The politburo held a meeting on Thursday and issued a very clear statement on the pandemic, indicating absolutely no flexibility whatsoever with regard to the “dynamic zero” policy. The core reasons given are a low vaccination rate among older people nationwide and inadequate medical facilities in much of the country. And while that is true, from the perspective of 2020, it was entirely avoidable. It suggests that the post-Wuhan euphoria — our system is clearly better able to handle this kind of crisis than the messy West — led to a measure of complacency and hubris. China’s low vaccination rate amongst old people is perplexing given the nature of the system. How is it not possible for such a system to ensure that everyone has a jab in the arm? As things are now, to reach the point of all older people receiving the two jabs and a booster, would take months and months. The other aspect is the imbalanced state of medical infrastructure across China the politburo referred to, and it is true that medical facilities and hospitals in many parts of the country are not at the level of Beijing and Shanghai etc. This is another area where there could have been another outcome. If only a fraction of the money spent on defense and security and transport infrastructure over the past couple of decades had been used instead to upgrade medical facilities, China today would be in better shape to handle something other than a dynamic zero policy.
Then there are the economic and social consequences of sticking to dynamic zero. The first economic numbers for April show, as expected, a dramatic downturn in many key indicators, and the impact will further drag on through May, June… who knows how long. It is going to be hugely damaging. And it will not just be a theoretical shift in the GDP growth rate percentage. As each day goes by, it impacts more more significantly on individuals and companies, particularly smaller private companies and of course their employees. Chinese society is overall well able to withstand such shocks, due to high savings rates and the psychology of being prepared for any eventuality, but nobody in Shanghai and elsewhere could have expected the kind of situation that China is now facing. Also worth noting is the increasing impact all this is having in the world, which leads us to the topic of supply chains.
The start of the pandemic in early 2020 forced the world to examine the central role that China plays in global supply chains, but ironically the conclusion was that it was indispensable, that it could not be removed from the chains and that, particularly in light of the speed with which China recovered from the initial pandemic attack, companies around the globe were best to leave things alone. Now here we are, two years later and serious reconsideration is underway by companies in all sectors. Companies are looking to move production away from Shanghai and East China in particular. Beyond the current work limitations and logistical issues, this situation has unfolded in a way which sends a clear message about how a centralized non-transparent system can change things at any time, with no warning or recourse. Companies don’t like to get caught in this kind of a vise and many will be looking to ensure they are protected from a recurrence. China is of course still a massive market with huge longer term potential particularly in terms of consumer markets, but the consequences of the nature of the system have never been clearer.
The same is true for many Chinese people. Everyone has a great desire for safety and measures resulting in a low death rate are welcomed and embraced. But for people in the major cities, this may be becoming a difficult pill to swallow. There could be an exacerbation of the divide between urban 1st tier China and the rest of the country in terms of not only living standards and asset levels, but a shift in terms of attitudes as well with the middle class in the coastal cities increasingly feeling alienated. Preserving stability is the most basic mantra of Chinese culture, reflected in fundamental docility in the face of official pronouncements. But as the lockdown stretches on, some people are increasingly scratching their heads. It sometimes almost seems like a carefully graded and conscious policy to gradually break people of the habit of passive obedience.
There is never a time when China is not interesting, but the situation today is as stark as any we remember in the past three decades with far greater consequences because of the stakes involved now. The amount of wealth and assets, the scale of China’s economy, the impact it all has on the lives of not only China’s population but also the world… the implications are just so massive. It’s a fascinating time. So it has never been more important to read carefully the pronouncements from the Center and to understand as clearly as possible what their intentions are and what the implications of that might be. We are heading towards the 20th Congress, which is scheduled for “the second half of 2022.” It is usually predicted that October will be the month, but who knows? maybe it will be fast-tracked. The more complex the situation, the trickier it becomes, and things are unlikely to get simpler in the weeks and months ahead. On the other hand, China invented bureaucracy and organizing such a meeting is surely an extremely complex affair.
There is much to mull in the coming weekend, which we hope is a pleasant one for you.