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China’s ‘Zero Covid’ Has Become Xi’s Nemesis

Thought Leader: Niall Ferguson
April 17, 2022
Source: Link

W. Somerset Maugham’s 1925 novel “The Painted Veil” features a harrowing description of a cholera outbreak in a provincial Chinese city. “The great city lay in terror; and death, sudden and ruthless, hurried through its tortuous streets … The people were dying at the rate of a hundred a day, and hardly any of those who were attacked by the disease recovered from it; the gods had been brought out from the abandoned temples and placed in the streets; offerings were laid before them and sacrifices made, but they did not stay the plague.”

That was the backward China supposedly swept away by Mao Zedong’s Communist revolution. In reality, man-made disasters outdid natural ones to kill tens of millions of people under Mao’s tyranny, the most disastrous being the famine of 1959-61. According to Frank Dikotter’s definitive account, 45 million people “died unnecessarily” as a result of the collapse of agricultural production caused by Mao’s disastrous “Great Leap Forward” — just under 7% of the Chinese population.

That China too no longer exists — the China of permanent revolution — or so we are told. Over the past two years, the government of President Xi Jinping has boasted time and again about the superiority of the Chinese response to the Covid-19 pandemic.

While decadent Americans failed to contain the spread of the SARS-CoV-2 virus, in China there were virtually no cases, and a grand total of 4,638 deaths through March. The U.S. mortality rate was a thousand times higher than the Chinese. In any case, the virus originated in the U.S. and was brought to Wuhan by Americans. If you like this sort of thing, just follow the Chinese Foreign Ministry’s “wolf-warrior” spokesman Lijian Zhao on social media. You can also learn how the war in Ukraine was our fault, too.

Several things about this story always struck me as off. First, the People’s Republic that Mao created remains a one-party state with more than vestiges of Marxist-Leninist ideology and a personality cult that now revolves around Xi. Second, the pandemic originated in Wuhan under circumstances that remain mysterious. The lab-leak hypothesis has not been confirmed or definitively ruled out. But the attempt — not only by the Chinese government but also by its Western apologists and social media censors — to shut down investigation of that possibility has been exposed.

Third, whether the virus originated in a lab or a “wet” food market, there can be no doubt that the Chinese Communist Party’s prolonged denial that it was transmissible between humans allowed the virus to spread from Wuhan to the rest of the world in a way that might have been avoided under a more transparent and truthful system of government.

Finally, the success of China’s “Zero Covid” policies since the initial outbreak depended on two things: the CCP’s ability to maintain a uniquely intrusive surveillance of the Chinese population and the virus’s relatively low reproduction number. Lockdowns worked in China and did not work in the Western world because no Western government has a system of social control like China’s. And Zero Covid was achieved in China because Covid wasn’t the measles.

Until it was. Or at least until SARS-CoV-2 mutated to produce a variant (omicron) significantly more contagious than those known by earlier letters of the Greek alphabet. The highly transmissible BA.2 variant of omicron is 35% more transmissible than BA.1, which was itself more transmissible than the previous variants.

Covid Comes Home

Daily new confirmed cases, based on limited testing, don’t bode well for the mainland

Source: Johns Hopkins University

The explosive spread of omicron, first in Hong Kong and then in Shanghai, threatens to blow the lid off Xi’s much-vaunted Zero Covid policy. By now, most readers will have glimpsed the shocking results, often in the form of brief clips on social media. For me, the most memorable evidence was audio rather than video. The images were of dozens of tower blocks at night, but the sounds were reportedly of thousands of their inhabitants shrieking eerily after weeks of incarceration in their tiny apartments.

Other scenes linger in the memory. A crowd breaking through a security cordon to get food. Scuffles between frustrated residents and officials. The streets of this vast city deserted; the highways to and from Shanghai closed; the huge fleet of container ships offshore because the port is closed. People’s Liberation Army soldiers being sent into the city. The cats and dogs of infected people being stuffed in bags and put down. A drone flying up to the people yelling from their apartment windows and saying: “Please comply with Covid restrictions. Control your soul’s desire for freedom. Do not open the window or sing.”

In one case, a young man in Shanghai called the police to say that his family had been out of food for four days, and offering to go to the police headquarters to be arrested, in the hope of being fed. The police officer responded that he was struggling to feed himself.

All this illustrates the difference between Somerset Maugham’s China and Xi Jinping’s. The People’s Republic has left “The Painted Veil” far behind — only to become the dystopian surveillance state depicted in Yevgeny Zamyatin’s seminal science fiction novel “We” (1921). But the central event of “We” is a revolt against the “One State” and its omniscient “Benefactor” — a revolt that originates in the exposure of a few dissidents to the natural world beyond the borders of the surveillance state.

China’s history can be understood as a succession of imperial dynasties, of which the CCP’s is just the latest. Each of the dozens of dynasties sought, with varying degrees of success, to impose order on — by Western standards — a vast populace. Periodically, however, the Middle Kingdom would descend into dongluan— turmoil. For example, one of the most destructive conflicts of the modern times was the huge and bloody civil war that raged when the Taiping movement challenged the Qing dynasty between 1850 and 1864.

A key part of the legitimacy of the Communist Party’s rule is that, according to the regime’s version of history, there was much more chaos before 1949 than after it. Indeed, a central element of Xi Jinping’s claim to an extended term as China’s leader is — as a former minister once vehemently explained to me — that he “saved the Party, saved the army, saved the state” from a new era of turmoil caused by chronic corruption and political infighting.

So is Covid’s revenge on its country of origin the beginning of a new era of turmoil? How big will the economic consequences be of Xi’s last-ditch effort to maintain Zero Covid? Could these in turn undermine Xi’s domestic-political position? Might this crisis prove to be even more consequential than the Russian invasion of Ukraine, which has so preoccupied the world for the past two months?

My answers to these questions are: Probably not; bigger than Western investors currently expect; almost certainly not; and no.

The first thing we need to do is to get the current Chinese outbreak into perspective. Yes, Hong Kong had an omicron nightmare in February and March. Confirmed cases surged from zero to above 75,000 a day at the peak. Relative to population, Shanghai has followed a very similar trajectory in the past few weeks. Guangzhou (the southern port city once known in the West as Canton) has warned of possible community spread and has launched a citywide testing protocol, as well as creating a makeshift hospital with 2,000 beds in an exhibition center.

China has seen nothing like this since January 2020 in Wuhan, ground zero for the pandemic. Indeed, the current crisis suggests a more widespread contagion than in early 2020.

Yet these numbers are far from shocking when compared with recent American or British experiences. In terms of mortality, Hong Kong had a bad March, comparable with New York’s experience in January 2021 and January 2022, but roughly a third as bad as New York’s in April 2020. Relative to population, China’s Covid case and death counts remain trivial by Western standards.

As in the West, so in China, omicron produces a spike, not a curve. The effective reproduction number (Rt) in Shanghai receded from 1.83 (on April 6) for seven days in a row, and was down to 1.50 on Wednesday. That day, China reported 3,020 confirmed symptomatic positives (including 2,573 in Shanghai) and 26,391 asymptomatic cases (including 25,147 in Shanghai).

Experience from the U.S. and U.K. suggests that Rt peaks about 9 to 21 days ahead of case numbers. Indeed, the Shanghai municipal government predicts that the current outbreak could end around May 2, with a total of 293,720 infections.

The problem is that the Chinese data lack credibility. It’s implausible, to put it mildly, that Shanghai has to date experienced 200,000 recorded cases but zero deaths. (Hong Kong reported 8,886 deaths out of 308,705 cases.) An anonymous official reportedly admitted that the criteria for confirming cases and deaths were “susceptible to political meddling.” This echoes last week’s leaked recordings from Dr. Zhu Weiping, an epidemiologist at the Shanghai Center for Disease Control, who spoke of deliberate official hiding of and tampering with data.

Part of the Chinese government’s problem is that they overpromised on Zero Covid as a strategy, underestimating the virus’s shape-shifting properties. But they also overpromised on their vaccines.

The traditional inactivated-virus vaccines made by Cansino, Sinovac and Sinopharm offer little protection against BA.2 infection and hospitalization. And many elderly Chinese remain unvaccinated even with those inferior vaccines — perhaps as many as 15 million over the age of 80. Less than half of those over 80 have received the full double-dose vaccine course, and less than 20% have received a booster. For the over-60s, just over half (56.4%) have received a booster. Booster uptake in China is low partly because it is unclear if it’s safe to boost an inactivated viral vaccine.

Thanks to licensing agreements with Fosun Pharmaceutical Group and four other companies, China now has access to millions of courses of Pfizer Inc.’s antiviral Paxlovid treatment, which it will deploy to high-risk populations. Other Chinese pharma companies are scrambling to produce their own therapeutic drugs. This will lower the fatality rate. But China’s biggest problem is that it is far behind the curve with mRNA vaccines.

The Pfizer vaccine, licensed to Fosun since December 2020, is still nowhere to be seen in China. The Walvax/Abogen partnership has finished enrollment of 22,000 subjects in a global phase 3 trial of its own mRNA vaccine, but there have been numerous delays, and the reported side effect of lymphopenia (a low lymphocyte white blood cell count) is concerning.

Even China’s formidable testing capacity will not be able to cope with a nationwide omicron wave. Though the production of test kits has been ramped up — earlier this month, three new rapid antigen tests were approved, bringing the total to 27 — not even China can conduct hundreds of millions of tests a day on a sustained basis. Over 100 million tests have been performed in Shanghai alone, but there are anecdotes that even the testing process can lead to Covid spread as people come into contact with one another.

The economic consequences of China’s omicron crisis are already big and could get bigger. Cities and provinces currently under full or partial lockdown represent 23% of GDP.

These measures, and additional barriers to intercity travel, have caused steep declines in economic activity measured by highway traffic mobility and truck freight volumes. Reduced activity has, in turn, cut Chinese oil consumption by 1.3–1.4 million barrels a day.

The supply-chain impact could be much greater than between July and September of last year, when relatively targeted restrictions were imposed at a handful of ports. According to data from VesselsValue Ltd., the number of ships waiting to be loaded or discharged in the port of Shanghai has risen 500% in the last six weeks. This is almost twice the level at the peak of supply-chain disruptions in the third quarter of 2021. In a letter to China’s vice premier this month, the European Chamber of Commerce in China stated that 51% of German companies’ logistics and warehousing and 46% of their supply chains were completely or severely affected by the current Covid situation in China.

Carried Away

Road-freight traffic volumes year-over-year, seven-day moving average

Source: Morgan Stanley Research

There are other economic consequences, too. Jilin Province, which reopened last week after three weeks of lockdown, is one of China’s most important agricultural producers. Along with Shandong and Hebei, it accounts for around 30% of the country’s corn and wheat production. A flare-up in cases in these regions could lead to a jump in food prices.

China has not yet experienced the inflation surge that we are seeing in much of the rest of the world. The latest consumer price inflation print registered a modest rise from 0.9% year-on-year in February to 1.5% in March. But vegetable price inflation was 17.2% in March, up from minus-0.1% in February.

There seems little doubt, in short, that omicron and Ukraine together have caught the Chinese government by surprise after it ambitiously targeted “around 5.5%” GDP growth at the March joint sessions of the National People’s Congress and the People’s Political Consultative Conference. Talk to people in the Chinese business community and you will hear phrases like “the economy is the worst it’s been in my memory.” Recently trending on Toutiao (China’s Twitter for news) were questions about how to move out of China.

What of the political consequences? You might think that the crumbling of the Zero Covid policy and the deteriorating economic situation would pose a threat to Xi. But I think you would be wrong. First, most Chinese don’t blame Xi or the central government but local officials in Shanghai for botching Covid policy by failing to impose a lockdown as soon as cases emerged. It remains a common proverb: “The mountains are high, and the emperor is far away.”

On Wednesday, party media confirmed that the president had taken personal responsibility for the decision to double down on the Zero Covid policy. “Xi Jinping pointed out that the current global pandemic is still very serious, so we cannot relax prevention and control work,” the report read. The watchwords remain: “Adhere to the [policy of] prevention of imported cases and a rebound of domestic cases … Adhere to scientific precision and dynamic zero COVID.” Another commentary declared:

Despite the mounting difficulties to contain the evolving, more transmissible and concealed virus, the country shall defeat it with action and determination. China will never give up on protecting the lives of its citizens. Trying to “live with the virus” … which relies solely on vaccination instead of other prevention measures, is not a choice for China … China will not and cannot adopt such a defeatist and Darwinian method …The dynamic zero-Covid policy is a reflection of the Chinese government’s people-centered development philosophy.

Two weeks ago, Xi dispatched Vice Premier Sun Chunlan to Shanghai to take control from the hapless municipal government. Upon arriving, Sun unequivocally committed to bringing the outbreak under control, whatever the cost. The CPP media mouthpiece Xinhua wrote that Sun had been sent “to carry out the important instructions of General Secretary Xi Jinping,” namely to “investigate the prevention and control of the epidemic.” Sun “stressed the need to adhere to the general policy of ‘dynamic zero’ without hesitation or wavering, resolute and decisive attitude, and rapid and vigorous action.”

In response to the economic crisis, in a similar way, Xi has put Premier Li Keqiang in the hot seat. Li acknowledged in a talk at an economic forum on April 7 that “the global situation is complicated and evolving, and pandemic outbreaks have been reported at home. Some emergency factors have already surpassed expectations.” He added that “policy support” would be need to “intensify at an appropriate time. While existing measures should be enforced as soon as possible, we should study new countermeasures.”

Chinese economists have recently been arguing for more support for businesses through tax cuts and subsidies, more monetary easing by cutting the reserve-requirement ratio and interest rates, more measures to stabilize the property market, and more infrastructure investment. Even so, it is possible that Li will announce a more realistic GDP growth target after this month’s Politburo meeting. Meanwhile, the party slogan of the moment is “unified domestic market,” which implies yet more state control over the economy.

The underlying reality is that, for social as well as economic reasons, Zero Covid will need to be quietly abandoned. That is why Shanghai restrictions have been eased in the past few days. Residents in areas with no recorded cases in the past 14 days are now permitted to leave their buildings. Some individuals who have tested positive are being allowed to quarantine at home rather than public quarantine centers.

Last week, Caixin magazine reported a four-week pilot program in eight coastal manufacturing hubs, including Shanghai and Guangzhou, to loosen quarantine requirements. The required centralized quarantine period for inbound travelers and close contacts of Covid patients has been shortened from 14 to 10 days, though they are still subject to seven-day quarantines at home afterward and multiple Covid tests during the 17-day period.

Meanwhile, the criteria for relaxing community mobility restrictions have been loosened from 14 to 10 days without positive cases. Morgan Stanley’s base case is that China will not exit from Zero Covid until after the close of the 20th Party Congress in the fall. In practice, that may no longer be viable.

Yet such a deviation from Xi’s rhetoric is unlikely to weaken him politically. Unlike President Vladimir Putin in Russia, who is very clearly the sole owner of the thus-far disastrous invasion of Ukraine, Xi has preserved the semblance of collective decision-making, as the deployment of Sun Chunlan on Covid and Li Keqiang on the economy shows.

In any case, the faction that would have benefited from a policy fail by Xi is the so-called “Shanghai gang,” associated with Jiang Zemin, Xi’s predecessor as general secretary from 1989 to 2002. Yet Shanghai politicians are in the doghouse right now over their omicron outbreak, while Jiang’s influence is fading as he is now 95 and rumored to be failing mentally.

The phrase “painted veil” was borrowed by Somerset Maugham from Percy Bysshe Shelley’s sonnet:

Lift not the painted veil which those who live

Call Life: though unreal shapes be pictured there,

And it but mimic all we would believe

With colours idly spread, — behind, lurk Fear

And Hope, twin Destinies; who ever weave

Their shadows, o’er the chasm, sightless and drear.

Fear and Hope are indeed weaving their shadows over Xi Jinping’s China. The painted veil is the propaganda of his glorious leadership of the nation to a new “great power status” and “common prosperity.” Citizens of Shanghai have just had a glimpse of the sightless and dread chasm that lies behind. But the painted veil will soon descend again.

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