[China Economic Dilemma] ① On One Side Exit Strategy, On the Other Side Tightened Quarantine Measures

Market Shaken by Rumors Amid Reopening Hopes
Even Key Exports Falter, Making Easing of Restrictions Inevitable

[Image source=EPA Yonhap News]

[Asia Economy Beijing=Special Correspondent Kim Hyun-jung] While China is seeking a zero-COVID exit strategy to normalize economic activities, it appears that the frontline epidemic control measures are not being relaxed. Based on subtle shifts in government stance, the market reacts sensitively and remains on edge whenever rumors arise. Since the rebound of the Chinese economy, which plummeted after the spread of COVID-19, depends on the timing and intensity of epidemic prevention policy announcements, there is an assessment that Chinese authorities will find it difficult to continue ignoring expectations for reopening (resumption of economic activities). [Related Article] China’s Economic Dilemma

◆Epidemic easing signals only... actual intensity increased= Recently, Chinese epidemic prevention authorities and local governments have been sending faint signals of policy changes. In regions such as Guizhou, Sichuan, Gansu, and Guangdong, the previously free polymerase chain reaction (PCR) tests have been converted to paid tests (up to 5 yuan) since this month, and some areas in Guangdong and Anhui provinces announced the removal of the PCR negative certificate requirement for boarding high-speed trains or airplanes. These changes can also be understood as preparatory steps for transitioning to 'with-COVID' policies. Additionally, the Party’s official newspaper, People's Daily, mentioned on the 4th that the aftereffects of COVID-19 are at a 'mild level,' and on the 6th and 7th, epidemic-related response policies were announced in Hohhot, Inner Mongolia, and Beijing, respectively.

However, the intensity of daily epidemic prevention measures centered in the capital Beijing shows no signs of easing. The core epidemic prevention measures, such as the ten-day (7+3) quarantine upon entry and mandatory periodic PCR testing, remain unchanged. Movement from other regions to Beijing is arbitrarily blocked by authorities using the 'Tanchuang' (pop-up window deactivation) function of the Jiankangbao (health app that verifies nucleic acid test results), and in Korean-dense areas like Wangjing in Chaoyang District, Beijing, the PCR testing cycle has been strengthened from once every three days to daily for the time being.

Amid the discrepancy between declarative signals and actual epidemic prevention, the market is thirsty for news of 'dynamic zero-COVID' easing. The Shanghai Composite Index rose 5.3% in the first week of this month, while Hong Kong’s H-Share Index and Hang Seng Tech Index surged 9.0% and 15.6%, respectively, driven by expectations of epidemic easing. Remarks by Jeong Gwang, former chief scientist at the National Center for Disease Control, hinting at changes in zero-COVID policy at a conference, and forecasts by local Chinese securities firms that the 10th epidemic prevention guideline containing regulatory easing could be announced soon, combined with rumors about the establishment of a 'with-COVID' expert team led by Wang Huning, secretary of the Central Secretariat and known as 'Xi Jinping’s strategist,' have fueled the spread of these expectations. Bloomberg’s report that the State Council is considering abolishing the 'circuit breaker' that suspends flights carrying confirmed cases for up to two weeks also added weight to this.

◆Exports also plummet... bleak outlook= While the government delays easing epidemic prevention, China’s economic indicators continue to show weak trends. According to the announcement by China Customs on the 7th, China’s exports in October amounted to $298.37 billion (approximately 420 trillion won), a 0.3% decrease compared to the previous year.

If this continues, the outlook is bleak. According to the Hong Kong South China Morning Post (SCMP), Nomura Securities stated regarding this indicator that "it is the first negative turn since May 2020," and predicted that export contraction could deepen to 4% year-on-year in November and December. They added, "The decline in exports will burden growth, employment, and investment, and may prompt the Chinese government to reconsider its zero-COVID strategy and real estate regulations." Nomura Securities also analyzed that as of the 3rd, 10% of China’s GDP is under some form of lockdown due to restrictions.

Jang Ji-wei, chief economist at Pinpoint Asset, pointed to supply disruptions caused by zero-COVID as the reason for October’s export slump, citing the Foxconn incident in Zhengzhou as a representative case, and forecasted that export growth will remain weak for the next few months.

The previously released official Chinese manufacturing Purchasing Managers’ Index (PMI) was 49.2 in October, down from 50.1 the previous month and below the baseline of 50.0. China’s third-quarter gross domestic product (GDP), released last month, improved to 3.9% from 0.4% in the second quarter but was far from the annual target of 5.5%. The manufacturing sector’s work resumption rate remains around 70%, and youth (ages 16?24) unemployment approaches 20%.

An anonymous diplomatic source said, "There is a consensus among policymakers that it is difficult to maintain epidemic prevention in the same way as before," but added, "However, the number of confirmed cases announced by regions differs from actual cases, and response capabilities vary, so each is coping in a self-help manner, causing a disconnect between external policies and on-the-ground policies." Another source added, "Chinese authorities will adjust the intensity of epidemic prevention measures comprehensively considering the COVID-19 health situation, China’s economic conditions, internal epidemic prevention needs, and authoritative interpretations from the World Health Organization (WHO)."