomura, which in the last few months warned a reopening would be “painful and bumpy”, said in a report published on Monday that the government had “reluctantly given up its zero-Covid strategy because it simply does not work and is too costly”.

A growing number of Wall Street firms are turning bullish on Chinese stocks, which are trading at historically low valuations. In a report published last Sunday, Morgan Stanley lifted China to an overweight position in its portfolio, with “a clear path set toward reopening warrant[ing] an upgrade”.

Bloomberg Economics has even come up with a possible road map for a full reopening, with “the final pivot to ‘living with the virus’” likely to occur by the end of June 2023 when “the economy will be free of any material Covid curbs”.

To be sure, plenty of investors remain circumspect about China’s exit from its “zero-Covid” policy. Yet, sentiment towards the country has improved sharply in the past several weeks. The MSCI China Index, a gauge of onshore and offshore equities, is up 34 per cent since October 31.

From a market standpoint, there is a strong case to be more optimistic about China. Investors were waiting with bated breath for a clear indication that Beijing would start easing restrictions. There are now signs aplenty, including allowing home quarantine for asymptomatic and milder cases.

03:27

China further eases pandemic restrictions in latest step towards reopening after zero-Covid

The government is also loosening policy in the all-important property sector. The mood in global markets has brightened amid signs inflation has peaked, allowing central banks to ease up on monetary tightening.

Yet, anyone with a cursory knowledge of the dire predicament facing China right now has ample reason to be concerned. For starters, speculation about the pace and timing of reopening belies deep uncertainty over the exit route from the pandemic.

The one thing that is clear is that the shift away from draconian measures to suppress Covid-19 bears little resemblance to the reopening of other economies, including those that imposed harsh lockdowns. There is no countdown to “freedom day”, as was the case in Britain and other countries. Instead, Beijing is trying to strike a balance between relaxing restrictions and averting an uncontrolled outbreak.

02:34

England lifts Covid-19 restrictions as infections surge

The problem is that China is ill-prepared to open up, as seen in the case of Taiwan, which abandoned its own version of “zero Covid” in April. Despite being better placed to cope with a lifting of restrictions – at the time more than 70 per cent of its over-75s were fully vaccinated while the early ending of mandatory hospitalisation for all cases eased pressure on the health system – Taiwan experienced a spike in deaths amid divisions over whether living with the virus was the right approach.

China’s failure to capitalise on the successes of its zero-tolerance approach – infections and fatalities are much lower than in major Western economies – has left it with an under-vaccinated elderly population and a severely strained, ill-equipped healthcare system. Moreover, Beijing’s propaganda machine has wasted the precious time it had to start educating the country about the uncomfortable trade-offs a meaningful reopening entails.

The acute dilemma over how and when to reopen, the relatively low number of people in China who have had Covid-19 and, crucially, the dramatic rise in cases during the past month are somewhat reminiscent of the challenges faced by Western economies early on in the pandemic.

In a newsletter published on December 2, Columbia University history professor Adam Tooze said that “at this moment China has become a time machine taking us [back] to the drama of Wuhan and then on from there to the horror of Bergamo and New York’s chaotic emergency rooms”.

People line up at a pharmacy in Beijing to stock up on medicine on December 7 as Covid-19 restrictions begin to ease. Photo: Reuters

This is an exaggeration, not least given that almost 90 per cent of the population has been vaccinated and an increasing number have received their booster shots. Yet, the combination of the lack of a credible exit plan and the uncertain path of the virus makes it hard to predict what China will look like after “zero Covid”.

What is more, China’s economy is unlikely to rebound sharply. Unlike the United States and Europe, whose reopening processes were underpinned by massive stimulus programmes, Beijing has eschewed the large-scale fiscal and monetary support packages it provided during previous crises and is determined not to use the property sector to stimulate growth.

The publication of weak trade data on Wednesday – exports and imports last month contracted at a steeper pace than anticipated – also underscores the sharpness of the slowdown in the global economy. Tellingly, oil prices continue to fall despite the increasing unwinding of pandemic controls in China.

Many investors betting on China’s reopening will play down these concerns on the grounds that it is not the destination that matters but the journey. The problem is that the journey itself is fraught with peril.

Nicholas Spiro is a partner at Lauressa Advisory