For Beijing, Zero-Covid Is a Political Achievement
China has a healthcare-infrastructure problem. Its workforce of doctors and nurses, as well as its network of clinics and hospitals, are woefully inadequate for a population of 1.4 billion. The state aims to avoid the upheaval associated with a rampant, nationwide Covid-19 outbreak, whether sparked by Omicron or a now-unknown variant. Its ongoing zero-Covid policy is designed to keep the healthcare system working, rather than overwhelmed.
In mid-February, in the South China Morning Post published a letter-to-the-editor that is an apt, if not polite, description of zero-Covid: “The idea of this strategy is to find those who have been infected, especially elusive cases, and isolate them in a designated hospital (if not in their homes) so that they can’t spread the virus. In the meantime, all close contacts of the infected individuals are watched and monitored. These measures are kept up until the patient tests negative, guaranteeing they no longer pose a threat. Contacts continue to take tests until officials are convinced there isn’t a case they are missing. After that, the lockdown can be lifted.” Other voices might refer the policy as brutal, invasive, or severe.
Many economists contend that China needs to mitigate these controls so that the domestic economy can deliver better, necessary growth. Beijing may not embrace this one-or-the-other argument. Chinese officials just announced a growth target of 5.5% for 2022. This figure is at the high end of most private-sector estimates. The number likely does not fully accommodate the impact of the higher US interest rates and the geopolitical crisis; it is premised on heavy government spending. Some experts to whom we spoke anticipate a delicately-worded downward revision in the government estimate by mid-year.
Zero-Covid is cutting China out of the global supply chain. Forced, spontaneous shutdowns of factories, villages, and seaports mean that component parts and raw materials are not making their way into the world market, requiring companies to find alternatives sources of supply. This shift in vendor relationships is sticky; a quick return to Chinese companies is unlikely. As one example, that massive Intel plant being built for semiconductor manufacturing in Ohio, featured in Biden’s State of the Union address, is in part a response to supply-chain issues.
Zero-Covid further limits China’s ability to trade in finished manufactured goods in an opportune manner. Besides consumer electronics, China is a major exporter of toys, furniture, and clothing, among countless other items. Those retailers that source goods globally now look to other nations with competitive cost structures, perhaps permanently.
Beijing seems oddly enamored with its zero-Covid policy, given sizeable economic consequences. In a nation where burgeoning wealth has provided wide latitude to the Chinese Communist Party, you would think that robust economic momentum would be an all-encompassing government priority. The sort of 10% or better growth rates we saw in the 2000s have yet to fall from Chinese institutional memory.
Simply stated, we suggest that zero-Covid will be sustained for longer-than-expected because of the potential spillover impact of an overburdened healthcare system on civil unrest. Fear of public protest has long been the primary motivation behind many government decisions. The Tiananmen Square uprising in 1989 is prominent, but there are more contemporary examples based on state-enterprise restructuring and rural-to-urban migration, among other development issues.
Healthcare infrastructure in China is fragile, especially with a fast-aging population. Bloomberg cites key data in a March article entitled, “Why It’s So Hard for China to Exit Covid Zero.” In China, there are fewer than three doctors per 1,000 people, a ratio that is far worse than most developed nations. But that average is distorted by the contrast between urban and rural areas. In some underdeveloped regions, there are fewer than two doctors and nurses per 1,000 people. The data is even more sobering when you look at the availability of intensive-care beds. In China, there are only 3.6 ICU beds for 100,000 people, compared to 25.8 in the United States and 33.9 in Germany.
The unfolding Omicron-based crisis in Hong Kong means that Beijing is unlikely to alter its zero-Covid approach for at least another year, in our view, affording the government more time to address healthcare infrastructure, both social and physical. This view was largely affirmed by Chinese Premier Li Keqiang in his speech to the National People’s Congress in early March. One lurking problem is that the Covid-19 jabs used in China rely on an inactive virus rather than the messenger RNA technology that is common in the West. Chinese officials hesitate to discuss the long-term effectiveness of their vaccines.
Beijing considers its ability to control the spread of the coronavirus as a political achievement, akin to mounting a successful Olympic Games or implementing the Belt and Road Initiative. That conviction will suppress a rumbling debate over the need for policy change. We may see some accommodation to less-intensive regulation on a trial basis in selected locations, but we consider widespread adoption of novel approaches to be aspirational, at least for now.
In 2023, however, President Xi Jinping is set to assume an unprecedented third term in office. Fresh Covid-related directives at that time will afford him the sort of economic, political, and social firepower suited to a de facto coronation
Our Vantage Point: Global growth is already hindered by higher US interest rates and the geopolitical crisis. The impact of China’s ongoing zero-Covid policy further constrains the year-ahead outlook for the world economy.
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