WILL CHINA ELIMINATE ZERO-COVID POLICY?

November 8, 2022

NEWS:

There was a rumor that China would ease strict zero-Covid curb but the administrations overturned it. Due to analysts, China-related stocks would be more volatile on the Monday’s trade.

China’s National Health Commission reiterated the country’s rigid adherence to the elimination of Covid-19 at a press conference last Saturday. They also warned that the residential health was to become more severe as the situation got complex when the country entered the winter season. The country witnessed a six-month break of 4420 Covid infections on Saturday. The soaring cases strengthened the administrations determine to adhere to the restrictions.

Despite the country’s rigid commitment to the elimination of Corona virus, Chinese stocks suffer from emerging decrease. Last week, when the rumor of restrictions’ appeasement, Chinese stocks in Hong Kong was recorded to achieve their best numbers over seven years and shares in Shanghai gained the highest points since July 2020.

However, there has been some recent positive changes since Chinese health officials are working on a plan to cut down on the length of quarantine that travelers must spend in the hotel from 10 days to eight days or a week. Zeng Guang, former chief of epidemiologist of the Chinese Center for Disease Control and Prevention, announced on a call hosted by Citi that authorities also planned to reopen the border between Hong Kong and China in the first half of next year.

The Chinese bullish market tends to rise back after the US Public Company Accounting Oversight Board stopped on-site inspections of Chinese companies’ audit data in Hong Kong.

ANALYSIS:

Effects

Closing border barred international tourists to travel to China. This affected Chinese travel industry to a great extent. More and more residents have complained about this loss of national income but received no response from the authorities.

The largest impact that zero-Covid could have is the economic recession. Trades couldn’t practice normally since the demand for goods sinks as the result of the income decrease. Importantly, exports also declined significantly too which signs a decrease in the health of the economy. When the market is not profitable, industrial outputs reduce too.

Besides that, the rigid lockdown rules affected China in the trade-war against the United States. Both China and the United States subsidized the Russia-Ukraine war and received loss in property but the closing barrier made it harder for China to replenish the loss since trades were restricted. Recognizing the economic downturn, the Chinese government had to implement policies to save and rescue the economy. The policies include tax relief for business entities, especially for small- and medium-sized companies, preferential loans, and support for businesses to employ more workers to solve the problem of increasing unemployment rates.

The continuous lockdowns not only resulted in the closing of domestic businesses but also the leaving of international businesses. While domestic enterprises somehow receive the financial support from the government, it was difficult for international companies to get any support and many companies were forced to leave the Chinese market. This will affect the diversity in the market and Chinese customers can’t have a large range of options.

Unemployment is one of the most destructive effects of the lockdowns. Many companies were not able to pay wages for their employees so that many people lost their jobs. This affect the market since businesses couldn’t sell their products.

Last but not least, after the reopening of some entertainment places and malls, there was an overcrowding situation. Residents were over-excited to go outside after a long time being restricted. However, overcrowding situation would lead to the outbreak of diseases which could have even greater effect.

Why does China persist with zero-Covid restrictions?

1, Testing residents’ ability to self-supply

When China closed its barrier, the supply of foreign products was limited and there was also a lack of goods to supply all residents in China. This will lead to the situation that Chinese had to produce the necessity themselves. The administrations could evaluate their residents’ ability of production. When Chinese residents are verified to meet the standard of self-supplying, the administrations can be confident that they do not have to depend on other nations to gain the supply goods. Then, China will expand their power, or have the gut to do greater things to achieve their goals in the world economy.

2, Far-sight for long-term development

China is the biggest producer in the world. Other countries have to import goods from China and even producers from other countries have to purchase resources from China to make goods. For example, many countries produce iron and steel but they have to purchase coke from China to produce them. If China stopped supplying goods, the production in other countries will be affected greatly too. By this way, China can prove its power in the world market.

China has an ambition to make their currency lead in the world market and dollar is now the leading currency. During the pandemic, while the United States printed twice the amount of cash, China focused on production. As previously mentioned, China holds the largest pie in the world’s production. When there is a shortage of goods, China will be able to increase prices. When China has the advantage in prices of the production of the whole world, the value of yuan will increase.