One of the most prevalent pipe dreams in markets in recent months, even more widespread than the inevitable - if not imminent - Fed pivot is that China will capitulate on its long-standing Zero-COVID policy (despite it being a perfectly convenient scapegoat for Xi to deflect anger at the slowing economy) during this month's 20th party Congress, despite skeptical insiders such as China Beige Book warning that this isn't going to happen.
Having done the rounds w/3-4 dozen funds over past month, 1 thing blew us away: the % convinced Xi will announce an endgame for #CovidZero at the Congress.
This conviction goes against so much evidence. But the trade is "so juicy" it seems to have taken on a life of its own.
— China Beige Book (@ChinaBeigeBook) October 11, 2022
Well, it appears that the market will be disappointed yet again.
According to SCMP, for the second day in a row, China's Communist Party mouthpiece, People’s Daily, urged the country to stick with its zero-Covid strategy, "dampening hopes that controls would ease after a pivotal political meeting this month." The commentary was the clearest sign yet, according to the SCMP editor, that the party is determined to continue with the stringent zero-Covid approach after its twice-a-decade national congress, which starts this Sunday. On Monday, the newspaper called for confidence and patience with the zero-Covid strategy, which aims to cut all virus transmission chains.
Xi Jinping has been portrayed by state media as leading a national pandemic control effort that has resulted in few deaths. He has staked considerable political capital on the purported superiority of China’s handling of the pandemic compared with the West. Still, the public and countless investors had hoped for a shift from the present measures after the 20th party congress, where Xi is expected to secure a precedent-breaking third term as the party’s top leader.
According to Tuesday’s commentary, China’s dynamic zero-Covid approach has balanced pandemic control with economic and social development, allowing China to achieve “extremely low” mortality and “smooth” social and economic functioning.
“Dynamic zero is the anti-epidemic strategy with the lowest overall social cost and is the best option for the timely control of epidemics in China at this stage,” it said.
State news agency Xinhua also joined the chorus on Tuesday and called for the country to “build resilience and stamina” and not to “lie flat” – a term Chinese officials and media use for coexisting with the virus. To be sure, pressure for China to abandon its Covid zero strategy has been mounting as the world’s second-largest economy faces a historic slowdown. The most recent World Bank projections put China’s GDP growth for the year at 2.8%, down from its initial forecast of 5% and well below the rest of Asia.
The recent National Day holiday, traditionally a week-long spending and travel spree, saw trips drop 18 per cent from a year earlier and 39% compared to 2019 levels. Tourism revenues fell 26 per cent from the same period last year and totalled less than half of those earned in 2019. The country’s people, who have cooperated with frequent testing, sudden lockdowns and travel restrictions, have grown increasingly frustrated by the disruptions to daily life.
Meanwhile, China has seen a rebound in Covid-19 cases in recent weeks fuelled by stealthier and more transmissible variants.
Case counts have slowly climbed, with nearly new 2,100 local infections reported on Tuesday, though total cases remain much lower than in countries that have opted to coexist with the virus. In response, local governments have doubled down on efforts to contain the spread. Some cities in eastern Zhejiang province have asked travellers to complete testing within 1½ hours of arrival or face restrictions that would ban them from entering public places.
Other cities have imposed lockdowns even when there are few infections. In the city of Yongji in Shanxi province, a three-day lockdown was imposed as a precaution, though no local infections were reported.
In Beijing, some primary school pupils were sent home after infections were found at a game shop in the downtown Qianmen area. The capital city has had 54 local infections since September 29, and local party chief Cai Qi vowed to handle the outbreak as if “facing an abyss and walking on thin ice”.
“We must make every effort to guard against new outbreaks and quickly and decisively handle it … to ensure the safety of the capital,” Cai said at a meeting on Saturday.
Tuesday’s commentary recognized the challenge of containing outbreaks across the country, but said “the more this happens, the more we must appreciate that dynamic zero is sustainable and must be adhered to”.
The epidemic is a big test. If the epidemic can be prevented, the economy can be stabilised, people’s lives can be safe and secure, and economic and social development can be smooth and healthy,” it said.
"Compared to some countries that have relaxed travel and mask restrictions, China lags behind when it comes to vaccination and booster shot rates among the elderly. Some 90 per cent of China’s population received a primary dose of a vaccine, but only about 57 per cent received a booster shot. Among people 60 years or older – a group more vulnerable to severe Covid-19 – only 70 per cent received a booster jab.
Citing the country’s large population and imbalanced healthcare resources, People’s Daily said relaxed controls would inevitably raise the risk of infections in susceptible populations, and the spread of cases would deal a serious blow to the economy and social development.
“[We] will end up paying a higher price and suffer bigger losses,” it said, almost hinting that China will keep using covid zero as a scapegoat for all economic weakness for years to come...