"Covid Zero" is Crushing China
Production and consumption both cratered in April. The impact on the rest of the world is uncertain.
The Chinese government’s draconian efforts to stop the spread of the coronavirus are hitting the domestic economy almost as hard as the initial lockdowns imposed more than two years ago. So far, the damage seems contained to China itself, with the rest of the world benefiting from the collapse in Chinese consumption of crude oil and other commodities. Whether that relatively benign outcome persists will depend on how changes in Chinese production and consumption map onto the needs of the other major economies.
The Logic of “Covid Zero”
Despite starting in China, the coronavirus pandemic largely spared its country of origin thanks to the success of a brutal suppression campaign in February-March 2020. By summer 2020, normalcy had mostly returned—as long as you weren’t planning to enter or leave the country.
Chinese pharmaceutical companies were also quick to develop and mass produce reasonably effective vaccines. The Sinovac and Sinopharm shots may not be as good as the ones based on mRNA technology, but they are good enough that they can prevent the worst outcomes if patients get at least three doses.
The problem is that, while China’s vaccination rate appears relatively high at first glance, the headline number is deceiving. Most Chinese haven’t gotten a booster shot, which means they are relatively unprotected against the latest variants. Worse, China’s elderly—who, like the elderly everywhere else, are the most susceptible to the virus—are vaccinated at far lower rates than the general population.1
Moreover, even though the Chinese government secured access to Paxlovid before the Omicron and BA.2 variants hit the country, they don’t seem to be willing to actually use the antiviral therapy. (Bloomberg ran a story on February 14 with the headline “China’s Approval of Pfizer Pill Opens Door to Ending Covid Zero”, which turns out to have been premature.)
This puts the Chinese government in a bind. China’s healthcare system lacks the resources to deal with an uncontrolled outbreak in an under-vaccinated population without antiviral treatments. “Letting it rip” would condemn millions to death, if not more. And Xi Jinping has tied his own political reputation and the legitimacy of the Communist Party to China’s management of the pandemic, particularly the early lockdowns imposed on Hubei province.
Faced with these self-imposed constraints, the Chinese government’s decision to eradicate Covid within China’s borders by locking down hundreds of millions of people for weeks at a time becomes (slightly) more understandable. I will leave it to the public health experts to determine whether “Covid Zero” is succeeding on its own terms, just as I will leave it to the political analysts and Zhongnanhai watchers to determine whether the strains that the strategy is imposing on the civilian population are sustainable. What I hope to explain are the economic and financial consequences.