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China may reopen soon, but ‘millions’ of new COVID cases will disrupt its economic recovery

The changes confirm recent messages from Chinese officials that the country is entering a “new stadiumof its COVID response and affirms bullish calls from analysts who expected mainland China to reopen after years of COVID-era lockdown sooner than expected.

On Monday, Morgan Stanley analysts said Chinese stocks were undervalued now that the reopening of China’s economy looks imminent. Investors had already received the memo; they piled up in China’s stock markets on hints from Beijing that it was preparing to ease some of the country’s strict COVID rules. Hong Kong’s Hang Seng index is up 30% since the beginning of November. (The Hang Seng Index is still down 37% from its February 2021 peak). Both the Shanghai SSE Composite Index and the Shenzhen SZSE Component Index are up 10% since the beginning of last month.

“It’s a great opportunity to buy the downside in the coming months,” Bank of America China chief equity researcher Winnie Wu told the South China Morning Post.

However, the reopening of mainland China and the inevitable COVID outbreak that will follow are likely to cause further economic disruption in the first half of next year. Despite their newfound optimism, analysts warn of an “uneven” economic recovery to come.

Beijing loosens COVID rules

For nearly three years, China has used tough measures to suppress the spread of COVID-19. Officials have imposed multiple rounds of mass testing and district-wide crash lockdowns to contain even a handful of cases. But rare, nationwide protests against Constant lockdowns and tests in late November likely hastened Beijing’s concession that the country needs to move forward.

Wednesday, China introduced new rules representing the biggest easing of its hardline COVID response to date. China’s State Council has announced that people with mild COVID symptoms will be able to recover at home instead of in quarantine camps, and people will no longer need a negative COVID test to travel or enter most public places. And while lockdowns can still be imposed, officials will limit them to individual floors or buildings, rather than entire neighborhoods or districts.

Some of these measures had already been implemented by local officials in cities such as Shanghai, Beijing and Guangzhou where protests have occurred. And last week, Vice Premier Sun Chunlan, the top Chinese official responsible for the country’s COVID response, said mainland China was in a “new phase” of the pandemic. China’s state media has also laid the groundwork for a COVID-zero shift, with Xinhuathe country’s state news agency, saying “the most difficult phase of the pandemic has passed” in an article on Tuesday.

When will China reopen?

Lockdowns and other COVID restrictions have weighed on the Chinese economy. China’s GDP grew just 3.9% year-on-year in the third quarter, below Beijing’s target of 5.5%. The latest wave of COVID outbreaks and lockdowns in the country is throwing it into a deeper hole. Service activity slackened in November to reach a minimum of six months, according to the latest index from Caixin services purchasing manager. Factory activity also reduced in November, declining in October.

The COVID-zero is also depressing the Chinese export market. A hastily imposed COVID lockdown at one of Foxconn’s major iPhone factories has led to protests and production stopped. Foxconn on Tuesday said chaos contributed to a 29% decline. turnover in November compared to the previous month. It’s the first time the manufacturer has reported a decline in monthly revenue in the all-important pre-holiday season.

Beijing may be concerned about the interruption for foreign manufacturers regarding the protests, says Alicia Garcia-Herrero, chief Asia-Pacific economist for investment bank Natixis. “China cannot afford to lose the jobs offered by foreign companies,” he says.

Prior to Wednesday’s announcements, most investment banks had pegged mainland China’s exit from COVID-zero to mid-next year. Even though it believed Chinese stocks were undervalued, Morgan Stanley stuck to an early forecast that the country would reopen by spring 2023, moving to a system where “extensive mandatory containment measures and large-scale COVID testing will no longer be in place.” ” and by reversing many measures to avoid contact.

But even before Wednesday, the country’s subtle retreat from COVID-zero had prompted some banks to raise their forecasts of a full reopening or to express more confidence in their bullish calls since the start of the year. Goldman Sachs expects a reopening in mid-2023, but sets the possibility of an early reopening at 45% on Sunday, up from 30% in November.

Garcia-Herrero says China could open as early as later this year. “We assume the whole of 2023 will be open,” he says.

Of China ‘zig-zag’ economic recovery

There’s a big caveat to reopening mainland China: an inevitable easing of restrictions trigger a large surge in COVID cases unlike anything the country has seen before.

Such an outbreak could have deadly consequences, given relatively low vaccination rates among the elderly and Beijing’s distribution of Chinese-made vaccines that are less effective than mRNA vaccines. According to official data, only 40% of people over 80 received a booster dose. Studies prove it three doses of Chinese COVID vaccines are needed to provide the same level of protection against severe disease and death for the Omicron COVID variant as two doses of Pfizer or Moderna’s mRNA vaccines.

China has recently pledged to improve vaccination rates among the elderly, which many analysts have taken as a sign that the country is preparing for a reopening.

says García-Herrero that China could administer the third booster dose to 70% of over 80-year-olds by the end of the year “if they really accelerate”, in which case the country could open up “immediately”. But even in that scenario, she cautions, “a lot of people would probably die.”

China could report just as many 20,000 dead a day from COVID-19 in the spring if it continues to reopen at its current pace, according to modeling by Wigram Capital Advisors, a macroeconomic advisory group.

A surge in COVID cases, fatal or otherwise, will hamper China’s economy, even as Beijing eases COVID controls. Ordinary Chinese, worried about contracting the coronavirus, are likely to insulate and reduce consumer spending until the epidemic subsides. And those who catch COVID will stay home from work while they recover, reducing production and disrupting operations. “Many people will fall ill, which could result in factories being closed or facilities unable to operate at full capacity,” Zhang Zhiwei, chief economist at Pinpoint Asset Management, told the newspaper. South China Morning Post.

Even Morgan Stanley’s more optimistic research note on Monday warned of an “uneven” recovery. There will be “persistent containment measures, and perhaps some zigzags, during the initial phase of the reopening,” wrote Robin Xing, the bank’s chief China economist.

“The combination of rising cases, some regions easing policies, the winter flu season and the upcoming Lunar New Year when hundreds of millions of people typically travel makes it difficult to predict how cases, COVID restrictions and mobility might evolve over the next few months, Hui Shan, chief China economist at Goldman Sachs, wrote in a note Sunday.

And a surge in cases could lead to public unrest over a zero COVID exit from those concerned about the surge in cases caused by the reopening, warns Garcia-Herrero.

The public backlash could trigger higher volatility and lower growth for the first half of the year. Goldman Sachs predicted in November that China’s economy could grow just 2% in the second quarter of 2023, before rebounding to 10% GDP growth in the following quarter as people adjust to living with COVID.

Hong Kong’s experience earlier this year is an example of how an uncontrolled outbreak in a COVID-zero territory can devastate an economy. After two years of isolation and a low number of cases, the semi-autonomous Chinese city suffered a massive outbreak between February and April this year. Low vaccination rates among the city’s elderly population resulted in 9,100 deceased in the first four months of the year, making the outbreak the deadliest in the developed world.

Even the outbreak of Hong Kong it brought down the city’s economy. GDP fell 4% in the first quarter, compared to the same period a year earlier. Consumer spending and investment also fell by 5.5% and 8.4% year-on-year, respectively.

The city has not yet fully recovered. The Hong Kong government now wait an economic contraction of 3.2% for 2022.

An outbreak in mainland China that mimics Hong Kong’s would be huge given the size of the mainland. Goldman Sachs forecasts “millions of new cases daily for a few months, which would be orders of magnitude higher than the highest number the country has seen to date.”