Sinology: On the Path to Pragmatism
By Andy Rothman
On the Path to Pragmatism
Xi’s move to ease China’s COVID policy should reduce obstacles to normal life in the country and set the stage for a gradual economic recovery.
“Short of a public health catastrophe, it’s hard to imagine that the Party will return to its zero-tolerance approach.”Andy Rothman, Investment Strategist
In the October 26 issue of Sinology, we wrote, “Now that the Party Congress is over, Xi Jinping has one big decision to make: return to the pragmatic policy path that made China rich and kept the Communist Party in power; or set a course for managing COVID and the economy that inhibits innovation and growth.” On November 11, Xi signaled that he has chosen pragmatism.
On that day, Xi’s government published a list of 20 measures designed to “optimize” mitigation of COVID, marking a significant change in direction of policy towards living with the virus and away from zero tolerance for cases. This more pragmatic path will be bumpy and implementation may stray off course during the winter as cases rise and local officials struggle with the new direction. Lockdowns and other obstacles to normal life will continue to appear in the coming months before ending in the spring. The need to vaccinate many millions of older people is also a challenge. But, short of a public health catastrophe, it is hard to imagine that the Party will return to its zero-tolerance approach, especially since the 20 measures were published under Xi’s name.
The change in direction of COVID policy has been accompanied by new government measures to support recovery of the property sector in what appears to be a coordinated effort to restore consumer confidence and jumpstart one of the most important parts of the economy.
It will take time for China’s economy to recover from the depths of zero-COVID but the new measures together with steps to help real estate boost significantly my level of confidence that Xi has made his one big decision and has chosen the pragmatic path I’ve been expecting.
20 measures to ‘optimize’ COVID mitigation
The most important aspect of the 20 measures is that they are designed to reduce obstacles to normal life in China which should set the stage for an economic recovery. For example, the government will stop tracking people (secondary contacts) who had only minor risk of exposure to confirmed COVID cases. This should dramatically reduce the number of people forced into quarantine, lowering the risk to consumers of going to shops and restaurants, and traveling.
The rules for designating towns and cities as “high risk” will be eased, and the length of quarantine for domestic travel from high-risk places will be further reduced. Only places with high case rates and unclear sources of infection and transmission will require frequent PCR testing. The central government announcement also states that local officials who violate these new directives will be punished severely.
The measures will make it easier for people to enter China from abroad, reducing the number of pre-arrival tests required and shortening the quarantine period to five days in a hotel and three days at home. (While this is still extreme compared to the rest of the world, it does represent improvement from the current 7+3 quarantine rule and from 14+7+7 at the start of this year.) Controls on flights from abroad will be relaxed, which should lead to an increase in the number of flights to China as well as a fall in currently very-high ticket prices.
The steps also include calls to promote vaccination, especially among the elderly, as well as stockpiling of drugs and medical equipment. Progress on this will be critical to further relaxation of restrictions in the spring.
“The change in COVID policy and steps to help the property sector appear to be a coordinated effort to restore consumer confidence and jumpstart a key industry.”Andy Rothman, Investment Strategist
Xi’s good reasons to move cautiously
In my view, the new policy direction is surprisingly clear, especially because this announcement was made directly by Xi. However, investors should understand that the path to the end of lockdowns—critical for a full economic recovery—will be bumpy, especially as COVID cases are on the rise in China. There will be more lockdowns in the coming months as well as reports of local officials failing to follow the new policy guidance. As a result, economic data is likely to remain weak through the winter. The end of lockdowns is not likely until the spring, which should be followed by a gradual economic recovery in the second half of the year.
China must change course. Zero-COVID has been successful from a public health perspective but under Omicron the economic and social cost has been significant. Fear of lockdowns has made families and companies reluctant to spend. Growth has slowed and unemployment has risen, especially among young people. Under zero-COVID, China’s economy has been on an unsustainable path.
It is, however, understandable that the course correction announced last week will be gradual. The number of COVID cases has risen sharply in recent weeks and is likely to increase further during the winter. China does not have enough intensive-care hospital beds. The country’s overall vaccination rate is high but there are about 25 million people over the age of 60 without any jabs and another 59 million older Chinese who need boosters. Fully protecting the most vulnerable will take time, which is why I do not expect lockdowns to end until the spring.
Three things to keep in mind
This more pragmatic approach to COVID, which strikes a better balance between public health and the economy, is in Xi’s own self-interest. Last week’s announcement leaves me confident that he is on the path to pragmatism.
As we continue to track two milestones on this path—further changes in COVID rhetoric, and increases in jabs—there are three things to keep in mind:
- China is likely to remain the only major economy engaged in serious financial easing while much of the world is tightening.
- Chinese households have been in savings mode since the start of the pandemic with family bank balances up 42% from the beginning of 2020.
- Those funds should fuel a consumer rebound in China and a recovery in mainland equities, where domestic investors hold about 95% of the market.
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