Covid-19 Protests Pose A Potential Tipping Point For China

THE POPULAR DISCONTENT with the restrictions on daily life caused by the zero-Covid strategy has been simmering for months. The way it is now boiling over into mass street protests across China involving clashes with authorities is unprecedented for a country where the forceful imposition of social stability is the norm.

In Shanghai, where there were minor acts of resistance during the two-month lockdown earlier this year, reports say thousands of protestors have taken to the streets over the weekend, with some overtly critical of the Party and its leader, Xi Jinping. Police were seen bundling away those inciting such sentiments.

Protestors also laid flowers in the city’s Urumqi Street in memory of the ten victims of a fire in a locked-down apartment building in the Xinjiang capital on November 24. That deadly event triggered confrontations between residents and authorities amid accusations that residents of the building had not been able to flee and firefighters prevented from arriving by the zero-Covid restrictions (both allegations denied, as would be expected in state media; however on Sunday, Beijing authorities announced a ban on barricading the entrance gates of buildings under lockdown).

Mass protest movements everywhere tend to have a trigger event, often something not so out of the ordinary but occurring at the right moment to kindle smouldering discontent. The Urumqi fire may prove to be that, although equally, the leadership will move rapidly to extinguish any movement that might challenge it.

Beyond the street scuffles from Guangzhou to Lasha and Zhengzhou, there are incipient signs of anti-regime protest in the white banners in Shanghai and white sheets of paper held by students protesting in Beijing and Nanjing, both anti-censorship symbols that were also used by pro-democracy protestors in Hong Kong. Unverified videos on social media also show students chanting in support of freedom and democracy.

The frustrations and exhaustion of coming up to three years of strict zero-Covid restrictions, quarantines and testing are difficult to imagine elsewhere, where living with the pandemic has become the standard public health policy response. Allowing some dissent to blow off steam is a necessary safety valve in China; regulating it will be the challenge for authorities.

Beijing is boxed in. Zero-Covid is a policy closely attached to Xi and one to which he has repeatedly re-committed. Politically, it cannot be jettisoned overnight.

China’s low vaccination rates among the elderly, especially those over 80, plateauing booster rates and relatively ineffective vaccines compared to the Western mRNA shots that China refused to import make the health risks of lifting the policy unacceptably high. Hospitals would likely be swamped and a wave of mortality would undermine the Party’s narrative of its care for the people in contrast to the hundreds of thousands of deaths accepted by Western governments in their rush to open up for economic reasons.

Efforts to administer the zero-Covid policy more flexibly, including targetted rather than citywide lockdowns and less stringent quarantine rules, have been stymied by the repeated surges of infection caused by the omicron variant of the virus. Finding euphemisms for ‘lockdown’ has become a cottage industry among officials as large city after large city experiences new outbreaks requiring suppression.

The virus has adapted but China’s response to it has not.

Last week, China recorded its highest number of daily Covid cases since the pandemic began, 31,527 cases, a relatively tiny number for a country of 1.4 billion people and having an official Covid death toll of 5,200. That is three deaths per million of the population, compared with a rate a thousand times that in the United States.

China’s zero-Covid policy has saved lives, albeit at a high cost to economic activity. That cost is becoming potentially higher with reports that the giant electronics contract manufacturer, Foxconn, plans to shift half of Apple’s iPhone production from China to India in what would be Covid’s first major impact event on a global value chain.

Hitherto, the leadership has been prepared to accept the economic costs for political reasons. The question now is, how high a price in social stability on top of that will it be prepared to tolerate before the inevitable crackdown occurs.

Update: Protests in Shanghai and Beijing continued for a second night on Sunday.

Vaccination Will Not Eradicate China’s Zero Covid Policy

PRESIDENT XI JINPING is far from the first world leader to have a well-publicised exemplary vaccination against Covid-19.

Yet, the remarks by Zeng Yixin, deputy head of the National Health Commission, that the top leadership have all been vaccinated with domestically produced Covid vaccines is notable on several counts.

First, information connected to senior officials’ health is customarily tightly held.

Secondly, Xi’s doubling down on ‘zero-Covid’ is China’s signature response to the pandemic in contrast to most of the world’s acceptance of endemic Covid, trusting a vaccinated population will keep severe infection and mortalities at low rates. Attempting to eradicate Covid through the zero-Covid policy carries high costs, socially from the mass testing, strict quarantine rules and local lockdowns, and economically from the disruption to commerce and manufacturing lockdowns cause.

China’s Covid mortality rate is minuscule compared to other countries, but, until recently, so were its vaccination rates, especially among the vulnerable elderly. These are now officially up to 90% (share of the population that has been double jabbed). However, Sinovac, China’s inactivated-virus vaccine, does not reach the same level of effectiveness as the mRNA vaccines used in the West until three doses, which may explain the timing of Zeng’s announcement about Xi. China’s mRNA vaccine, ArCoV, is in trials.

However, it will reinforce speculation in the West that Beijing is preparing to drop its zero-Covid policy. That seems unlikely if only because Xi’s endorsement has made the policy a political imperative rather than an issue of public health.

The Party has also been using low Covid mortality and case rates as evidence that China’s political system is superior to liberal democracy, a key pillar of its argument for its legitimacy. It would take near-universal vaccination with an mRNA vaccine to reduce mortality and severe infection to sustain that narrative in place of zero Covid.

That is many, many months off. Cai Qi, the Beijing Party Secretary, recently said his city would uphold zero Covid for the next five years.

Arguing that vaccination levels and treatment capabilities have reached a level at which it was no longer necessary to eliminate the virus through zero Covid would also be challenging. The Party’s propagandists would need to find a uniquely Chinese spin on a policy widely adopted by other countries.

Minimising the economic damage of zero Covid is gaining policy attention, especially as headwinds increasingly batter the economy. Dynamic zero-Covid means eradicating new local outbreaks by removing infected cases to isolation centres. Lockdowns are becoming more targeted and quarantine periods shorter. The capital, for example, has managed to avoid the lengthy citywide lockdown that afflicted Shanghai from late March to early June.

However, zero-Covid will remain in place for at least the rest of this year, well into next, and, potentially, well beyond.

Zero-Covid Weighs Heavily On China’s GDP Growth

CHINA’S ECONOMY JUST about eked out positive growth in the second quarter compared to a year earlier, but the contraction from the first quarter tells the story of the economic impact of the zero-Covid policy on businesses and consumers, especially the lengthy lockdown in Shanghai.

Gross domestic product grew by 0.4% in April-June year-on-year and contracted by 2.6% compared to January-March, the Bureau of National Statistics announced today.

Shanghai’s economy shrank 13.7% year-on-year in the second quarter and Beijing’s 2.9%.

The national year-on-year number was the smallest since the data series began in 1992, excluding the 6.9% contraction in the first quarter of 2020 due to the initial COVID shock.

The recent high-frequency indicators, particularly for retail sales, suggest that the economy is starting to bounce back.

However, outbreaks of the highly contagious Omicron variants forcing more full or partial lockdowns remain a downside risk to recovery, given the continuing commitment to the zero-Covid policy.

The beleaguered property development sector remains a drag on growth, and the worsening outlook for the global economy is a further headwind.

The official target of 5.5% growth for the full year continues to look beyond reach, with an unrealistic 10% growth needed in the second half to achieve it. Further stimulus measures are likely, although authorities are limited in what they can do that will not stoke inflation (subdued by world levels) or worsen long-term debt risks.

Bloomberg calculates that $1.1 trillion has been earmarked for infrastructure spending, suggesting at best an extended pause to the effort to deleverage the economy.

Mini-Lockdowns Become China’s New Normal

THE LATEST VARIANTS of Covid-19 are posing new challenges to China’s zero-Covid policy and raising concerns that another round of lockdowns is imminent.

According to authorities, Macau has closed its 30 casinos and other non-essential businesses for at least a week after recording more than 1,500 Covid cases since the middle of June. Some 19,000 people are in mandatory quarantine.

Several casinos have been converted into temporary medical facilities, as Macau has only one public hospital.

While not formally locked down citywide, Macau, in practice, is closed.

Meanwhile, Shanghai authorities announced on Sunday that the city had identified its first case of the Omicron BA.5.2.1 mutation and that residents in several Shanghai districts are undergoing three days of double rounds of Covid testing. Mass testing in multiple districts also took place last week.

Mass testing has become the first line of defence to keep infection levels in check, with a negative test required to travel on public transport or enter certain places and those testing positive being put into mandatory quarantine.

China’s first case of the highly contagious BA.5 variant was discovered in the city in mid-May. Authorities said it was brought into the country by a passenger on a flight from Uganda. It has since been detected as far away as Xian and Dalian in Liaoning province.

Shanghai only emerged from a punishing near two-month lockdown in early June. Central government officials have said that new curbs should be targeted to reduce economic damage, but there is no indication that the huge cost of closing Shanghai has changed Beijing’s commitment to its zero-Covid. strategy.

Elsewhere, mass testing is also being conducted in several districts in Guangzhou and Xining in Qinghai province. Nanchang in Jiangxi province closed places of entertainment on Saturday.

Temporary curbs, including shutting entertainment and cultural venues, have also been imposed in Danzhou and Haikou in Hainan province and Lanzhou in Gansu. In all, some 6 million people are affected.

The town of Qinyang in Henan almost wholly locked down its nearly 700,000 residents from Sunday. One person from each household is allowed out every two days to get groceries.

Shanghai Reopening Would Be China’s Most Powerful Stimulus Measure

THE EASING OF the lockdown in Shanghai on June 1 may prove the most crucial stimulus measure that authorities take to revive China’s economy and get it anywhere near the official target of 5.5% GDP growth this year.

The more-than-two-month-long lockdown has not been lifted entirely, though there is no staggering of the easing. Most people can move more freely around the city, provided they can show a green health code on their smartphone. Public transport within the city has restarted. Crucially, many businesses are reopening their doors, with in-person customers having to show a negative Covid test within the previous month 72 hours.

However, 10% of the population of 25 million residents in high-risk areas will remain confined at home. Confirmed Covid cases and close contacts still face quarantine or hospitalisation. A localised outbreak risks the reimposition of a neighbourhood lockdown. Residents returning from trips outside the city still need to quarantine. Schooling remains remote, and places of mass entertainment remain shut.

Nonetheless, word reaches this Bystander that the mood in the city is far more one of celebration and relief than the noble forbearing that official media portrays. That, in itself, is likely sending a message to city officials, who have not emerged from the lockdown covered in glory.

Residents have been angry at the strictness of the measures, city officials’ ineptness in enforcing them, leading to, for example, food shortages, and the fact that much of the financial aid has gone to businesses and factories, not to households.

The economic cost has been tremendous. An academic paper published earlier this year gives a sense of the likely scale of the cost — full percentage points of GDP. Shanghai is the country’s biggest and most affluent city and its financial, commercial and international business hub. It accounts for 3.8% of China’s GDP and 10.4% of China’s trade with the rest of the world (2021 data).

It will likely take months for the city’s economy to be operating at anything like normal again, not least because supply chains need to stabilise first.

The manner of the easing of the lockdown allows both President Xi Jinping and Premier Li Keqiang to maintain their positions on the need for the zero-Covid policy and the need to reopen an economy facing multiple headwinds, respectively.

Earlier this week, government departments started to flesh out the details of the 33-point stimulus package that Li announced on May 23. The measures are broad-ranging, including tax cuts, business subsidies and loans, and infrastructure investment. As important as staving off a potential recession, the stimulus aims to stabilise employment, the government’s short-term priority.

The measures also included initiatives such as streamlined customs and immigration intended to bolster the confidence of foreign firms manufacturing in China who might be thinking this is a time to look elsewhere.

The critical but beleaguered property sector has had separate support measures, including interest rate cuts.

The economic impact of getting Shanghai back to normal business would mean more to the national economy than all of the above.

Shanghai’s lockdown has been the most disruptive but only one of several in major cities that have provided a stark reminder of China’s willingness to throw the economy into turmoil when political priorities demand it.

As Li has repeatedly warned, the official target of 5.5% GDP growth is undoubtedly out of reach. Much has been speculated about a rift between Xi and Li ahead of the autumn’s Party Congress, the truth of which is probably impossible to know. Sometimes, economic tumult is just economic tumult.

No Going Back For China On Zero-Covid

EVEN THOUGH NEW Covid-19 infections have peaked, Shanghai city authorities are imposing stricter control measures, an indication of the intensifying political dimension to the zero-Covid policy on which President Xi Jinping yet again pinned his personal colours at the Politburo Standing Committee on May 6.

Shanghai is already under what is now more than a month’s-long lockdown that has seen deaths, caused economic disruption and kindled social unrest amid localised food shortages and disgruntlement about city authorities’ management of the situation.

More mass testing and stricter enforcement of mandatory quarantine for those testing positive or who have co-residents, not just family or close neighbours who test positive are on the way. Residents have reportedly received notices of the imposition of ‘quiet periods’ of three to seven days in which they will not be allowed outside and non-essential deliveries will be halted.

Beijing, too, is extending quarantine measures and making its lockdowns less ‘lite’ in a bid to avoid the capital becoming a second front in ‘the battle for Shanghai’.

As this Bystander has noted before, the top leadership is in a bind. Under- and ineffective vaccination has left it with little option but to persist with trying to achieve zero-Covid. Treating the pandemic as endemic now would likely trigger a wave of deaths that would undermine the narrative of China, unlike the heartless West, putting the lives of its citizens above economic considerations.

Yet the longer it persists with zero-Covid, the less choice it has but to continue it. Politically, Xi cannot make a U-turn, especially with a critical Party Congress coming up in the autumn. The messaging by state media and censorship of social media will negate public criticism of Xi, while local officials will be under pressure to fall into line.

The same may hold less true in elite circles, even if criticism remains muted. Few if any will take the gamble of speaking out loudly against Xi now, cognizant that his power may be far greater after the Party Congress.

China’s First-Quarter GDP Growth Raises An Eyebrow

THERE HAS BEEN much about China’s latest surge in Covid-19 infections to cause a raised eyebrow.

That its largest city Shanghai, now entering its fourth week of strict lockdown, has only just officially reported its first three virus-related deaths is one. The first-quarter GDP figure announced today by the National Bureau of Statistics, at 4.8% growth year-on-year, is another.

Thre is a huge political incentive for officials not to report Covid-19 deaths, given Beijing’s doubling down on its narrative that its zero-Covid policy in prioritising saving citizens’ lives is superior to the West crass re-opening at any cost. That and ultra-narrow criteria for ascribing a death to Covid make it highly likely that Covid-19 deaths have been undercounted on a scale in China that far exceeds undercounting elsewhere.

Local officials have long suspected overcounting economic activity, although much less so of late. Yet every tallying muscle must have been strained to record 4.8% y-o-y GDP growth in the first quarter and 1.3% growth from the final quarter of 2021. Private economists had forecast around 3.5% and barely 1.0%, respectively.

It may well be that growth was sufficiently strong in the first two months of the quarter that it offset much of the sharp slowdown evidenced by March’s drop in retail consumption and slowing industrial output and investment spending. (It is also prudent to remember that these are preliminary data that may yet get revised.)

Retail sales contracted 3.5% from a year ago, the first decline since July 2020; industrial output growth decelerated to 5% from the 7.5% expansion in January-February. Investment growth also slowed to 9.3% in the first quarter from 12.2% in the first two months of the year.

The relative strength in industrial production and investment is surprising given the already-reported weakness in some of the sector numbers underpinning them, such as sharp falls in car and cement production.

The economic damage inflicted by Covid lockdowns would have intensified toward the end of March, with Shanghai going into lockdown on March 28. A group of economists at Chinese and US universities estimated that a month-long lockdown of the city would cut 2.7% off national GDP for the month.

Shanghai is now entering its fourth week of a lockdown that has closed many factories. The longer the lockdown-induced impacts on production drag on, the larger the spillover effects through supply-chain disruptions on the rest of the economy.

Beijing will be anxious to minimise those given the multiple headwinds the economy is facing, few, such as the Russian invasion of Ukraine with its consequent impact on commodities prices, within its control.

The Ministry of Industry and Information Technology has sent a team to help more than 600 companies in Shanghai restart operations, including those producing computer chips, cars and car parts, medical supplies and equipment and pharmaceuticals. ‘Closed-loop’ bubbles for industrial workers will be imposed. Limited production at plants supplying Apple and Tesla resumed this way over the weekend.

Less easy to address and politically more concerning is the rise in unemployment the lockdowns are causing. At 5.8% in March, joblessness was at its highest level since the early part of the pandemic.

The economy is likely to get worse in April before it gets better. China’s ambitious goal of 5.5% GDP growth for the year looks distant. Increasingly frequent warnings from top leadership about the economic headwinds from geopolitical tensions, inflation pressures and slowing external demand underline this.

More monetary and fiscal stimulus is inevitable to bridge the economy to the point where more effective vaccination can relieve the necessity for economy-sapping lockdowns to contain a virus whose increasingly contagious if less deadly mutations are outrunning zero-Covid’s capacity to contain them.

Counting The Economic Cost of Zero-Covid

CHINA HAS TRADED economic growth for saving lives in the pandemic — the quid pro quo of its zero-Covid policy — and criticised Western nations for doing the opposite.

A new paper by five economists from Chinese and US universities, led by Jingjing Chen of Tsinghua University, seeks to put a hard number on that hit to the economy.

It is a large one.

The quintet estimates that if the four big cities of Beijing, Shanghai, Guangdong and Shenzhen underwent a one-month full-scale lockdown, China’s real GDP would fall by up to 8.6% during the period.

They reached their estimate by analysing real-time data of inter-city road haulage rather than the more commonly used measure of consumption declines.

Applying their model to the most extreme case scenario — all Chinese cities put into full-scale lockdown for one month — GDP would decline by 53% in the month.

It is unlikely, but not impossible given the Omicron breakthrough, that Beijing, Shanghai, Guangdong and Shenzhen would be put into lockdown simultaneously for that long. Nonetheless, the authors point out that a full-scale lockdown of a single big city would be sufficient to impact national GDP:

The largest three effects come from Shanghai, Beijing and Shenzhen, where full-scale lockdown will knock 2.7%, 2.5% and 1.8% off the aggregate real income, respectively.

The paper gives academic backing to Shanghai authorities’ efforts to avoid a full-scale lockdown of the country’s financial and commercial hub for as long as possible.

The authors note that their research looks at only the short-term impacts of citywide lockdowns and does not consider the effects on expectations and saving and investment decisions in the longer term.

The authors also conclude that a city’s economic size is the primary determinant of the aggregate effect of locking it down. Yet, a city’s position in the country’s trade network plays a more significant role in the spillover effects. These can account for about 10% of the aggregate impact.

The strictness, severity and persistence of China’s lockdowns make international comparisons difficult. However, the authors say that the economic losses caused by Chinese lockdowns are four times as large as those caused by the Italian and Canadian lockdowns in the second quarter of last year.

Omicron Continues To Challenge China’s Zero-Covid

WORKD REACHES US of panic food buying in Guangdong. Residents are stripping supermarket shelves bare, fearing the possibility of a Shanghai-style citywide lockdown following the discovery of new Covid-19 cases in Guangdong’s provincial capital. Authorities are due to start mass testing. Given Beijing’s doubling down on its zero-Covid policy, restrictions on movement will surely follow.

Meanwhile, Shanghai authorities are suggesting some slight easing of the severe lockdown residents there have been under for more than a week. They will categorise districts into three types according to the level of risk from Covid. Once a section achieves the least risky status, some of the strict restrictions on movement may be eased locally.

That will still take some time to pass. All infectious cases will have to be moved to within centralised Winter Olympic-like ‘closed-loop’ central facilities first so the outbreak is contained there and cannot spread. Jilin in the northeast is only just coming out of its lockdown after 33-days.

China’s largest city and financial and commercial hub is still struggling to provide the locked-down with basic food supplies and medical care. However, reports say the situation has stopped getting worse and is improving in some districts as the logjams in distribution start to ease.

Shanghai has experienced China’s worst coronavirus outbreak since the early days of the pandemic. The under vaccination of the elderly and relative ineffectiveness of China’s vaccines — Sinovac cuts the death rate tenfold for over-80s but is roughly half as effective as the Pfizer-BioNTech vaccine — have painted Beijing into a corner.

It has little option but to stick with its zero-Covid policy despite its inability to deal with the rapid spread of the high-contagious but less fatal Omicron variant. Nonetheless, zero-Covid now no longer means zero local cases but zero local cases outside quarantine facilities.

Attempting to live with the virus as other countries are now doing would likely result in a politically unacceptable wave of deaths and hospitalisations until widespread vaccination with more effective vaccines could be achieved on a mass scale. That would require a national roll-out of an indigenous mRNA vaccine that would take months to administer the initial two shots.

It would also undercut the official narrative of how China’s success in keeping the death rate low by international standards stands in contrast with Western governments’ willingness to accept high death rates among their citizens in order to reopen economies.

Shanghai Covid Surge Will Have Political Fallout

SHANGHAI’S COVID-19 OUTBREAK is becoming a political and medical emergency.

The country’s financial and commercial hub is struggling to contain the mainland’s worst outbreak of infection since the initial one in Wuhan in early 2020.

Officials reported 8,000 new cases on Saturday, a new daily record, and more than 13,000 on Monday as mass testing got into fuller swing.

The city tried to avoid a total lockdown because of Shanghai’s economic importance, opting for a two-phase policy that started on March 28. That has failed to contain the outbreak and become chaotic.

The city’s hospitals, short of beds and medical services, have struggled to cope. The mass testing programme has experienced delays in getting results. Feeding 25 million people in lockdown is proving to be a logistical challenge.

Nationally, China has reported no new deaths from Covid-19, although unofficial reports of deaths in Shanghai have been circulating for some days.

As in Hong Kong, low and ineffective vaccination rates among the elderly appear to have exacerbated the situation. The Donghai Elderly Care Hospital in eastern Pudong has reportedly suffered a severe outbreak of infections.

A senior Party official, Ma Chunlei, has said Shanghai was not sufficiently well prepared for the outbreak, a rare public admission of shortcomings in a city regarded for its administrative competence.

This has prompted a mobilisation of external assistance not seen since the pandemic’s early days. Vice Premier and Politburo member Sun Chunlan, who oversaw the strict anti-Covid regime at the recent Beijing Winter Olympics, was sent to the city at the weekend to provide political and administrative direction.

She stressed ‘unswerving adherence’ to the zero-COVID approach and told the city’s officials to improve their quarantine management. She also told police to guarantee social order in lockeddown areas and treatment facilities, a hint perhaps that residents’ exasperation is boiling over beyond social media.

The People’s Liberation Army has now mobilised 2,000 personnel and other provinces sent 36,000 people to help the city.

The first lockdown, covering everyone east of the Huangpu River, which includes the financial centre in Pudong, has been extended. With phase two, covering the city’s western side, still in effect, the whole city is now locked down.

It is unclear how long that will last, but it will likely stay in place until the medical situation stabilises, perhaps another week or more.

Shanghai’s mild experiment in easing back from the zero-Covid policy has backfired. That will have economic ramifications for an already slowing economy and how any further big-city outbreaks are handled.

Even more, it will have political ramifications ahead of the Party Congress in the autumn that will depend on how the top officials of the influential Shanghai party come out of the medical crisis.

There will be a new raft of Politburo leaders to accompany President Xi Jinping’s likely third term, over which the Shanghai faction would expect to have some sway. Local Party secretary, Li Qiang, had been tipped as a possible replacement for Li Keqiang as premier. He will look like a less safe pair of hands now.