China’s State Council announced a set of 20 measures on Friday that adjust the country’s Covid-19 response. Collectively, it is the strongest signal to date that China’s leadership is preparing to relax containment measures.
It is important to stress that this will be a gradual and hesitant transition. Practical easing of containment measures will likely only start in March 2023 and gain ground in Q2 and Q3 2023. China’s public health vulnerabilities and the leadership’s very low tolerance for deaths means that containment will stay a key aspect of China’s Covid strategy throughout next year, with pervasive testing and quarantines as necessary to control growth in cases. In the meantime, China faces a very difficult challenge battling outbreaks this fall/winter. Indeed, one motivation for today’s announcement is to lift confidence, with the immediate impact quite limited.
All in all, recent signals fall to the upside of our cautious expectations for the pivot, with momentum to meaningfully relax containment measures and lessen the impact on the economy shifting from late 2023 to mid-2023 (please see: Signal on vaccines is positive, but the Covid pivot will be gradual).
Measures announced today
The measures that are attracting the most attention in the Western news relate to international travel, including reducing quarantine times (from 10 days to 8 days) and ending the practice of penalizing airlines for bringing in positive cases. These will be helpful for gradually resuming international flights in coming months, though travel is unlikely to normalize until late 2023 or 2024.
Changes to domestic containment measures include:
- Reducing quarantine times for first contacts
- Removing mandatory quarantines for secondary contacts
- Calling on cities to not require high-frequency PCR tests when there are no Covid cases
- Raising the threshold for local governments to block travelers from designated high-risk areas
Less noted but significant is the fact that the State Council is also more explicitly calling on local officials to accelerate the vaccination campaign and invest in treatment capacity, including anti-virals. As we have noted, it is critical that China’s leadership send the signal for local governments to shift resources from containment to preparation to handle a surge in cases. That message is now starting to happen, though implementation will likely be slow given the immediate focus on battling outbreaks.
Implications
- The immediate impact of today’s measures is quite limited. The overall zero-Covid framework remains in place, and local governments will be under intense pressure to contain outbreaks – now at their highest level since April – heading into the winter. A key motivation for this announcement is the confidence effect given a heavily demoralized population and economy. There is still a real risk that market optimism – convinced that a robust pivot is close – will outrun reality.
- This is not the end of zero-Covid but it is clearly a sign that China’s leadership recognizes that the policy in its current form is unsustainable – socially as well as economically. Still, Beijing will be intensely focused on avoiding a surge in serious illness and death from Covid – the key priority for Xi Jinping. China faces major challenges on this front, including completing the vaccination campaign – which may require the rollout of mRNA vaccines to be fully effective – and heavy investments in preparing the public health system. We will be closely monitoring progress in these areas to gauge when a robust reopening is possible.
- Collectively, current trend lines suggest a very gradual process of relaxation that starts after the March 2023 National People’s Congress but gains momentum in H2 2023. Local officials will be battling Covid outbreaks through the winter, and many of them will receive new appointments at the NPC. Hence, some of the critical preparation for relaxation may only start with the NPC and require several additional months and even quarters of work.
- The public health challenges means that relaxation of zero-Covid policies will be extremely cautious and subject to setbacks and reversals. No territory, even Taiwan, has managed a smooth pivot from zero-Covid, and Hong Kong’s fumbled outbreak this fall will loom large for Chinese officials. Even throughout 2023, Officials will be prepared to re-tighten and even lockdown if cases surge beyond a comfortable threshold. Different local governments will adopt their own measures with limited coordination. This will not be a smooth, orderly, and well-telegraphed transition.
Near-term watchpoints
- The extent to which Xi Jinping is truly committed to relaxation of measures given public health concerns. There is a risk that Beijing will be satisfied with the immediate confidence effect of today’s measures and that follow-up – preparation for relaxation in the spring – will lag, particularly as local officials fight new outbreaks.
- Whether Beijing intends for mRNA vaccines to be necessary for a confident reopening, and when it might approve and deploy them.
- Whether local governments receive adequate funding and political incentives to ramp up investments in the public health system. There will likely be some signals at China’s annual Central and Economic Work Conference in December, and more concrete measures to come at the NPC. But it is worth noting that local government finances are battered, with some localities even running out of funds for PCR testing. Investments in ICU capacity and other treatment measures could be quite slow, which in turn will limit Beijing’s capacity to relax containment measures.
In the meantime, China faces an extremely difficult containment challenge from outbreaks this fall/winter. The most serious current outbreak is in Guangdong province, China’s largest provincial economy and a key export hub (please see: China Flash Note: Markets getting hit with double whammy on Covid). Overall, we expect the impact of lockdowns this winter to be more disinflationary (hitting Chinese domestic economic activity) than inflationary (causing supply chain disruptions), as officials have become better at avoiding bottlenecks to production lines and logistics.
