China must rethink Zero Covid

China must rethink Zero Covid

It finally feels like the world, collectively, is moving in one direction. Toward reopening. Toward the new normal. Hong Kong, after some of the world's strictest quarantine rules kept Covid-19 at bay for almost two years, last Thursday reopened gyms, beauty parlours, theme parks and cinemas for the first time in more than four months.

Many schools have also resumed in-person learning. Further easing of restrictions is expected in May and June if new cases continue to dwindle. The number of daily infections has dropped below 1,000 from a peak of more than 70,000 on March 3.

The focus now, however, is on how far Hong Kong will go in opening up to the rest of the world and regain its role as an international finance hub. While leader Carrie Lam has lifted country flight bans and reduced hotel quarantine for inbound travellers to seven days from as long as 21 days, airlines are regularly banned for carrying three or more passengers found to be infected on arrival.

Japan lifted its general ban on entry for nationals of 106 countries earlier this month. Daily caps on arrivals have been steadily growing. Most recently, it began granting entry visas to parents, siblings and grandparents of foreign residents. The country is still closed to tourists but there are signs that authorities are working toward a cautious reopening to leisure travellers.

Elsewhere in Asia, many places including Malaysia, Thailand and Vietnam are taking steps to allow vaccinated travellers to enter freely. Singapore aims to remove all Covid tests for fully vaccinated visitors "very soon", possibly in the next few weeks.

Then there is China, with its Zero-Covid approach that is looking increasingly heavy-handed and unhinged. That has led to serious concern not only about the Chinese economy but also spillover effects on the rest of the world.

Faced with the country's worst virus outbreak in two years, Shanghai has doubled down on the Communist Party's unrelenting Zero-Covid approach, with a heavy toll inflicted on business and morale. Public anger is growing and more people are venting online, which is making Chinese censors' jobs even harder.

Economists say 40% of China's GDP is already "in some form of lockdown". If the Shanghai lockdown persists for this month alone, it will cost China's most populous city and financial hub a 6% loss of GDP, which translates to 2% loss of GDP for the whole country.

Last Thursday, Nomura Holdings cut its forecast for Chinese economic growth to 3.9%, from 4.3%. That would be China's worst annual performance since 1990, excluding 2020 when the pandemic pushed the growth rate down to 2.2%. Nomura's forecast is far lower than the government's target of 5.5%.

The government has been trying to stabilise the supply chain and inject liquidity to help the economy. But there are doubts about the effectiveness of such policies as President Xi Jinping has made clear he's sticking with Zero Covid.

"We need to work together to defend people's lives and health," Mr Xi told the Boao Forum for Asia in Hainan on Thursday. "For humanity to clinch the final victory against the Covid-19 pandemic, more hard efforts are needed."

While he made no mention of the Shanghai lockdown or the growing debate over the costs of his strategy, he reaffirmed the underlying goal of minimising deaths.

The dim economic outlook adds social risks to the political pressures confronting Mr Xi as he prepares for a leadership reshuffle later this year expected to give him a precedent-breaking third term.

Achieving Zero Covid is now way more costly and difficult but it seems the world still underestimates China's slowdown because so much attention has been focused on the Russian-Ukraine conflict and US interest rates.

The epicentre of the Omicron wave in China is the Yangtze River Delta, the economic, financial and logistics centre of China, containing some of the world's largest factories and ports.

As long as Omicron remains unchecked, lockdowns will continue to significantly disrupt production, distribution and consumption, weighing on the economy and the wider world. Foreign direct investment may also face a decline given the strict restrictions on travel, production and logistics.

President Xi's goal to simultaneously achieve both Zero Covid and 5.5% growth now seems very challenging. Instead of losing both battles, the administration needs to act quickly on adjusting its Zero-Covid strategy because that is the key to a growth recovery in coming months.

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