China’s zero-Covid exit and reopening will be neither smooth nor swift

As Beijing begins easing pandemic restrictions, the rising Covid-19 caseload and pressure on hospitals could force local authorities to back-pedal
Even with a fully reopened economy by next year, recovery will take time

Aidan Yao

Published: 7:30pm, 14 Dec 2022

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A 20-point plan to recalibrate China’s pandemic response – followed by additional 10 measures announced last week – marks the beginning of the end of the zero- Covid policy.

In fact, steps towards reopening have quickened after social protests across the country suggested diminishing public support for the rigid controls that have been in place for three years. Beijing is likely to have used this shift in public opinion to accelerate the policy exit, paving the way for an eventual reopening of the economy and society in 2023.

While the direction of travel is clear, the path to reopening is unlikely to be smooth and linear. A sudden change in pandemic response – from government-mandated lockdowns to self-motivated medical protection – will create its own risks as the virus sweeps through communities.

Indeed, with Covid-19 cases surging to record highs, pressure on the public health system could mount in some regions. China’s limited ICU capacity, in particular, could struggle to cope with rising severe cases among the elderly, where vaccine coverage has yet to reach appropriate levels.

Some local authorities could be forced – by a rise in hospitalisations or even deaths – to reverse easing measures to slow the virus transmission, or face a chaotic exit from the zero-Covid policy. Neither would be pleasant for the economy, nor society at large.

To manage these risks, Beijing needs to carefully sequence the transition out of its existing policies. I think this should proceed in three phases. Phase one should focus on getting the public medically and mentally ready for a change.

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This should involve raising the vaccination rate for the elderly, introducing more antiviral drugs, constructing more field hospitals and ICU capacity, and reshaping public consensus to ease people’s fears of the virus. These changes are already under way, but the pace of building the medical defences needs to quicken.

Phase two should put emphasis on reopening the domestic economy. This involves easing social and mobility restrictions, replacing mass PCR testing with RAT testing, loosening quarantine controls (by allowing for home surveillance), and abandoning the frequent use of “static management”. A broad liberalisation within China could be reached by the middle of next year, at least.

The final step would be to open the border with the rest of the world through successive reductions of quarantine restrictions for visitors. Once completed, China would be reintegrated back into the global community – something that should be possible by the end of 2023, if not earlier.

Investors must remember China has the tools to speed recovery

This reopening is critical for the economic recovery anticipated by the market next year. But even with the right sequencing of actions, as outlined above, there is no guarantee of smooth sailing for the real economy.

The latest data, including the PMIs and mobility indicators, suggests that the economy is currently under tremendous pressure from tightened administrative controls and surging Covid-19 cases impeding normal social and economic activities. The growth momentum has slowed markedly so far in the fourth quarter, with little sign of improvement on the horizon.

People walk by office towers in the Lujiazui financial district of Shanghai on October 17. Photo: Reuters

Indeed, economic growth is likely to stay subdued in the next month or two as the public adjusts to the changing Covid policies and rising infections, which may instil cautious behaviour among consumers and businesses. Beijing needs to use this window to accelerate vaccination and get medically prepared for a more substantial relaxation of administrative controls after the Lunar New Year.

As the economy reopens more decisively thereafter, consumption and services activity could lead a cyclical upswing. The growth momentum is expected to build beyond the first quarter of 2023 and accelerate strongly in the second half of the year once the domestic economy is freed from the pandemic.

This economic reopening could create some inflation pressure later in the year, but much less so than seen in developed economies. The much larger starting point for spare capacity and prevailing disinflationary forces need to be unwound before price pressure can sustainably emerge.

Doomsayers should think twice before writing off China’s economy

In addition, this year’s strong growth in global commodity prices is unlikely to be repeated in 2023, particularly as recession takes hold in developed economies. This is barring another escalation of geopolitical conflicts involving major energy and commodity producers.

Inflation could become a focus of the central bank in 2024 if China’s reopening and economic recovery proceed smoothly. But for the coming 12 months, I think the key task for the People’s Bank of China is to keep its policy accommodative to safeguard the economy back to trend growth.

Aidan Yao is senior emerging Asia economist at AXA Investment Managers