Chinese assets rallied on Tuesday on unverified social media reports that Beijing is establishing a committee to study a reopening plan, led by chief ideological theorist Wang Huning. Per reports, the plan would target reopening in March 2023.
We have been consistently cautious about expectations for China’s pivot away from zero-Covid, which we continue to think will be later to begin and slower to execute than many investors anticipate (please see: Beware of head-fakes on a Covid pivot, 10/20/2022). A report later this week will lay out scenarios for China’s Covid policies in 2023 and key signposts.
In the meantime, China’s foreign ministry spokesperson said he was “unaware” of a new committee – and indeed several aspects of today’s rumor strike us as implausible. These points are also worth keeping in mind when interpreting other potential signals in coming weeks.
The rumored choice of Wang Huning to oversee a Covid committee would be odd. Wang is a political theorist with no expertise in public health or overseeing the massive administrative effort necessary for China to contemplate a pivot. Following China’s 20th Party Congress, Wang is due to become the Chairman of the Chinese People’s Consultative Conference (CPPCC) in March, which has no operational role in China’s bureaucracy.
More broadly, the target of a March 2023 reopening is extremely ambitious. If you assume – as we do – that Xi Jinping is determined to avoid a surge in serious illness and death from Covid, then China is not close to prepared for a pivot in March. The main obstacles include:
- An incomplete vaccination campaign. Less than 70 percent of elderly (60 or older) have received booster shots, risking a high mortality rate for this segment of the population if China reopens. More fundamentally, there are concerns about the overall effectiveness of the inactivated vaccines in use in China, including waning effectiveness if not boosted with another type of vaccine. Deployment of mRNA vaccines may not be strictly necessary for China to make a pivot but would significantly increase Beijing’s comfort that it can be done successfully. But even if China were to approve use of domestic or foreign mRNA vaccines (see point further below) it would take many months to roll out boosters.
- An unprepared public health system. The experience of Taiwan, among others, shows that even with mRNA vaccines a reopening will lead to a surge in Covid cases. China’s public health system is not equipped to handle such an influx, especially with resources now tied up in containment (quarantine centers) rather than treatment of large numbers of patients. The risk of the public health system becoming quickly overwhelmed – particularly in poor provinces – is a key concern of Chinese officials and justification for relying on a containment-first strategy.
- Bureaucratic incentives. Local officials are under intense pressure to adhere to the zero-Covid strategy and prevent outbreaks – indeed, the Party has cast this effort as a sign of political loyalty. Moving officials from a containment-mindset to preparing for a surge will take time and clear directives from the leadership. Moreover, the bureaucracy will be in flux until the March 2023 National People’s Congress, which formalizes new government appointments for this five-year political cycle. This is typically not the period for China to undertake major shifts in policy.
- An unprepared public. The Chinese population has been told for 2.5 years that Covid is dangerous, justifying the enormous lengths that China has gone through to limit outbreaks. Moving from this stance to “living with the virus” requires careful messaging from the government to reduce the risk of a panicked population and corresponding risks for the economy.
In short, reports on the potential timing of a Covid pivot should be assessed alongside the state of China’s actual preparations. In addition to monitoring signs of progress in the areas above, one near-term watchpoint is whether China is moving closer to approving use of mRNA vaccines. A domestically developed mRNA shot is in phase three trials in China and has been approved for emergency use in Indonesia. As for foreign mRNA vaccines, Bloomberg is reporting this week that BioNTech will be among the companies joining German Chancellor Olaf Scholz on his visit to China starting November 4. Chinese conglomerate Fosun signed an agreement with BioNTech in early 2020 to produce the vaccine in China, but Beijing has yet to approve its use, likely out of Xi’s preference for a homegrown solution under Beijing’s full control. There is no indication yet that Scholz’s trip signals a turnaround in Beijing’s thinking, but it is worth monitoring.
A final caveat: once a pivot occurs, it is likely to precede very hesitantly. Chinese authorities continue to stress that containment will remain a mainstay of China’s Covid strategy. A “reopening” in China will take place within a framework that relies on a vast testing and quarantine apparatus, with officials ready to reimpose lockdowns as necessary to limit a surge in cases. The degree of quick relief for China’s economy – much needed as it is – will be correspondingly moderate.
