China: Navigating its way out of 'Zero-Covid'

  • 05 May 2022 (7 min read)

Key Points

  • A vicious Omicron flareup is giving Beijing’s ‘Zero-Covid’ policy its toughest test since the onset of the pandemic. Although the strategy has proven effective to date in confining infections to a few places, the enormous economic and social costs have raised doubts about its sustainability
  • The prospects of continuing economic and social disruption may have shaken Beijing’s confidence in the strategy and could, in our view, prompt tangible changes as soon as Shanghai’s situation stabilises
  • The adjustment won’t be a sudden leap to full liberalisation – due to health and political considerations – but a gradual and managed shift away from draconian lockdowns to more targeted containment, vaccines, self-testing and protecting the vulnerable
  • While conceptually possible, striking the right balance will be difficult in practice. Doing too little may not help the economy, while going too far could risk losing control of the pandemic, incurring vast damages on the social and macro system
  • Beijing therefore has to walk a fine line to seek a viable solution. Our base case assumes the right balance will be achieved and growth recovers in the second half of the year. Failure to do so could see the economy struggle more than it did in 2020
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