Chinese shares tumbled Friday, amid ongoing concerns around the economic fallout of Xi Jinping’s strict pandemic containment regime, which the Politburo’s Standing Committee not only defended, but suggested was beyond reproach.
The Party will “fight against any speech that distorts, questions or rejects our country’s COVID-control policy,” the Committee said, according to a statement carried by CCTV. The policy, authorities insisted, is “scientific and effective” and will “stand the test of history.” There was no mention of the economy.
At this point, it’s probably fair to assess that China is operating under one-man rule. It’s not so much “the Party” anymore, as it is just Xi, or “the core,” as he likes to be called. I suggested Thursday that Xi may be pot committed, and I think that’s basically accurate. To the extent there’s dissent at the highest levels of government, and the economy isn’t able to operate under rolling lockdowns in perpetuity, it’s conceivable he might feel compelled to purge any such dissent in a politically-sensitive year.
Read more: ‘COVID Zero’ Untenable Amid ‘Severe’ Chinese Economic Drag
There’s also a “clash of the civilizations” element. Beijing chafes at Western critiques of Xi’s strategy. “COVID zero” has become another manifestation of China versus the West — one world, two systems, if you’ll pardon the joke. A Friday decree that central government agencies and state-backed firms replace all foreign PCs within 24 months underscored the rift.
Do note: The COVID measures aren’t free, although I suppose from an MMT perspective they are. There isn’t anything sold in yuan that China can’t “afford,” but on Nomura’s estimates, testing three-quarters of the population every couple of days would consume more than 8% of the country’s fiscal budget. That, Ting Lu suggested, could crowd out investment in other areas, including infrastructure, China’s parachute whenever the pace of growth decelerates too sharply. “There are also opportunity costs,” Nomura remarked. “People have to spend time to take the test.”
Other analysts have suggested mass testing could actually be a form of fiscal stimulus to the extent it allows the economy to re-open. But that just begs the question. This isn’t really about tests or how to fund them. It’s about what happens after people test positive. If every positive test entails shutting down entire cities, then the rest of the discussion is meaningless. If “COVID zero” is supposed to be taken literally — and Xi pretty clearly sees it that way — then mass testing will just lead to more lockdowns. The more people you test, the more cases you’re going to find.
Whatever the case, markets aren’t amused. Mainland shares fell 2.5% Friday (figure above).
Note that it’s only been two sessions since the Politburo promised to bolster markets and the economy. That sweeping pledge was issued last Friday. Mainland markets were closed for a holiday until Thursday.
The yuan, meanwhile, weakened through 6.70 (figure below).
That raises the specter of additional losses for global equities. Periods of rapid yuan depreciation have triggered turmoil at various intervals over the past decade (e.g., 2015/2016 and August 2019).
“Persistence is victory,” the Politburo reminded the Chinese citizenry. “Our virus control work is at a crucial point,” the Party added, in the same statement, which offered the following tautological justification: “We will retreat if we don’t keep going.”
Remarkably, the head of the second largest economy and the most populated country in the world is full of himself. Again Xi confronts reality more with hubris, and less with informed perspective and intelligence. That ironically “marvelous” tautology may live on in the ongoing story of China with the quintessential autocrat in charge.
I’ve got to say, for all of the faults, limitations, and imperfections in how the US has handled the pandemic, we at least have a reasonable understanding that it’s endemic at this point, according to Anthony Fauci. In other words, it exists, and we can’t do anything about it. But it’s also less disabling and it’s not as threatening to the mostly vaccinated populace as it once was.
China is just a couple years behind us. Remember when our fat orange “core” told everyone Covid would be gone by Easter, 2020, and in case of emergency inject bleach and tan your guts? Wake me up when the Chinese start stealing their pigs’ medicine.
Hilarious headline H!
Imagine how many fewer people would have died under a more competent president in the US? Add it to the list of failures for his administration. Speaking of his failures, anyone done any analysis yet on how the easy to win trade war has impacted global inflation?
China’s current Zero-Covid measures cannot eliminate the virus, so they will either be 1) continued indefinitely or 2) substantially changed.
1) amounts to an very large drag on China’s growth, maybe as much as 5 ppt. Given the growth target, Xi will have to push stimulus very hard. The main tools he seems to be willing to use are construction and business lending, maybe tech liberalization too. There are some ways to invest for that scenario.
2) would likely involve some combination of more/better vaccines and therapeutics. I’m unsure how to address that specific part of the scenario, but its probably unnecessary as a retreat from Zero-Covid would likely boost indicies broadly, in China and abroad.
There is also the scenario where Xi chooses 1) but fails to crank the stimulus dials. I guess one’s general inflation plays would help in that case.
Stepping back a bit, there is a very positive thing about the current situation. The markets have rarely been this exciting, interesting, challenging, and even “fun”. Even if one isn’t exactly having “fun” at the moment, gotta appreciate not being bored.
China uses inactive virus to vaccinate instead of mRNA and it is unclear how effective or durable those vaccines are, even while they are the most used Covid vaccines on the planet
This informs the Zero Covid strategy a bit more