Daily new cases of COVID-19 continue to rise in China, surpassing the peak reached during Shanghai’s lockdown earlier this year. The number of cities affected by COVID outbreaks is also increasing. Local governments are struggling to quickly balance containing the spread of the virus with complying with central government measures, which call for a more targeted approach. 

The central government may soon have to choose between more lockdowns and more COVID-19 outbreaks. In this regard, the latest signals from policymakers suggest that they have been leaning more toward the latter and are now focused on optimizing Covid control policies; they have also begun preparations for a further easing of control measures in the future and an eventual reopening. 

China's top official in charge of the fight against COVID-19 noted this week that the country's efforts to combat the virus are entering a new phase as the Omicron variant wanes and more Chinese people get vaccinated, which could indicate that Beijing may be trying to ease its strategy.

Specifically, it is worth highlighting the measures to expand medical capacity, promote health campaigns, and improve supply chain security:

• From a strictly public health perspective, if restrictions are significantly relaxed, the consequences for health care are uncertain, as China lacks sufficient facilities—such as ICU beds—to cope with a contagious virus spreading among a population with very little immunity. For this reason, efforts are focused on making the necessary investments to increase the number of ICU beds from 4 per 100,000 residents to 4 per 25,000, in order to minimize the likelihood of deaths.
• The progress and expansion of the vaccination program for older adults announced this week are also steps in the right direction. The country is rolling out a fourth COVID-19 vaccine to accelerate the reopening process.
• As for supply chains, if authorities respond to the surge in COVID-19 cases with stricter lockdowns, that will have consequences for production and shipping in global trade, but that likelihood is low given the latest announcements. Otherwise, there is no strong evidence that supply chains will be significantly affected in the short term, as factories continue to operate. However, the “zero-COVID” policies are beginning to erode global confidence in industrial supply chains, and the international economic community is increasingly times about the stability of supply chains in China.

Two final questions 

Does all this mean that China will completely abandon its “zero-Covid” strategy? The answer is no. The zero-COVID policy will likely remain in place through the winter and into the Chinese New Year.

Does all this point to a major rebound in growth linked to China? There are still downside risks to growth in the short term, as several major cities are reporting a sharp rise in COVID cases, meaning growth is unlikely to exceed 3.0% this year, but if China abandons its “zero-COVID” policies, the country should be able to return to a growth rate closer to its potential of 5% to 6%—assuming, of course, that there is no potential recession in the rest of the world in 2023.

Source: Goldman Sachs

Humberto Mora

Investment, Finance, and Business Manager; Stockbroker