In our note yesterday we remarked that the zero-Covid strategy is effectively over, and the question now is what replaces it: a cautious “Very Low Covid” strategy (our basecase), a chaotic pivot, or a rapid controlled pivot that starts this winter (please see: China’s strategy is shifting from Zero-Covid to Very Low Covid). Policies, politics (including recent protests) and outbreaks are all highly fluid, so it is important to monitor incremental signals and update the outlook accordingly.
With that backdrop, there were several developments in China on Wednesday that make it more explicitly clear that zero-Covid is over and suggest the leadership is becoming more comfortable with a pivot.
Most important was a forum that vice premier Sun Chunlan held with public health officials. Sun has the day-to-day responsibility for Covid policies, including ensuring compliance with the “dynamic clearing” (zero-Covid) strategy. But the official readout of the meeting showed a significant change in messaging:
- Sun signaled that China has entered a new – less dangerous – phase of battling Covid due to declining severity of the virus and China’s vaccination campaign: “With the weakening of the pathogenicity of Omicron virus, the popularization of vaccination, and the accumulation of prevention and control experience, China’s epidemic prevention and control is facing a new situation and new tasks.” The emphasis on Omicron being mild is very significant, implying growing confidence on the part of China’s leadership that it can cope with a rise in infections as well efforts to prepare the public for an increase in cases as the country moves from zero-Covid into a new stage.
- Sun did not mention “dynamic clearing” or repeat standard phrases emphasizing unswerving adherence to the policy. Her overall tone was less political than in the past and emphasized the contributions of public health experts.
There were also signals at the local level in China. Guangzhou, battling China’s largest outbreak, lifted restrictions on movement in districts that are not considered high risk, and will also allow some close contacts of Covid cases to quarantine at home. Beijing, in the midst of its largest outbreak to date, will also allow some close contacts to quarantine at home. These are significant changes.
Encouraging signs – but some key caveats
The economic and especially social pressures on zero-Covid – most dramatically seen in mass protests over the weekend – have forced a faster change in policies than we have been expecting. The key question now is how authorities’ comfort with loosening holds up as cases rise. China is in the very early stages of moving away from zero-Covid, with infections still extremely low by international standards (less than 40K new cases per day as of this week).
We are slightly lowering the probability of our Very Low Covid basecase scenario to 55% (from 60%), raising the probability of a Rapid Controlled Pivot to 30% (from 20%) and lowering the odds of a Chaotic Pivot from 30% to 25%. This reflects the growing confidence behind loosening measures and stepped-up preparations for a pivot. The basecase of Very Low Covid entails containment measures that remain tight overall to slow growth in infections in coming quarters, and a subdued economic recovery over the course of 2023.
We have been guarded about expectations for China’s pace of reopening based on two main factors: (1) the leadership’s determination to keep fatalities and serious illness low; and (2) the significant risks of a surge of illness/death given the incomplete vaccination campaign and vulnerabilities in the public health system. These warnings still apply: we expect the pivot to be cautious, and subject to an ebb-and-flow of tightening and loosening based on public health conditions. No country has executed a smooth pivot on Covid, and Xi Jinping has very strong political incentives to keep deaths very low by international standards.
Key signposts include:
- Outbreak dynamics. It will be important to watch the course of specific outbreaks (such as Guangzhou and Beijing) but also to monitor whether a more relaxed approach in those cities is seeding outbreaks elsewhere. If so, and cases nationwide show an explosive growth trajectory, we expect a re-tightening of containment measures.
- Fatality rates. Public pronouncements that cases are not severe are encouraging, but again China is in early days still.
- Signs that the hospital system is coming under strain as cases rise. This does not appear to be the case yet, but decisions to reduce testing and quarantine announcements are partly an admission that as infections rise, quarantine centers will run out of capacity. Many cities are building large quarantine hospitals, but most of this capacity will not be online until this spring (and even then a shortage of trained personnel will remain a key vulnerability).
- Further shifts in central government messaging, including from Xi Jinping. This could come at the Central Economic Work Conference (typically held in early-to-mid December) and the Politburo meeting that immediately precedes it.
