Nov 15, 2022 03:45 PM

Wang Tao: China’s Looser Covid Restrictions Mark an Important Step Toward a Policy Change

Photo: VCG
Photo: VCG

Covid outbreaks have flared up in multiple cities across China since late September. The number of new daily cases (confirmed cases and asymptomatic infections) surged from a few hundred in September to more than 10,000 on Thursday. In particular, the city of Guangzhou, with a population of 19 million, reported that the number of daily new cases more than doubled in a week to 2,600. In the city, the number of mid-to-high risk areas rose from 1,400 at the end of September to around 7,000 on Thursday.

Therefore, tighter Covid-related restrictions have weighed on economic activity, especially services and the movement of people. In October and the first 10 days of November, the average number of people who rode the subway in 18 large Chinese cities fell 19% from the same period the previous year. That’s up from a 12% year-on-year drop in September. Property sales suffered deeper declines, falling by 18% year-on-year in October and 23% year-on-year in the first 10 days of November. The full truck load traffic index slid to about -26% year-on-year. Overall, the UBS Composite Activity Index weakened to -8.5% year-on-year in October and -12% year-on-year in early November.

Against this backdrop, the central government released 20 measures on Friday to refine Covid controls. The government is still sticking with its “Dynamic Zero-Covid” goal and emphasizes that these refinements don’t mean a wholesale Covid policy easing or “lying flat,” which effectively means living with virus.

However, the 20 new measures indeed relax some Covid restrictions, refine some Covid rules, and call for reducing local add-on restrictions. Key measures include: shortening the quarantine period, removing quarantine for indirect close contacts, cancelling the “circuit breaker” scheme for inbound flights, limiting the use of PCR testing, narrowing the coverage of risk areas, cracking down on local add-on restrictions, accelerating booster vaccination, improving the health care system, and stockpiling drugs to treat Covid-19.

As we wrote in our China outlook 2023, we expect the country will ease off its “zero-Covid” policy, notably from the second quarter of 2023, which should be preceded by preparatory work on multiple fronts. We think Friday’s announcement not only eases previous tight Covid restrictions, but also starts to pave the way for a major Covid policy change in the future, which is largely in line with our expectations.

It includes:

1.) Changes in official communication and narrative (e.g. easing restrictions amid a surging Covid wave)

2.) Clarifying the changed nature of the omicron variant and proper medical response to it (e.g. shortening quarantine period, no identifying indirect close contacts)

3.) A notable increase in booster vaccinations (e.g. explicitly calling for accelerating booster shots for the older population)

4.) Improving health care facilities and hospital capacity (e.g. making differentiated treatment plans, building a hierarchical medical system, stockpiling anti-Covid drugs and equipment)

That said, these measures are likely only the early steps of a major Covid policy change. We still would like to see more concrete efforts to minimize the Covid shock and secure a smooth transition, such as further decisive narrative changes, a clear calibration of Covid policy objectives and a more effective strategy to boost vaccination, among others.

The announcement reiterates that China is not abandoning its “Dynamic Zero-Covid” strategy, and explicitly calls for more rapid, resolute and decisive measures to contain the spread of pandemic at an early stage, especially in important areas, with confirmed cases being identified, reported, quarantined, and treated as rapidly as possible. Given the eased Covid restrictions but still surging Covid outbreaks, we think it is still possible to see intermittent lockdowns in some cities if the new cases surge sharply and broadly.

That said, the lockdowns should be more targeted and more limited in high-risk areas, rather than whole cities. Indeed, Guangzhou just announced it will follow today's newly released guidelines, keeping Haizhu district under lockdown while easing the duration of quarantine for close contacts and suspending it for indirect close contacts. Meanwhile, for other low risk areas, local add-on restrictions may be reduced, which should be positive for the normalization of economic activity. Looking ahead, the current Covid outbreak may flare up further in winter due to the eased Covid restrictions. It will be more challenging for the government to manage Covid if the number of new Covid cases jumps to tens of thousands or more. That could force China to adjust its Covid policy even further. We maintain our expectation for subdued growth in the fourth quarter of this year and the first quarter of 2023, before seeing a notable rebound starting in the second quarter. (UBSe: 2023 GDP growth 4.5%).

Wang Tao is the head of Asia economics and chief China economist at UBS Investment Bank.

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