Decoding Beijing’s mixed signals on ‘zero-COVID’; despite popular perception, Xi still focused on anti-corruption

     SinoInsight  1       

Xi Jinping’s call for the CCP to be “unwavering” in his “zero-COVID” policy has many observers, businesses, and investors believing that the PRC will not move away from its draconian pandemic restrictions and measures. Many also believe that China’s economic prospects are bleak because Xi will prioritize political and national security over the economy.

Meanwhile, the CCP has been sending mixed signals on its plans for “zero-COVID” even as several localities (Guangzhou, Zhengzhou, shut down of schools in parts of Beijing, etc.) reimposed strict epidemic control measures to control recent outbreaks. Noteworthy developments include:

Nov. 2
The PRC National Health Commission held a meeting to convey and study the “spirit of the 20th Party Congress” to its Party members and cadres, as well as those of its directly affiliated agencies. Ma Xiaowei, director of the National Health Commission, attended the meeting and delivered a speech.

The meeting praised Xi Jinping and called for the full implementation of the decisions and deployments of the 20th Party Congress, including adhering unwaveringly to the general strategy of preventing the coronavirus from entering the country and causing a rebound in cases, as well as to general policy of “zero-COVID.” The meeting also called for the resolution implementation of the “four earlies” (early detection, reporting, isolation, and treatment), and the controlling of sudden outbreaks “within the smallest scope, the shortest time, and the lowest cost.”

Nov. 3
Jin Dongyan, a professor at the University of Hong Kong’s School of Biomedical Sciences, said in an interview with Health Times (a mainland media outlet under Party mouthpiece People’s Daily) that the symptoms of long COVID are mild and short-term. Jin added that mental health problems like fatigue, headache, insomnia, and anxiety form the bulk of long COVID symptoms.

Jin’s interview with Health Times was republished in several official mainland media outlets and led some observers to believe that the CCP was laying the groundwork to shift its “zero-COVID” policy.

Nov. 4
Bloomberg News reported that the PRC State Council recently asked government agencies, including the Civil Aviation Administration of China, to prepare for the ending of the “circuit-breaker mechanism,” citing sources familiar with the matter. The circuit-breaker mechanism would temporarily ban airlines from flying specific routes into China for a week or two depending on how many COVID-positive patients they brought into the country.

Bloomberg added that the request is part of a three-step plan conceived in the middle of 2022 to normalize China’s aviation industry. The first step is to increase the number of flights into China, and this appears to be already underway. The second step is the easing of the circuit breaker rule and the third step is facilitating a full return to normal aviation traffic. The timeline for implementation of the second and third steps is unclear.

Nov. 6
State media reported that 30,000 people participated in the Beijing Marathon, which was paused for the past two years due to COVID-19. Only residents of the city and some invited runners took part. Runners had to be vaccinated, did not need to wear masks, were forbidden from leaving Beijing for seven days before the run, and had to produce a negative test in the previous 24 hours.

Nov. 7
The Wall Street Journal reported that CCP leaders are considering reopening steps but are “proceeding slowly and have set no timeline,” citing people familiar with the matter.

The Journal noted that Beijing has already taken measures to ease border controls and is likely to further reduce the number of hotel-quarantine days for incoming travelers by early 2023 to seven days, down from the current seven days in a quarantine facility and three days of home monitoring. Also, officials have informed retail businesses that the frequency of PCR testing could be reduced as early as November 2022, partly due to the high cost of mass testing. People familiar with the matter said that the PRC government is planning to cut down the thousands of testing stations set up across the country, also due to cost reasons.

“The reopening in China will be carried out in an orderly manner. It will start gradually depending on the geographic areas and sectors, and it will be different from what we’ve seen in the West,” a person involved in discussions told the Journal. For instance, the authorities could implement less stringent measures in cities that are major business hubs.

The PRC is also maintaining close contact with the World Health Organization and monitoring the latter’s COVID-19 pandemic alert level. If the WHO downgrades the alert level, “Beijing could start to push for more aggressive easing measures and adjust the domestic narrative on COVID-19, effectively declaring victory in containing the virus,” according to people familiar with the matter. For instance, Beijing could start treating COVID-19 as a “Class B” infectious disease after a change in the WHO’s designation; the PRC is currently treating COVID-19 as a “Class A” disease and applying stricter public health measures. Yet even a redesignation of COVID-19 severity could see China take “perhaps a year” to return to “prepandemic levels of activity.”

Beijing is also looking at the elderly vaccination rate and access to oral antivirals to treat COVID-19 before considering a full reopening of the economy. The authorities had approved two antivirals earlier this year, and is planning a vaccination campaign later this year targeting vulnerable groups (95 percent of those age 60 and above to receive two doses of the vaccine).

However, the people familiar with the matter said that “many of the [“zero-COVID”] measures will remain” this year, including efforts to “aggressively stamp out even small outbreaks, through mass testing and lockdowns.” People will still require health codes to access public spaces and travelers to China will face quarantines and rounds of testing. Beijing is taking a cautious approach to easing “zero-COVID” because it is considering “the potential costs of reopening for public health and support for the Communist Party.”

OUR TAKE
1. The various news items above affirm our earlier observations (see here and here) that the PRC is preparing to relax “zero-COVID” restrictions. In particular, the “leaks” to legacy Western media outlets like Bloomberg and The Wall Street Journal show that Beijing is serious about reopening and is floating “trial balloons” first to gauge international reaction, manage external expectations, and fine-tune its plans.

The news items also affirm our analysis that Xi Jinping could gradually move away from the policy even though it may never be removed from the books. The PRC National Health Commission’s call to “unwaveringly” adhere to “zero-COVID” is part of CCP formalism; as long as a policy is not officially rescinded, officials will keep repeating it in meetings and other formal settings to demonstrate their compliance with Party Central. Meanwhile, local officials will often implement Beijing’s policies in accordance with their self-interests and after weighing the political signals sent from the top (上有政策, 下有對策). For instance, second-rank Politburo Standing Committee member and former Shanghai Party secretary Li Qiang pursued “precise epidemic prevention” in Shanghai in early 2020 before switching to a purer form of “zero-COVID” in early 2022 following mass outbreaks in the city.

As we previously noted, Xi’s ability to effectively move the regime away from “zero-COVID” will be limited by the degree to which he can overcome systemic problems in the CCP regime like “orders not leaving Zhongnanhai” and officials adhering to “prefer left rather than right,” “one-size-fits-all,” and “campaign-style” approaches, as well as other Party culture-derived habits.” Xi might also have done himself a disservice with regard to easing “zero-COVID” by elevating his ally Li Qiang to the Politburo Standing Committee in the “premier-elect” position; local officials looking to build political capital with the Xi leadership and wanting to be “politically correct” could decide that emulating what Li did in Shanghai with epidemic prevention is the right way to go to brighten their career prospects.

While the reports by Bloomberg and The Wall Street Journal indicate that Beijing has no timeline for easing “zero-COVID,” we believe that the Xi leadership could step up efforts in that direction following the second round of major personnel reshuffles at the 2023 Two Sessions (to be held in March barring unforeseen circumstances) and the conclusion of the political conclave.

The Journal noted that Beijing is moving cautiously on relaxing “zero-COVID” because it is concerned about fresh outbreaks affecting the CCP’s political legitimacy. We believe that the Xi leadership is also likely worried that reopening too quickly could escalate capital outflows, migration out of China, and reduce foreign exchange. Already, Western media outlets are reporting (see here and here) that wealthy Chinese and business elites are leaving the country because they fear that things could turn for the worst following Xi’s power consolidation at the 20th Party Congress. Beijing could further be worried about losing an effective “stability maintenance” tool in “zero-COVID” just as social tensions and pressures are increasing with the rapid deterioration of the Chinese economy.

2. Domestic and external factors are threatening regime security and compelling Xi Jinping to move away from “zero-COVID.”

To cope with the U.S. and its allies ramping up pressure on China, the Xi leadership is moving to reintegrate the PRC more deeply with the world and the global economy so that the West still has an interest in working with (and thus help preserve) the CCP regime. Improving international relations and changing negative foreign impressions of China are also vital to stemming outflows from the mainland. Loosening “zero-COVID” therefore becomes essential to Beijing’s global reintegration and diplomatic efforts.

At home, Beijing needs to alleviate the damage done by “zero-COVID,” including wrecking the Chinese economy, causing business closures, raising unemployment, creating government financial shortages, and worsening social problems. For instance:

Economic impact

• On Oct. 31, the National Bureau of Statistics (NBS) announced that the October manufacturing purchasing managers’ index (PMI) fell to 49.2 from 50.1 in September. The NBS blamed recent COVID outbreaks for the PMI’s fall into contraction.
• On Nov. 7, the PRC reported contractions in China’s exports (down 0.3 percent) and imports (down 0.7 percent) in October, the worst performance since May 2020.

Local government financial shortages

• On Nov. 1, the PRC finance ministry issued a guiding opinion on “revitalizing the state-owned assets of administrative institutions” (關於盤活行政事業單位國有資產的指導意見). The document required administrative institutions at all levels to “revitalize” (i.e. assets are to be shared, used [and not waste], adjusted [transfer unused assets to work units that need them so that they are not wasted], and leased [under-utilized assets are to be rented out to increase income]) and utilize assets (estimated total amount of 40 trillion yuan) such as property, land, vehicles, furniture, and large instruments to raise funds and subsidize their revenue and expenditures. This indicates that many government departments are currently very short on funds and need to sell off assets to make ends meet.
• Mainland media reported on Nov. 4 that most of the eight listed nucleic acid testing companies saw double-digit or even triple-digit profit growth in the first three quarters of the year. However, the accounts receivable of the profit-making companies exceeded their net profit over the same period. For instance, the accounts receivable of Pony Testing, Dian Diagnostics Group, Shanghai Labway, and Guangzhou Kingmed was three times that of their net profits over in the first three quarters of 2022. Some of these companies also have negative cash flow, including Shanghai Labway (negative 245 million yuan, or a year-on-year decrease of 366 percent). The news indicates that local governments that mandated several rounds of mass testing likely owe the testing companies huge sums and were not able to make payments due to severe financial shortages.

Outflows

• The Institute of International Finance estimated that foreign investors pulled $8.8 billion from Chinese financial markets in October.

Factory closures

• The Financial Times reported that factory managers in southern China are seeing orders drop 30 to 50 percent in October. This has resulted in factory closures and blue-collar workers struggling to find jobs.

Record civil service applicants

• The 2023 national civil service exam saw a total of 2.5 million applicants, an increase of nearly 480,000 people (up 23.76 percent) from a year ago and a 10-year high, according to mainland media. We noted earlier that the uptick in civil service exam takers reflects serious economic problems in China and is a sign of rising unemployment due to business failures under the “zero-COVID” regime.

Intensifying social trouble

• In mid-October, the Foxconn factory in Zhengzhou implemented a “closed-loop” management system for its employees following a coronavirus outbreak. Near the end of the month, workers were seen climbing the factory’s fence and fleeing the facility despite the presence of heavily armed police on the roads. The exodus of workers (estimated to be in the thousands) came after some workers died after not receiving treatment under “closed-loop” management, according to information circulating on Chinese social media.
• In early November, a viral video showed a knife-wielding man in Baigou Town in Hebei Province forcing his way out of an area under lockdown to buy milk powder for his child. While the man was later arrested by the police, he was let go after being fined just 100 yuan. The light punishment and release of the man suggested that social tensions were high in the area under lockdown, and the police did not want to further disrupt “social stability” by going too hard to desperate “zero-COVID” violators.
• On Nov. 3, the local authorities of Lanzhou City issued an apology over the death of a three-year-old boy who died of carbon monoxide poisoning after medical care was delayed due to a “zero-COVID” lockdown. The incident sparked massive outrage online, with many criticizing Beijing’s “zero-COVID” policy for causing the death of the child. The Lanzhou authorities’ rare admission of responsibility was likely an attempt to mollify an incensed public in the hopes of preventing social anger from boiling over and triggering unrest.
• On Nov. 8, the Linyi City public security bureau in Shandong Province announced that it had arrested seven people who clashed with the police over COVID-19 restrictions. The public security bureau said in a statement that it would take strong actions against those who “illegally violated the legal rights of personal protection of citizens.” News of the arrest circulated on Chinese social media but was later deleted by censors by noon that day, a sign that the authorities are concerned that the incident could inspire similar events elsewhere.

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