Goldman Says China May End Covid Zero Earlier Than Expected

(Bloomberg) -- China may end its Covid Zero policy earlier than previously expected, with chances growing of a messy exit as infections spread and residents protest virus controls, according to analysts including from Goldman Sachs Group Inc.

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Goldman said there’s some chance of a “disorderly” exit as it sticks to a forecast of a 30% probability that China will reopen before the second quarter of 2023. Teneo Holdings LLC said the social unrest could prompt the government to move faster in adjusting its zero-tolerance approach to combating infections.

“The central government may soon need to choose between more lockdowns and more Covid outbreaks,” Hui Shan, Goldman’s chief China economist, wrote in a note late Sunday. Local governments have struggled to “balance quickly” controlling the spread of the virus while obeying recent measures mandating a more targeted approach, she said.

The economy has been roiled by Covid Zero, with increasingly strict controls curbing peoples’ mobility and disrupting business activity. Turmoil at an Apple Inc. manufacturing facility in Zhengzhou, which has been wracked by lockdowns and worker unrest, is likely to result in an iPhone Pro production shortfall of close to 6 million units, Bloomberg News reported.

Although the government recently unveiled a 20-point playbook aimed at easing some of the strictest controls in China, many cities have continued to lock down communities to control the virus as cases surged to record levels.

The curbs have prompted demonstrations in major cities including Shanghai and Beijing over the weekend, putting pressure on President Xi Jinping and his government to adjust their approach.

“I don’t expect Xi to publicly admit error or show weakness, but this wave of protests could cause the leadership to decide privately that the exit needs to proceed more quickly than previously planned,” said Gabriel Wildau, managing director at advisory firm Teneo in New York.

Market Turmoil

China’s benchmark CSI 300 Index of stocks ended Monday 1.1% lower, the biggest drop in a month, amid investor concern that the protests are creating more uncertainty for the nation’s path toward reopening. The onshore yuan weakened 0.44% to 7.195 per dollar as of 5:36 p.m. local time, after depreciating as much as 1.1% in early morning trading. The yield on China’s 10-year bonds rose 3 basis points to 2.865%.

What Bloomberg Economics Says...

Strict Covid curbs are costly for people’s livelihoods -- and the protests underline discontent. But less visible, public concern about the health risks entailed in rapid reopening run deep -- partly because zero-tolerance stance has helped keep Covid deaths low relative to other countries.

-- Eric Zhu and Chang Shu

For the full report, click here.

Christopher Beddor, deputy China research director at Gavekal Dragonomics, outlined two alternate scenarios for a policy exit. An optimistic scenario would involve the continued use of many Covid restrictions “short of extended lockdowns.” The aim would be not to minimize cases but to avoid overwhelming hospitals and reduce deaths, he said.

In a “messier scenario,” the cycle of local lockdowns and protests continues for weeks, with some cities still attempting to contain the virus while it spreads out of control in others.

“In either case, China has arrived at the beginning of the end of Zero Covid,” he said.

Dan Wang, chief China economist at Hang Seng Bank Ltd., said a “rapid or a reckless reopening” would be worse for China’s growth. If the Covid policy is relaxed too quickly, there’s a risk of a jump in deaths, as was the case in Beijing recently, she said in a Bloomberg TV interview on Monday.

“That could result in a very awkward position for a lot of local governments when it comes to the priorities in their industrial reopening.”

Goldman’s Hui said the worsening virus situation imposes downside risks to the bank’s growth forecast for the fourth quarter. The firm projects gross domestic product to grow 3% this year, slightly below the consensus forecast of 3.3% in a Bloomberg poll of economists.

While there is a chance of an earlier reopening, Goldman still sees a second-quarter exit from Covid Zero as having the highest chance of happening -- around 60%, Hui wrote.

Chinese officials have tried to stem the economic damage by rolling out more supportive policies, as early data for November suggested a slowdown in activity from the month before. Along with Covid-related disruptions, the ongoing property sector turmoil remains a big risk for China’s outlook.

The People’s Bank of China on Friday said it would cut the amount of cash lenders must hold in reserve for the second time this year, to take effect next Monday. The cut is aimed at “keeping liquidity reasonably ample” and “increasing the support for the real economy,” the central bank said.

--With assistance from Fran Wang and Jacob Gu.

(Updates with details of disruption at Apple assembly plant.)

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