Chaos in China: Rushed exit from zero-COVID strategy could COLLAPSE Chinese economy

12/01/2022 / By Arsenio Toledo

The Chinese Communist Party (CCP) is currently struggling to deal with nationwide protests over its Wuhan coronavirus (COVID-19) lockdown policies. This tumult has caused the country’s economy to drop, with Goldman Sachs warning that a rushed exit from its zero-COVID strategy could spell doom for the Asian giant.

The current protest wave in China was sparked by a deadly apartment fire in the city of Urumqi that led to the deaths of 10 people, including a three-year-old child. The deaths are being attributed to zero-COVID policies making it difficult for emergency responders to fight the fire and save the lives of the people who were trapped in the apartment building. Thousands upon thousands of people have held demonstrations and marches all over China, including in cities like Beijing, Shanghai and Wuhan. (Related: Rare nationwide protests erupt across China to challenge CCP’s zero-COVID policy.)

In a note published Nov. 27, Goldman Sachs Chief China Economist Hui Shan noted that the investment bank is currently putting the chances of China retracting its zero-COVID strategy and reopening the country fully before the second quarter of 2023 at 30 percent.

Hui added that Goldman Sachs predicts reopening to now include “some chance of a forced and disorderly exit.” This means that the rollback of COVID-19 regulations may be too hurried and disorganized, causing the CCP to lose control as more COVID-19 outbreaks spread across the country.

If this happens, public health services would be strained, people would be corralled back into their homes as party officials re-institute zero-COVID policies and manufacturing and commerce become disrupted, causing the entire economy to crash.

Chinese financial market already being rocked by protests

Goldman predicts the disruption to cause further “downside risk” for its earlier projections of China’s fourth-quarter GDP. The bank earlier predicted a three percent year-on-year growth for 2022, far below the 5.5 percent that the CCP is targeting.

China’s benchmark stock index, the CSI 300 Index, ended 1.1 percent lower on Nov. 28, the biggest drop in over a month. The onshore yuan weakened by 0.44 percent to 7.195 yuan per dollar on the same day after depreciating by as much as 1.1 percent during the early morning trading period. The yield on China’s 10-year bonds also rose by three basis points to 2.865 percent.

Financial analysts believe more economic disruptions will occur in the coming weeks as the CCP passes some rollbacks in its zero-COVID policy, believing that these concessions will prevent more protests from forming.

“The developments have caused pressure on the renminbi and China-related assets such as the Australian dollar this morning as the market prices in political risk,” said Alvin Tan, Asia financial strategist for RBC Capital Markets in Singapore. “Apart from the risk of further political unrest, near-term COVID risks continue to mount as winter approaches. Much tighter restrictions with associated economic disruptions are more likely in the coming weeks than abrupt loosening.”

“The market does not like uncertainties that are difficult to price and the China protests clearly fall into this category. It means investors will become more risk averse,” said Gary Ng, an economist for investment banking company Natixis. Ng warned that Asian and Pacific markets like Australia, Hong Kong, Taiwan and South Korea will likely have to deal with the fallout.

“The China economy is heading in the direction of reopening, but the road to the reopening could be a bumpy one,” said Mizuho Chief Asia Financial Strategist Ken Cheung in Hong Kong. “Overall, the China fourth-quarter outlook should remain grim… What’s more, the outbreak of social unrest reflected the prevailing feeling of anti-pandemic fatigue after a long period of lockdowns and all of these will likely suppress consumption.”

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