China’s Great ‘Zero-Covid’ Guessing Game

It is the great economic guessing sport about China: When will China’s zero-tolerance approach towards Covid-19 be abandoned?

While manufacturers and companies worry about their profits, uncertainty is raging through the financial markets. Global leaders and policymakers are sizing up Beijing’s moves as part of their own growth calculations, given China’s central role in the global economy.

The answer comes down to one man — the country’s top leader, Xi Jinping. His word is all the more sacrosanct since securing a precedent-defying third term at the Communist Party’s congress late last month, where he stacked his leadership with loyalists and set out an agenda that shook global assumptions about the trajectory of the world’s second-largest economy.

The lack of visibility into his thinking has left the world trying to divine whether even the smallest signals could indicate the government is fine-tuning its “zero-Covid” policy to limit the harm to the economy. After the congress, China’s financial markets took a dramatic plunge over concerns about Mr. Xi’s power play. Shortly after, speculation about the loosening of Covid restrictions sent them flying.

Every day seems to bring new data points that are not consistent for the markets. Officials at the lowest levels of health are pushing for less strict enforcement of existing measures. Top officials, however, insist on their determination to keep the course.

Authorities are in a difficult situation. Daily cases in the country are at a six month high. In China, there are more than 8,100 new infections each day. Officials are resorting, as usual, to longer lockdowns and more expensive mass testing in an effort to stop the spread.

And in China, nothing will be certain until Mr. Xi stops trumpeting “zero Covid” or clearly articulates that the country is changing direction.

China could have been a shining spot in a world stricken by the war in Ukraine and skyrocketing inflation. There were also rising concerns about a global recession. China managed to keep the virus under control with quick lockdowns, quarantines, and a relative boom in comparison to other countries.

The world has moved away from rigid policies, as the new Covid variants have proved milder and vaccines have become increasingly widespread. China, which is concerned about the potential for a high number of deaths from vaccines, has remained steadfast in its rigid policies. It is also reluctant to import any more powerful foreign vaccines.

Every new Covid-19 infection and each new Covid-19 outbreak creates uncertainty over when and how Mr. Xi will finally end his pandemic plan.

“China has this boot on the neck of economic activity, and we’re past the point where the boot made sense,” said Jude Blanchette, an expert on China at the Center for Strategic and International Studies. “The problem is, the most authoritative voice continues to reiterate no change.”

Economic benefits can be achieved by easing covid policies. People are staying at home in fear of being infected. They will be placed under strict guard and sent to long quarantine. China continues to isolate people who are sick with Covid, as well as anyone who comes in contact with them. Many shops and restaurants have shut down.

The world’s largest iPhone manufacturing complex in the north-central Chinese city of Zhengzhou went into a lockdown in mid-October and again this month. The facility employed 200,000 workers and was threatened by food shortages. Apple warned this week that the drastic measures would result in lower sales than expected.

The warning, and China’s latest Covid situation, was described by one analyst as “an absolute gut punch” for the company ahead of the most important holiday season.

At times, China’s financial markets seem disconnected from the reality. Investors seeking a change in policy are looking for any information, usually rumors or reports with thinly sourced sources, and sending the markets on an emotional roller coaster ride.

Wall Street banks have been releasing rosy reports pointing out the potential for rewards when China opens up. This has also helped to fuel rallies. A report from Goldman Sachs this week predicted Chinese stocks could jump by 20 percent “on (and before) reopening” from the pandemic.

Often, investors are seizing on official signals, even if the Chinese government isn’t actually revealing much. At a news conference last Saturday in Beijing, for example, senior health officials declared that they were “unswervingly” committed to zero-Covid policies, but within reason.

While the majority of the country still supports the zero-Covid strategy for mass testing, there are some signs that this approach may be at its limit. Local governments are feeling the financial pinch as they run out of funds to pay for Covid controls measures such as mass testing. Social costs are also increasing as more people are locked up, with their anger, frustration, and discontent being filtered through the internet.

Some of these excesses have been addressed by authorities, who also rein in local guards who resort violence to enforce restrictions. A Shandong Province police force announced Tuesday that seven of its guards were being held for beating and dragging people. This statement quickly became viral and was not censored.

Officials are also offering tiny hints that they might consider a new approach if medical advances could ease the pressure on China’s health care system.

Shanghai has recently begun offering an inhaled Covid-19 vaccine, developed by CanSino Biologics. Officials believe that it could increase immunity and appeal to those who are still skeptical about vaccines. The vaccine will soon be available in more than a dozen cities.

Two Chinese pharmaceutical firms are close to receiving approval for mRNA vaccinations that use technology developed in the United States. China has made significant progress in the drafting of distribution agreements with foreign drug corporations, as well as developing and acquiring Covid treatments. This includes a homegrown antiviral pill.

Zeng Guang, an ex-chief epidemiologist at China’s Center for Disease Control and Prevention, stated last week that China was making progress in terms of opening up and loosening its policies. The comments were made at Citigroup’s private investor event and quickly spread online, prompting a surge in financial markets. Citi spokesperson declined to comment.

Investors can’t tell if these signals will lead to a wider easing of Covid controls. Richard Harris, chief executive of Port Shelter Investment Management, Hong Kong, stated that it is difficult for investors to predict.

“They’re trying to play both sides at the same time without giving in on the central cause, which is a Covid-zero policy,” he said.

Many investors remain on the sidelines, waiting for more concrete evidence.

Winston Feng, MassAve Global’s portfolio manager, stated that he was looking into how authorities in Guangzhou have responded to a sudden increase in cases over the past few days. Last year, officials responded to relatively few cases with severe restrictions on people’s movements, sending robotic trucks with food into districts under lockdown. He said that officials had launched mass testing, but have not yet implemented a citywide lockdown.

“The nuance here is how much of that experimentation is now being conducted,” Mr. Feng said, adding that he expected China to take small measures to reopen but also impose renewed restrictions if needed to bring local outbreaks under control.

“There will be moments,” he said, “when you feel like you’re taking two steps forward, one step back.”

Zixu Wang And Li You Contributed research