We remain highly cautious on expectations for China’s pivot away from zero-Covid, both in terms of when it might start (March 2023 at earliest) and how it will proceed (very slowly and subject to setbacks). We outlined our thinking in our China 4Q policy outlook (link here) and will have a more in-depth treatment of signposts and scenarios for a shift in Covid policies following the conclusion of the 20th Party Congress this weekend.
But a short note in the meantime given that investor focus remains intense. The latest example: China’s equity markets as well as global crude prices responded favorably on Thursday to a report by Bloomberg News that Chinese officials are debating whether to reduce the required quarantine time for travelers coming into the country, from 10 days currently (7 in hotel, 3 at home) to 7 days (2 in a hotel, 5 at home).
Bloomberg noted that the leadership has yet to sign off on such a move and helpfully pointed out a big caveat: officials could well accompany an easing of international quarantine times with even stricter measures on internal travel and testing, which happened this summer when mandatory quarantine times were reduced from 21 days (depending on the locality). The net impact on economic activity – including China’s oil demand – would in that case be muted. This captures the broader point: China will only meaningfully loosen measures when it is ready to fundamentally move away from zero-Covid – and there are no signs that this is coming soon.
Our basic analytic framework for a Covid pivot is as follows:
- China’s leadership will continue to view zero-Covid primarily from a standpoint of public health. Xi has cast China’s ability to protect its population – where the West failed – as testament to the superiority of China’s governance system and implicitly his leadership. He will not authorize a major pivot away from zero-Covid until he has assurances that China will not experience a large number of serious illness and deaths. Even if those numbers are low relative to the size of China’s population, they could be quite large in absolute terms – and that matters for Beijing.
- China has much more to do on the public health side before it has assurances it can avoid a surge in illness and deaths. This includes raising vaccination rates (particularly in the elderly population), ensuring effective boosters (which *may* require rolling out newly approved or not-yet-approved vaccines), and the mammoth challenge of preparing the public health system for a surge in cases, such as building out ICU capacity. Even Taiwan – with a highly functional bureaucracy, good public health system, and much smaller population – saw a surge in mortality when it pivoted earlier this year. China has many poor provinces and rural areas with a weak public health infrastructure and lack of trained personnel.
- Before Beijing can signal a pivot, it needs to signal to the bureaucracy and the broader population that they need to prepare. China’s leadership has not even begun this shift in messaging to warn the population and system that an eventual pivot is coming. The vast majority of political and financial resources are tied up in containment and testing. There is relatively little urgency at the local government level behind completing the vaccination campaign and preparing for a surge, which will require time and funding. China’s vaccine holdouts (especially the elderly) also feel little urgency given the very low risk of catching Covid under current policies.
- Once China starts the pivot, it will be very cautious and subject to setbacks. Beijing will need to move slowly to avoid overburdening the public health system. It will also need to be careful about an abrupt move that panics the population, which would substitute one economic shock (containment measures) for another (voluntary restrictions on behavior such as staying indoors).
The key implications for investors are as follows:
- Investors need to monitor public health signposts as well as high-level signaling. The pivot won’t happen until the preconditions are in place. We will lay out some of these key signposts and implications in a forthcoming report and regularly updated tracker, but they include vaccine coverage, availability of treatments, and investment in hospital capacity.
- Beware of potential head-fakes in the meantime. Signals to start preparations will precede signals that the pivot is coming, and investors could very easily underestimate the amount of time between the two. The pivot itself likely won’t begin until after the March 2023 National People’s Congress at earliest, and more realistically may not gain momentum until mid-2023 or even later. Even then it will happen in fits and starts, with the authorities ready to reimpose movement restrictions, including targeted and even broad lockdowns, as necessary to slow surges. China’s public health officials uniformly stress that containment measures will remain a key feature of China’s Covid strategy.
