China’s Exit from the Zero-Covid Policy

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When China suddenly announced the lift of Covid-related mobility restrictions in November 2022, many had anticipated a major disruption from the wave of Covid infections and casualties. It could overwhelm the patchy health system and weigh heavily on activities. Since the lifting of zero-Covid measures, hospitals have been inundated with patients, most of whom are elderly or have pre-existing conditions, and crematoria have struggled to keep up with demand. Although there is a lack of data transparency, official death toll is reported as some 60,000 in the period from December 8th (a day after the government scrapped most Covid controls) to January 12th according to the National Health Commission. Previously, it claimed only 37 deaths. Some estimated the death toll to be 10 times the official figure. A study by Peking University estimated that, by January 11th, 900 million people in China had already caught Covid. The Economist forecasted that the outbreak would be at its worst in early January, having infected 75% of the population. One plausible reason for the lower-than-expected official figures is that Chinese officials are keeping Covid-19 off the death certificates of many people who die with the virus. Instead, they were attributed to other existing conditions or pneumonia.

China’s leaders were proud of containing the initial damages from the Covid pandemic by imposing very harsh restrictions, which produced much less fatalities than many other countries. The country’s zero-Covid policy has been a social and economic experiment without precedent: a vast public-health campaign that mostly kept the disease at bay. Before vaccines were widely available with its weak health system, officials could argue that this approach was needed to save lives. Although its initial success allowed more time to prepare for the relaxation of the zero-Covid policy, the government failed to raise vaccination rates or make hospitals ready. In fact, vaccination rates have been dramatically shot up only after the lift of the zero-Covid policy. Besides, domestically developed vaccines were less effective to more infectious Omicron variants of Covid-19. Worrying about potential casualties, the Chinese government maintained its zero-Covid policy until November. It was projected that reopening could result in more than one million deaths, especially from elderly people.

Faced with growing frustration over an extended period of mobility restrictions and sagging economic growth, the government abruptly lifted its zero-Covid restrictions. The zero-Covid policy lasted longer than anyone initially expected, then scrapped faster than anyone could have imagined. Without reliable data, anecdotal evidence and unconventional indicators suggest that Covid may already have swept through large parts of China. Mobility declined sharply in December but it recovered rather quickly. There is mounting evidence that much of China’s population has already been infected and that disruption is already fading rapidly since abandoning the zero-Covid policy in November. With infections waning, consumers are back to the streets and subway traffic in major cities is rapidly returning close to normal. We expect that the disruption from reopening will subside before the end of March and economic activity is likely rebound sharply.

Many economists think that the economic recovery will be bumpier but quicker than originally expected. Coupled with a wider shift toward more pro-growth policies, reopening rebound will significantly boost Chinese economy in 2023, and this year’s GDP growth has been revised significantly upward. The most obvious consequence is that consumption is probably on the brink of a sharp rebound. After repeated disruptions from the zero-Covid policy, we expect a huge pent-up demand from households. This will lead to a surge in demand for goods, services, and commodities. The zero-Covid policy is estimated to cost China’s economy about $1 trillion worth of GDP. Reopening will also benefit China’s troubled property sector. Since China’s authorities started to signal a shift away from the zero-Covid policy in November, there has been an overall equity rally in China. For example, MSCI China Index has risen by 50% since the beginning of November. This is a sign of confidence from investors that reopening and government stimulus will prop up its depressed domestic consumption.

The next challenge may be the Chinese New Year. Many observers had predicted that the travel rush surrounding the Spring Festival, which begins on January 22nd, would bring Covid from cities to rural areas. Even the Chinese president, Xi Jinping, is worried over the spread of Covid-19 to rural China during the lunar new year celebration. With massive human movements and family get-togethers, the period could become the biggest superspreader to rural areas where healthcare infrastructure is poorer and shortages of medicine is more acute. Even if infections have peaked in China, things may still get worse. Subsequent waves of the virus killed more than the first in other countries. For fear of looking weak, the Chinese government rejected an offer of free, effective vaccines from Europe. But its own mRNA vaccines would not be available before this summer.

It is doubtful to think whether the fundamental changes of Chinese communist party policies are taking place. The recent policy changes are just tactical move in the face of a severe economic downturn. At the moment, top priority of the government seems to be an economic growth above all. The party will soon trumpet that the country is swiftly returning to economic growth as Covid controls vanish. The main agenda continues to shift the focus away from market-based reforms in favour of state control and economic security. Once the current downturn has passed, a less market-friendly approach may resurface when the global economic and geopolitical environment remains fractured. After all, many foreign companies now see China as a riskier place to do businesses after watching the government enforce the zero-Covid policy in a draconian way and then scrap it without adequate preparation.

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