Shockingly low case counts, the Party’s Central Economic Work Conference concludes, thick smoke emanating from Beijing crematoriums, and a closed-door meeting of the National Health Commission…
Amid the endless stream of Tweets and headlines warning of a massive wave of COVID-19 deaths in China, there is no shortage of discussion about how serious the situation in the country might become. However, there has been some confusion, incomplete information, and countless questions circulating about what is known right now. We discussed the rollback of China’s Zero-COVID policies and growing problems like antiviral shortages in last week’s Pandora Report, so check there for more detailed discussion on those topics. This update aims to explain and clarify what is known about the current situation and analyze what might happen as a result of it, covering how China is counting cases and deaths, what vaccines are available in the country, critical threats the healthcare system is facing, and what this means in the current economic and political environment in the country.
The current wave in China is being driven by BF.7, which is short for BA.18.104.22.168, a sub-lineage of the Omicron BA.5 variant (good luck remembering all that!). BF.7 is reported to transmit faster than other variants, have a shorter incubation period, and be better able to infect those who previously had COVID-19 or are vaccinated. Dr. Li Dongzeng, Chief Physician at Beijing YouAn Hospital’s Infectious Disease Department, reported late last month that BF.7 is thought to have an R0 between 10.0 and 18.6. For context, the original strain of SARS-CoV-2 had an R0 between 2.0 and 3.0 and it officially infected 68,150 people as it ripped through Wuhan in 2020, though estimates of the true case count are as much as three times that number. Given what we have discussed previously about China’s Zero-COVID policy, specifically its failed vaccine strategy, this is incredibly dangerous with many models predicting around one million COVID-19 deaths in China in the coming months. Furthermore, with the rollback of Zero-COVID restrictions, a massive, immunologically vulnerable population is likely to be quickly infected, causing national and global economic problems. This policy pivot is also likely to further complicate business for the Chinese Communist Party (CCP) as its credibility is challenged by this spread and as the likely economic and human costs it will bring come to fruition.
What’s Up with China’s Case and Death Counts?
The incredibly low case and death counts China is reporting currently have left many highly skeptical of the government’s truthfulness. For example, there were officially five COVID-19 deaths on Tuesday, December 20, and just two the day before-and zero in the two weeks prior. The government also reported shockingly low numbers of new cases throughout this week. Meanwhile, the World Health Organization reported that China has 26,878 new cases and 78 new deaths, causing some confusion online and in media reporting. So, what gives?
First-What Counts as China in These Numbers?
Regarding the WHO numbers, it is important to remember that they include Taiwan’s counts in the totals for China. While the WHO’s interactions with and stance on Taiwan made global headlines in early 2020, little has been done to address this issue. Taiwan, officially the Republic of China (ROC), initially represented China in the United Nations and its umbrella organizations. This was because China was one of the original UN member states during the organization’s creation in 1945. This predated the Chinese Communist Party’s defeat of the Kuomintang-led government of the ROC, which led to the establishment of the People’s Republic of China (PRC) and the exiling of the ROC to the island of Taiwan in 1949. The ROC (still under the leadership of Chiang Kai-shek) continued to represent China in the UN until the passage of United Nations General Assembly Resolution 2758, or the Resolution on Admitting Peking, in 1971. This resolution recognized the PRC as “the only legitimate representative of China to the United Nations,” giving the PRC its permanent seat on the UN Security Council and expelling “representatives of Chiang Kai-shek from the place which they unlawfully occupy at the United Nations and in all the organizations related to it.”
Though Taiwan has functioned as a self-ruled democracy since 1949, the PRC insists that Taiwan is a renegade province that will eventually be reunified to the rest of the country. As a result, Taiwan lacks proper representation in organizations ranging from those in the UN System to the International Olympic Committee (where it is listed as Chinese Taipei). While this might normally seem like a purely political issue between the countries, it has important implications, particularly in the context of global health. Taiwan is an excellent international player in pandemic response, as demonstrated in its work to support other countries during the COVID-19 pandemic. The WHO has been largely unresponsive, however, which many critics argue is because the PRC forces its view of Taiwan as a province of the PRC on international organizations, irrespective of the potential harm this carries in matters like international development and global health. Earlier this year, there was a movement to allow Taiwan to attend the WHO’s World Health Assembly as an observer, which had support from 13 member states, including the United States. However, this bid was rejected.
Important to also consider is that the WHO counts Hong Kong and Macao in its counts for China, whereas some data sources differentiate between them and the mainland. Hong Kong and Macao are special administrative regions (SARs) of the PRC with their executive, legislative, and judicial powers devolved from the national PRC government. These SARs are the subject of the “one country, two systems” policy in China which came about as Hong Kong and Macao were transferred to the PRC from the United Kingdom and Portugal respectively in the late 1990s. Under this policy, the SARs would continue to have their own governments and maintain functions like overseeing their own legal financial affairs, including foreign trade. This has allowed them to hold onto their distinct cultures and functions with, for example, both SARs maintaining their own currencies separate from the PRC’s renminbi. In recent years, China has aimed to reduce the independence of the SARs, taking aim at Macao’s famous casinos this year and implementing the Hong Kong National Security Law in 2022, which sharply reduced Hong Kong’s autonomy. Importantly, despite these changes, the SARs have separate healthcare systems and have implemented different policies to control COVID-19 than the mainland. As we will discuss later, this has made the SARs an attractive location for mainlanders to seek care and vaccinations. However, the point here is that it is important to take Taiwan and the SARs into consideration when looking at COVID-19 cases and deaths in China.
What Does the PRC Consider a COVID-19 Death?
Irrespective of all this, the low number of total deaths in mainland China is still suspicious given the sudden policy reversals and sub-pay vaccines in the country. This is made worse by reports of funeral homes and crematoriums in the country being overrun by COVID-19 victims. For starters, the Chinese government is very strict in how it identifies a cause of death, which was a point of confusion even before this pandemic in comparing things like influenza mortality rates in the United States and China. However, it is even more important right now. China is only counting deaths from pneumonia or respiratory failure in its official COVID-19 deaths. This does not include deaths of COVID-19 patients who had pre-existing conditions, and proof like evidence of lung damage caused by SARS-CoV-2 is required for confirming COVID-19 deaths. This goes against the WHO’s guidelines and helps explain the shocking discrepancies between China and other countries’ COVID-19 death counts. During the outbreak in Shanghai earlier this year, many also claimed that their elderly family members who tested positive for COVID-19 and then later died were not included in the city’s official COVID-19 death count if they had underlying diseases, for example. Essentially this means that, even without overtly concealing numbers, China will always have a lower mortality rate than countries that count deaths where COVID-19 was a factor as COVID-19 deaths.
What About the Case Counts?
Okay, so it isn’t a COVID-19 death if a person has any kind of underlying condition or did not clearly die of pneumonia or respiratory distress after testing positive for COVID-19–but why are China’s case counts still so low? In the last two weeks, China has abandoned its mass testing strategy completely and even gone so far as to stop counting asymptomatic COVID-19 cases. It has also slashed central quarantine requirements, further reducing opportunities to accurately count cases. In May this year, as hundreds of millions were forced into lockdowns, the government ordered all cities with more than 10 million people to implement routine testing requirements and to ensure that testing facilities were available within a fifteen-minute walk from anywhere in the city. Places like malls, grocery stores, and restaurants required people to show a negative PCR test from less than 48 or 72 hours ago in order to enter, meaning that people were constantly testing even if their city, neighborhood, or building were not locked down.
Large scale mandatory testing was also mandated when cities entered lockdowns after cases were detected. For example, when Shanghai shutdown in March this year, the city tested all 26 million residents as it kept them all at home or in public quarantine centers if they were positive. The disease spread widely again this fall, prompting lockdowns across the country in an effort to control outbreaks ahead of the National Congress of the Chinese Communist Party, further demonstrating that the Party’s Zero-COVID strategy was not working well even with mass testing requirements.
In mid-November, as cases soared in Guangzhou and Chongqing and discontent rose across the country, the National Health Commission announced its 20 rules for optimizing Zero-COVID, which included relaxation of quarantine measures. This coincided with cities like Shijiazhuang, Yanji, and Hefei announcing they would end their mass testing programs. Later, cities like Beijing and Shenzhen relaxed their requirements for negative tests to use public transportation on December 3, which came before the total abandonment of mass testing just days later following the State Council’s announcement of its ten-point plan on December 7. Xinhua News, an official state media outlet, reported on December 7 that the new rules indicate that, “Apart from nursing homes, medical institutions, primary and secondary schools, kindergartens and other special places, people will no longer be required to provide negative nucleic acid test results and undergo health code checks to access public venues or travel to other regions.”
Furthermore, the ten-point plan’s changes in quarantine policies and determination of high/low risk areas are impacting overall case counts. While the previous 20 rules from November cut down central quarantine facility requirements, ended many mass testing requirements, and changed testing and arrival procedures for international flights, the new ten-point plan totally cut central quarantine requirements for mild and asymptomatic cases. It also changed requirements for close contacts to just five days of home quarantine as well, in lieu of being taken to a central facility. While these new requirements are helpful in that people should not be yanked away for an unknown amount of time because they are considered a close contact, these new changes also mean it is not really possible to have a reasonable understanding of the full extent of COVID-19’s spread in the country. While other countries have dealt with similar issues as at-home testing became more common, this is a much more complicated problem as China faces a winter of overwhelming case counts.
However, as we discussed on Sunday, provinces are introducing rollbacks at different paces. Now we are also seeing cities reintroducing stricter measures on their own, with Shanghai ordering schools and childcare facilities to close this Monday as cases climb. This has created a confusing patchwork of different policies and requirements, further adding to the chaos unfolding as China exits Zero-COVID. As we mentioned last time, CSIS has a helpful map tracking where provinces are at in terms of rolling back restrictions, though it is still hard to keep track of how individual cities are responding as the situation progresses.
Finally, in perhaps the most shocking change, many in China are being encouraged to go to work still even if they are positive for COVID-19. Earlier this month, with some hospitals reporting as many as 80% of their staff were infected, healthcare workers were encouraged or required to still come into work in order to keep up with demand. Now several local governments in China have asked workers to continue going to work even if they are sick in what many view as a warning of the coming economic problems that will be discussed later in this post. These complete 180° changes are simultaneously removing virtually all precautions while also overtly encouraging further infections by encouraging or requiring those who are sick to continue going around others.
A Glimpse Into What’s Actually Happening?
Despite the impossibly low official counts presenting by the government, a closed-door meeting of the National Health Commission reportedly offered a much better look into how many are currently infected. Reports claim that Sun Yang, Director of the Chinese Center for Disease Control and Prevention, informed the commission that at an estimated 37 million people, or about 2.6% of the population, are thought to be recently infected. Estimates from this meeting also indicate that about 248 million Chinese were infected between December 1 and 20, making the cumulative infection rate about 17.56%. The provinces with the high single-day new infection rates are Sichuan, Anhui, Hubei, Shanghai, and Hunan. Perhaps most shockingly, both Sichuan and Beijing are thought to have infection rates over 50%. Finally, infections have spread more rapidly in the Jingjinji Metropolitan Region (the megalopolis of Beijing-Tianjin-Hebei), the Chengdu-Chongqing region, Hubei and Central China. In contrast, the Yangtze River Delta (another megalopolis incorporating Shanghai, China’s most populous city), the Pearl River Delta (yet another megalopolis in the Guangdong–Hong Kong–Macau Greater Bay Area), and the Northwest and Northeast regions of the country are less impacted thus far.
Though these reports indicate health officials believe Beijing is past the peak of this phase, this is still very clearly just the beginning of this disaster. Shanghai has already ordered schools to shutdown in anticipation of growing case counts, in contrast to Beijing (which rolled back essentially all of its COVID-19 policies) and Chengdu, the capital of Sichuan province and the producer of the 2+3 quarantine poster above. As we will discuss further down in this post, this situation is likely to get far worse as the disease continues to spread in other major metropolitan centers and, eventually, across rural regions of the country, especially with the country’s subpar vaccines and the approaching holiday travel season.
Don’t Shoot the Messenger(RNA): China’s COVID-19 Vaccine Problem
Earlier in the pandemic, China claimed that it was nearing production of a domestically-produced mRNA vaccine for COVID-19 (even going so far as to announce the construction of a facility to manufacture ARCoVax/AWcorna in late 2020) and that it would approve the mRNA vaccine from Pfizer/BioNTech. Today, AWcorna only has emergency use approval in Indonesia, and the only people who have access to the Pfizer/BioNTech shot in China are German expats. China’s vaccination campaign has instead depended on two domestically-produced inactivated offerings-Sinopharm BIBP and CoronaVac. The country did recently approve and rollout CanSino Biologics’ aerosol offering, Convidecia Air, a viral vector vaccine growing in popularity as more Chinese seek out booster doses.
In mid-2021, the WHO approved the initial two offerings for emergency use based on limited clinical-trial data indicating that CoronaVac was about 51% effective while Sinopharm was about 79% effective. This was alright relative to the 63% efficacy reported for AstraZeneca’s viral-vector vaccine, but it was not as effective as the 90%+ reported for the Pfize-BioNTech and Moderna mRNA offerings. Nature News explained the initial criticism of China’s vaccines, writing “Both the Chinese vaccines are inactivated vaccines, which use killed SARS-CoV-2 virus. Researchers say this type of vaccine seems to be less potent because it triggers an immune response against many viral proteins. By contrast, mRNA and viral-vector vaccines target the response to the spike protein, which is what the virus uses to enter human cells.”
These numbers sound okay, especially with a high number of fully-vaccinated individuals in the country, but these efficacy rates were for the original strain found in Wuhan in 2020 and it has been several months since most people received their last dose of vaccine. 90.3% of the population has received the entire initial protocol, but, as of December 20, just 60.5% of the population has received a booster dose. Worse, those numbers shrink to 65.8% and 40% respectively for those over the age of 80 as of November. During Hong Kong’s outbreak earlier this year, similar hesitancy in elderly people (just 20% were vaccinated at the start of the outbreak in February) contributed to widespread death in the city’s nursing facilities. China announced in late December it would push to vaccinate those over the age of 60, though this is likely too little too late now, particularly given Chinese vaccines’ even more limited efficacy against Omicron and its sub-variants.
Finally, as was hinted previously, Macao and Hong Kong have become popular destinations for mainlanders throughout the pandemic, in large part because Pfizer/BioNTech’s mRNA offering is available in the special administrative regions. The SARs have also largely sold out of cold and flu medications and painkillers after the rollback of Zero-COVID on the mainland as people rush to find these supplies where they could.
Why Isn’t There a Vaccine Mandate?
This issue naturally leads to questions of why the government hasn’t just mandated vaccines already, even if the ones they can offer are not as effective as the mRNA offerings in the West. A vaccine mandate intuitively makes sense at first look, especially as much of the discourse about China’s handling of COVID-19 in the early days of the pandemic centered on the potential benefits of authoritarian rule in pandemic response. However, if it isn’t clear yet, China is playing a unique game and even its brand of authoritarianism is not always black-and-white.
There were attempts to create a mandate, with the Beijing Municipal Health Commission announcing one this summer, for example. Dr. Yangzhong Huang at the Council on Foreign Relations explained the announcement in June, writing “On July 7, Li Ang, the deputy head of Beijing Municipal Health Commission (BMHC) announced that beginning on July 11, those who had not received COVID-19 vaccines would be denied access to public venues including libraries, museums, and cinemas. The mandate also stated that those elderly who live in military and civilian retirement and nursing homes, as well as their visitors, be fully vaccinated.”
Chinese social media was lit up with backlash over the mandate and concerns that citizens’ informed consent was being compromised. Others directly asked the municipal government to reverse the policy, which ultimately did happen the very next day on July 8. Many around the world touted this as a victory for the people, but this is bizarre event points to the difficulty in understanding China’s health policies and to a complicated vaccine hesitancy more than a purely anti-vaccine sentiment. As Huang points out, this reversal came in a city where 98% of the residents were fully vaccinated. Furthermore, that explanation does not explain why the government reversed its policy on vaccines but not on other also unpopular measures like central quarantining. This reversal was also in response to social media posts over the course of a day so, while local governments in China do make similar policy reversals in the face of opposition movements, this usually takes much more time and is the result of backlash that is much more serious in nature. While Huang’s piece focuses on fragmented authoritarianism in the CCP and friction between leaders who supported Zero-COVID and mass vaccination, it also offers very important context for understanding vaccine hesitancy in China.
While there are younger people in China who have openly avoided getting vaccinated for COVID-19, this problem is concentrated in the elderly population. Again using the example of Hong Kong this year, 20% were vaccinated at the start of the outbreak in February, in sharp contrast to the more than 60% in that same group who were vaccinated for seasonal influenza. For reasons discussed earlier in this post, it makes sense for Hong Kong’s elderly to be hesitant to take a vaccine offered by the PRC’s government. However, these low rates were true despite the Pfizer/BioNTech mRNA vaccine being available.
While some point to the initial focus on essential workers as a likely reason why vaccination rates lag in China’s elderly population, a history of scandal is likely in large part to blame. For example, in 2018, Changchun Changsheng Life Sciences was fined ¥ 9.11 billion (about $1.32 billion at the time) after an investigation by the National Medical Products Administration found the company in violation of eight drug regulations. This kind of punishment was at the very least rare and came after some had severe reactions to the company’s rabies vaccine. The incident led many netizens to express their distrust in the country’s pharmaceutical industry, prompting calls from the likes of Xi Jinping and Li Keqiang for severe punishment for the company. However, the effects of this and similar events seem to have stuck around.
John Ruwitch discussed this issue recently in a piece for NPR, writing “It wasn’t always like this, according to Mary Brazelton, an expert in the history of science and medicine in China at the University of Cambridge. In the months after the Communist takeover in 1949, the Chinese government launched several successful vaccination campaigns, taking on smallpox, tuberculosis, diphtheria and other diseases.”
He continues, “If you look at earlier periods in the People’s Republic of China’s history…what you see is in some ways almost the opposite in terms of really strong vaccination programs that work quite hard to convince people, particularly elderly people, to receive vaccines against infectious diseases,” Brazelton says. But lax oversight and corruption during recent decades of breakneck economic growth has led to a string of product quality scandals in China — from baby formula cut with industrial chemicals to contaminated blood thinner and tainted vaccines.”
Now, as the government rushes to try and vaccinate more people, they seem to be pulling out every stop short of using foreign mRNA vaccines, seemingly sticking to the most flawed gun in the safe. Furthermore, this points to a complicated and sensitive situation for Chinese citizens as they try to balance the realities of heavily censored channels of communication, poor signaling and a history of mismanagement from the government, and a desire to protect themselves as best as possible. This situation, unfortunately, is likely to get much worse in the coming weeks as the healthcare system is overwhelmed.
Growing Danger for China’s Broken Healthcare System
Much of the world watched in horror in February 2020 as time lapse footage of Wuhan’s nearly overnight construction of two temporary hospitals to manage COVID-19 cases as the city’s normal hospitals became overburdened dominated news coverage. This wasn’t unique in the government’s epidemic playbook, as it had similarly erected the Xiaotangshan Hospital in Beijing amid the outbreak of SARS in 2003. However, it highlights an important flaw in the playbook. This kind of construction doesn’t really do much in the absence of an appropriately sized and prepared healthcare workforce. China faced a shortage of physicians and nurses well before the pandemic, a fact made much worse once case counts soared in 2020. Furthermore, as diseases spread across the country, Chinese rural citizens are typically left much less protected than their urban counterparts. These are central issues to the looming COVID-19 crisis unfurling in the country today.
The PRC has undergone significant healthcare reforms in the last decade or so, in large part through the Healthy China 2020 initiative, which sought to cut healthcare costs by increasing the percentage of care covered by insurance. Furthermore, as of 2020, about 95% of the population has at least some form of health insurance, though it typically covers only about half of medical costs. Coverage is split between employee medical insurance for employed urban residents, and resident medical insurance for unemployed urban and rural residents. About 75% of those insured in the country are insured by the resident medical insurance program, pointing to the sheer portion of the population that is either rural and unemployed.
This is an especially concerning fact as the healthcare system is overly reliant on urban hospitals for basic healthcare. The United States-China Economic and Security Review Commission (USCC) notes that hospitals account for 3.5% of medical institutions in China despite handling 45% of all outpatient visits. So, while the Party views quality healthcare delivery as an important part of its political agenda and there have been improvements in coverage and care, there are still serious issues in providing quality care nationally. As is often the case, corruption is a large part of this problem. As the USCC explains:
“Corruption among China’s hospitals and doctors is a widely acknowledged problem that has contributed to a low level of public trust in the country’s healthcare system and at times led to violence against Chinese doctors. In many cases, doctors accept illicit payments, known as hongbao, from patients in exchange for a higher quality of care. The practice of hongbao is widespread in China: in a 2013 survey of residents of Beijing, Shanghai, and Guangzhou, nearly one-third of respondents said they or a family member had given hongbao to physicians between 2000 and 2012. In addition to accepting these payments from patients, doctors and hospital officials also receive kickbacks for purchasing certain types of medical equipment or pharmaceutical products, a practice that has been described as “endemic” in China. In a 2010 survey of Chinese doctors, 78 percent of respondents said healthcare companies could not compete in China without paying bribes.”
This seems to bleed into patient distrust of medical clinics, interestingly, contributing to the over-reliance on hospitals to treat minor conditions. Beyond simple perceived incompetence of clinic physicians, there is a cycle of patient-physician mistrust at this level, as Nie at al. have discussed in Developing World Bioethics. They write, “Mistrust (particularly physicians’ distrust of patients and their relatives) leads to increased levels of fear and self-protection by doctors which exacerbate difficulties in communication; in turn, this increases physician workloads, adding to a strong sense of injustice and victimization. These factors produce poorer healthcare outcomes and increasingly discontented and angry patients, escalate conflicts and disputes, and result in negative media coverage, all these ultimately contributing to even greater levels of mistrust.”
This is worse at small clinics, with providers enduring verbal and physical abuse at the hands of patients’ loved ones. There is even a recently coined term, zhiye yilao that describes a “medical mob”, or “people who support families and their relatives in demanding financial compensation from hospitals following medical disputes, as Nie et al. highlight. While many of China’s elites can afford to simply seek care at a private hospital, this is not the case for the majority of Chinese who rely on public hospitals and clinics for their care, particularly those who live in rural areas.
Rural citizens typically either use small clinics or travel to wait in lines in an attempt to get into a hospital, further burdening the system. These rural clinics are often understaffed and poorly equipped, and the national health insurance scheme creates incentives to hospitalize people with relatively minor problems, which is especially problematic for these rural populations. Socioeconomic determinants associated with rural living and resources also contribute to the stark difference in health outcomes between China’s urban and rural populations. Rural residents also are at higher risk of developing many chronic conditions like heart disease, putting them at increased risk during outbreaks of infectious diseases like COVID-19.
As cases climb in urban centers, there are distressing signs that the much better-equipped urban hospitals are becoming overrun. As we discussed, many hospitals are requiring sick staff to still come into work as individual patient loads continue to swell. We and others have also stressed, too, that China does not have the kind of ICU capacity needed to deal with what it faces. This is true in urban centers, but even more so in rural areas, where there are also 30% fewer healthcare workers available. Furthermore, retired physicians and other professionals across the country are currently being called upon to help support efforts to combat the current surge in Beijing. All these signs point to major trouble in urban centers, indicating it is likely to be much worse for rural regions of the country.
As the Spring Festival travel rush, chunyun, approaches, many will travel from urban centers to their rural hometowns, likely spreading COVID-19 to these vulnerable areas. While many are currently opting to stay home on their own and a number of universities have given students the option to finish the semester virtually to cut down on travel, these factors might not be enough to protect these places from becoming overwhelmed in the coming weeks. As a result, the Party has urged local governments to upgrade their facilities and prepare for the oncoming waves. South China Morning Post reports that, “In a directive on Sunday, the Joint Prevention and Control Mechanism of the State Council asked rural hospitals and clinics to ensure pandemic medical services and timely treatment for high-risk patients, such as the elderly and people with underlying diseases.”
The directive reads in part, “Rural areas should…improve the ability of county-level hospitals to treat severe cases, and give full play to the role of health monitoring in township hospitals and village clinics to minimise the severity rate and mortality rate.” However, there is clearly no overnight fix for the kinds of deficiencies rural healthcare facilities struggle with. Despite this, Ma Xiaowei, Director of the National Health Commission, demanded on Wednesday that hospitals address swamped emergency rooms and get patients admitted to different departments. Ma also requested that medium and large hospitals accept more severe cases while promising that regulators will not hold them accountable for increasing fatality rates, according to the Financial Times.
Imploring under-equipped rural healthcare institutions and swamped urbans ones to suddenly improve their ability to treat an onslaught of severe cases is almost an unimaginable request, even for the State Council, as the country had over two years to get ready for its Zero-COVID exit. This complete failure of policymaking and pandemic management will almost certainly cost an unimaginable number of lives, irreversibly harm many people who do survive, further damage China’s and the global economy, and leave many demanding to know why the government did not prepare for this during the years the country spent shutdown.
What Does All This Mean Long-Term?
Just a couple weeks ago, testing positive for COVID-19, even if symptoms were mild or non-existent, was an express ticket to a government quarantine center for however long it took until the government decided one could leave. Shanghai shutdown for all of April and May just months ago, wreaking havoc on the local and national economy and causing global supply chain disruptions. The Party spent the last couple years pushing the message that this “devil” virus was so incredibly dangerous that it was worth it to continue these lockdowns and economic hardships. Today, however, the government insists COVID-19 is basically a cold, that nothing much will come of being infected, and that everything from herbal supplements to canned peaches are good remedies for it. This complete turnaround has many anxiously waiting for the economic consequences and wondering what this means for Xi Jinping and the Party in the long-run.
It’s the Economy, Shagua!
The CCP and State Council recently wrapped up the annual Central Economic Work Conference (CEWC), a meeting that sets the Party’s national economic agenda and directives for the financial and banking sector for the next year. At the meeting, Xi Jinping, who has been remarkably quiet since the end of Zero-COVID, gave a speech in which he indicated that China’s economy is expected to recover and improve in 2023, a tall order given the situation. A number of other critical points were made in an attempt to address the intense downward pressure the national economy is under, explicitly recognizing that the domestic economy has weak prospects coupled with unstable supply chains and shrinking demand.
Another critical point of the CEWC was that, “The meeting urged efforts to deepen the reform of state-owned enterprises (SOEs) while improving their core competitiveness, requiring that legal and institutional arrangements must be made to ensure the equal treatment of private enterprises and SOEs.” While China’s 2001 accession into the World trade Organization was contingent on achieving predominantly “market economy conditions,” the Chinese economy never truly transformed into a market-based one. Rather, despite some reforms in the 1990s and early 2000s, the government has maintained large SOEs in strategic and financial sectors while also maintaining policies that strongly favor these companies. Nicholas Borst explained the logic behind this succinctly for the Lowy Institute, writing “Rather than allowing the private sector more space, Beijing wants a tool for the implementation of government policy.”
In 2021, China had over 150,000 SOEs, with most of its Fortune Global 500 companies under state control. In 2019, SOEs accounted for more than 60% of the PRC’s market capitalization while accounting for 40% of its national GDP. For context, in 2019, Chinese SOEs made up more than 4.5% of the global economy–and now they are going to be treated equally with private businesses in China. This marks an important change as the Party also looks to increase demand by ensuring higher quality supply, and get a better hold on the deleveraging of the country’s real estate industry, stating that bail outs will come only if companies have well-founded plans for recovery. Just last month, amid further reduced apartment sales, the cabinet urged banks (again, most of which are SOEs) to increase loans for completion of unfinished apartments, with the central People’s Bank of China going so far as to reduce “by $70 billion the money that the country’s commercial banks are together required to hold for emergencies, freeing them to lend that money instead.”
Is This China’s Lehman Moment?
The current real estate crisis in China offers a particularly concerning look into just how damaging the sudden removal of Zero-COVID policies in the country could be both domestically and internationally. In recent years, it has been clear China’s real estate market was heading for trouble, with many people paying mortgages on apartments that are not even finished contrasting with the estimated 65 million units (1/5 of the homes available in the country) sitting completely open in China’s ghost cities. In late September last year, China Evergrande Group, China’s second largest property group, was forced to begin payments on its hundreds of billions of dollars in debt amid new regulations on developers’ debt limits. This started the current real estate sector crisis as when it caused several stock market indices to drop on September 20, 2021.
In the last year, it seemed that the Party was concerned the crisis would worsen in the absence of Zero-COVID restrictions. As Keith Bradsher explains in the New York Times, “Real estate development plays an outsize role in China’s economy, representing about a quarter of economic output and a quarter of its bank loans. Housing represents at least three-fifths of household assets in China, and many Chinese regard apartments as the only reliable way to build wealth.” This seemed to leave the Party locked into the restrictions in an effort to protect such an important but struggling part of its economy. Today, however, Zero-COVID is dead and the Party has indicated it wants less borrowing overall and that companies will only be bailed out if they present “well-founded” plans.
In the last year, the government has spent heavily on new railways and other infrastructure investments to try and help the economy amid low confidence, but that was with consistent COVID-19 policies in place. Furthermore, there have been concerns that injecting too much credit too quickly would be counterproductive to the goals of getting companies to borrow less and strengthen their balance sheets. In the real estate sector, the country has to somehow balance achieving sustainable growth and lowering prices, but that is not going to happen if sales keep falling. For example, in Shanghai this year, luxury apartment prices fell as much as 40% after the Party Congress because of concerns about the economic and political direction the country will take in Xi Jinping’s third term.
The CCP is Anything but a Party Right Now
Today, it is hard to fault those in Shanghai for selling off their multi-million dollar properties while they could. Models range in their estimated COVID-19 deaths in China in the absence of Zero-COVID, with some predicting under one million and some going over two million. This high of a number of deaths so suddenly, particularly as a result of the sudden end of virtually all precautions after years of constant testing and lockdowns, will be politically difficult to manage.
This also does not touch on how many Chinese will likely suffer from Long COVID and other long-term conditions if they do recover from COVID-19, something many other countries have had to learn the hard way. In the US, it is estimated that Long COVID costs the economy $3.7 trillion. While the US certainly has struggled with its COVID-19 response, it at least has effective vaccines. In September, Chinese state media was full of pieces talking about the “West’s hidden pandemic” of Long COVID and, now, it is nearly impossible to find any PRC official discussing this condition. The narrative has done a complete 180° on all fronts.
The threat of suddenly losing one million people completely and leaving an untold number burdened with long-lasting symptoms should be enough to make anyone reconsider their policy decisions. However, this is difficult for someone like Xi Jinping who has spent years building an image of infallibility while also championing Zero-COVID the last two years. He has often relied on rhetoric describing pandemic response as a war and continuously touted China’s unique approach as a better alternative to the “chaos of the West.” It is hard to believe what is happening in Xi’s China today is anything but complete chaos, and no amount of internet censorship and state media pieces about the supposed correctness of this new approach can keep the population totally unaware of that fact.
It still is not clear why Xi Jinping suddenly reversed course on Zero-COVID, even in the face of protests against the largely unpopular policy. Furthermore, as Xi begins his historic third term, he does so coming off a year of remarkable failure. As James Palmer recently pointed out in Foreign Policy, the once seemingly boring, safe choice in Chinese politics has proven to be anything but in the years since he took power, eliminated competition, and doubled down on state control over every facet of life in his country. Now, with mass death and further economic turmoil on the horizon, what will happen next for Xi Jinping and the CCP?