Goodbye ‘COVID Zero’

China eased COVID restrictions on Wednesday. Again.

Amid a rapid rollback of testing requirements across major cities and a relaxation of quarantine rules, officials in Beijing released a new 10-point plan to compliment 20 measures unveiled last month.

Going forward, the categorization of high-risk areas will be more precise and limited; the frequency and scale of mass testing will be reduced and minimized (negative tests will only be required for entry into places like hospitals, nursing homes and kindergartens); asymptomatic cases won’t be centrally quarantined; high-risk areas will only be subjected to lockdowns until there are five straight days with no new cases; pharmacies are forbidden from voluntarily closing and can’t limit medicine purchases; vaccinations for the elderly will be prioritized; monitoring at-risk populations will be enhanced; no movement restrictions and no service interruptions are allowed for low-risk areas; emergency exits can’t be blocked under any circumstances; and schools with no cases are required to conduct in-person learning and ensure that shared spaces are kept open.

So, basically, there’s no more “COVID zero.” Some described the new measures as “cautious.” I’d suggest the opposite. Especially when juxtaposed with the draconian regime the Chinese people have come to know over the past three years. None of the new measures are conducive to curtailing the spread of a highly transmissible, airborne pathogen. In fact, most of them (the measures) are guaranteed to facilitate the spread, but the good news is that if Xi simply stops testing people, confirmed cases will drop by definition.

As Bloomberg noted, “Markets appeared to be taken aback by how far-reaching the steps were. An initial rally fizzled as some investors worried about a spike in infections and chaos that might ensue.”

That underscores the risk for Xi, who generally pretended not to see the nationwide protests calling for his resignation late last month. The wholesale abandonment of strict curbs, while welcome in many contexts both domestic and abroad, means the virus will spread irrespective of what the official case count is. Hopefully, fatalities won’t surge.

“A big wave of three months or more — given the size of mainland China — seems inevitable before a sustained recovery can start,” SocGen’s Wei Yao and Michelle Lam said. “However, less testing means fewer cases, which is probably the reason behind the decline in the past week,” they added. “The death numbers have always been low in China, so we may not get a clear picture of the upcoming wave from official data.”

An epidemiologist now working for the Party described the new measures as a shift towards a “proactive, rather than reactive” approach aimed at maximizing the “efficient” utilization of resources. The same official mentioned “economic development” on Wednesday. Trade data released just hours earlier showed exports dove almost 9% YoY last month (figure below), far more than economists expected.

It was the worst showing since the original COVID lockdowns. Exports were the sole remaining pillar of support for the world’s second-largest economy. That pillar has now definitively cracked. In addition to the dire outlook for global growth, the mix shift in consumption across developed economies (from goods to services) no longer favors China, and “COVID zero” hampered production and port logistics.

“The decisions to ease some of the restrictions didn’t encourage investors to take on risk, as China’s trade data were underwhelming and clearly underlined why China urgently needs to focus on domestic sources of growth,” Rabobank’s Stefan Koopman wrote, adding that there’s “a clear risk that more acute changes to COVID policies [could] lead to chaos in the healthcare system.” If you ask Rabobank, China needs “significantly higher vaccination rates among the elderly and more stockpiles of medicines and equipment” before any decision to “fully open” the economy.

Imports dropped nearly 11% last month, the trade data showed, suggesting domestic demand remains very challenged, which in turn bodes ill for credit growth, potentially clogging the monetary policy transmission channel further. On Wednesday, a Xinhua readout of a Politburo meeting promised “forceful” fiscal and monetary initiatives to counter the economic downturn.

“In the next year, we must seek progress while maintaining stability, continue to implement a proactive fiscal policy and a prudent monetary policy, strengthen coordination and cooperation, optimize epidemic prevention and control measures, and form a joint force to promote high-quality development,” the readout said.

There were nods to “expanding domestic demand,” respecting “the basic role of consumption,” the desirability of “high-level opening up,” the courting of foreign capital and the necessity of “effectively preventing and defusing major economic and financial risks.”

There was no mention of “dynamic COVID zero” from the Politburo on Wednesday.

“Human beings are social creatures after all,” Rabo’s Koopman said, in the same note cited above. “You can’t indefinitely keep a ball submerged under water.”