Non-zero Covid?

Dec 8, 2022

So, Xi Jinping finally caved on one of his signature policies. Apart from the hopelessly impractical zero-Covid approach to dealing with the highly transmissible, but less lethal, Omicron strain of the virus, two key developments forced this concession: increasingly visible signs of social protest and pushback from multinationals operating in China.

Unsurprisingly, a biased western media was quick to cast the scattered protests as a regime-threatening outbreak.  But the oft-mentioned June 1989 Tiananmen Square comparisons were wide of the mark.  Back then, a democracy uprising was sparked by the April 1989 death of Hu Yaobang — a pro-reform former leader who was emblematic of a political alternative to the hardline CCP.  By contrast, as the outcome of the recently concluded 20th Party Congress underscored, Xi Jinping has no political opposition in China today. The  current protests were an understandable expression of anger directed at an oppressive policy blunder rather than motivated by sympathy or support for an opposing political leader.   With good reason, Xi took that criticism personally.

Apple, the world’s most valuable company, raised an even deeper issue.  Having made a huge strategic bet on China as a low-cost efficiency solution for the production and assembly of its major product lines, Apple felt the brunt of the zero-Covid backlash when worker protests in Zhengzhou all but closed down its gigantic Foxconn outsourcing platform, with significant impacts on current production.  Earlier this year, Apple had announced that it was shifting a small portion of iPhone production to India as a hedge against China risks.  The anti-Zero-Covid protests hint of further diversification moves in the future.  Reports of a letter to Chinese leaders written by Foxconn founder Terry Gou that warned of systemic supply-chain disruptions stemming from zero-Covid excesses drove this point home.  As the world’s factory and assembly line, the Chinese leadership can hardly afford to dismiss the concerns of multinationals and their suppliers which have played such a key role in its economic development.

In response to those reactions, Xi tweaked the zero-Covid policy by relaxing some draconian testing and quarantine restrictions. Investors were quick to pounce on this pivot as a classic re-opening play, reminiscent of the snapback in the spring of 2020 following the first wave of lockdowns in response to the original Wuhan outbreak.  But today’s circumstances are very different than they were nearly three years ago. As the highly transmissible Omicron variant spreads, China faces three major problems – poor vaccine efficacy, the under-vaccination of its vulnerable elderly cohort, and limited intensive care capacity in its under-developed healthcare system.

Al this raises the possibility of an upsurge in Chinese fatalities from Covid-19, undermining the case made by the Chinese leadership that boasts of the nation’s superior performance in coping with a devastating pandemic.  Autocrats hate losing any face.   For Xi Jinping, abandoning an unworkable zero-Covid policy may only be the beginning of such an affront.  And it could well have the unintended consequences of prompting him to dig in his heels on other contentious issues, such as those that have embroiled the US-China conflict.

You can follow me on Twitter @SRoach_econ

Sign up for Stephen’s Dispatches: