Cracks In China’s Zero-COVID Policy?

The age-old adage, “prevention is better than cure,” remains a valuable guide to decision making. But the pandemic has forced us to ask: how much does prevention cost? This is an especially important question as China continues its fight against the COVID-19 virus.

Chinese policymakers have stubbornly persisted with a zero-COVID strategy that focuses on containment of the virus. The stringent approach was the best prevention tool in the earlier lethal waves of the pandemic, but both mortality and infection rates have fallen across the globe. As a result, the world has chosen to live with the virus. However, China is the last major nation that continues to rely on lockdowns, mass testing, contact-tracing and quarantines to prevent the virus from spreading. The low efficacy of China’s domestically-produced vaccines have contributed to this orientation.

In a tacit acknowledgment that the costs of containment measures are now outweighing the benefits, Chinese authorities relaxed some restrictions last week, even as infections climbed to their highest levels in months. Quarantine requirements were eased for close contacts and international travelers from seven to five days, while maintaining three further days of home isolation.

The move spurred a rally in financial and commodity markets. Hong Kong’s Hang Seng Index rose 12% in just a week, and the mainland’s benchmark Shanghai Composite Index improved by about 3% over the same time period. Commodities from oil to soybeans to precious metals rebounded on hopes of a demand recovery in the world’s second-biggest economy. Though a welcome development for investors, Beijing’s move has also re-ignited inflation fears in some quarters.

We think that this reaction is substantially overdone. Beijing has only watered down strict COVID rules, not waived them entirely. Millions of people are still under lockdown in the western and southern parts of China. Lockdowns, and the economic impairment they cause, will continue to hold consumers and the economy back, as opposed to firing up demand for commodities and tourism-related services. Though eased somewhat, travel rules remain onerous, with inbound and outbound group tours suspended.