China’s poised to spend as much as $318 billion in a high-stakes bid to beat Covid lockdowns and prevent its economy from slumping into a recession.
The strategy, triggered by the devastating impact on growth and supply chains of Shanghai’s two-month-long lockdown, involves the construction of a massive additional Covid infrastructure. The goal is to have a testing booth within 15 minutes of everyone living in a big city in the nation of 1.4 billion people.
If it works, it will end the massive, extended lockdowns that wracked the nation since March, and help the economy rebound. If it fails, swingeing lockdowns will resume and the damage done to growth will be exacerbated by the $318 billion that Nomura Holdings estimates may be spent on expanding Covid testing infrastructure, an amount bigger than Finland’s economy.
“If the strategy doesn’t work, you get more Shanghais, which would be a killer for the economy,’’ says Taylor Loeb, a Washington-based analyst at research firm Trivium China. “Mass testing and monitoring are necessary steps to avoid lockdowns or the serious burden to the healthcare system that would result from letting the virus spread – both of which would likely be more costly to GDP.”
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Still, it’s an unpopular move by President Xi Jinping, who’s doubling down on his zero-Covid policy at a time when the rest of the world has decided to live with the virus. Putting in a massive testing infrastructure weds China to a permanent zero-Covid strategy for years to come that is exasperating locals and foreign investors alike.
The idea behind the strategy is simple: If China can test and isolate everyone associated with new infections quickly, it will halt the spread of the virus and avert the need for extended lockdowns that cripple growth.
The goal is to test entire city populations within 24 to 36 hours. Hangzhou, the capital of eastern Zhejiang province, says it’s able to test its 12.2 million people in just 16 hours while southern tech hub Shenzhen, bordering Hong Kong, says it can test its 18 million residents within 36 hours.
Warp Speed
Already the infrastructure rollout is advancing at warp speed. Shanghai has assembled a network of 15,000 testing booths almost overnight with residents requiring a Covid test every 48 to 72 hours or be barred from entry to public conveniences.
Ningbo, a major maritime and industrial hub in eastern China with 9 million people, expropriated a huge, suburban residential compound and transformed it into a 230,000 square metre “quarantine town” at the end of last month. Its 4,356 isolation rooms and suites come with monitoring cameras, cleaning robots and viral swab collectors.
An examination of Covid-related plans published by provincial authorities indicates about 50 prefecture-level cities in provinces from Zhejiang to Heilongjiang now have routine mass testing in place that affects about 420 million people. The cities have announced plans and procurement for items including protective gear, compact air conditioners, negative pressure air purification systems, and commercial vehicles to be repurposed as mobile collection and testing stations.
“It’s the most cost-effective way to prevent a repeat of any Shanghai-style lockdown in the future,” said Wang Haizheng, a doctorate fellow of economics at Shanghai’s Donghua University. “If people feel safer, they’ll be more willing to travel and spend.”
Without mass testing, the lockdowns caused by the highly transmissible Omicron variant would slice 1.1 percentage points off growth this year, says Soowchow Securities analyst Tao Chuan in Suzhou city near Shanghai. The new, rapid testing strategy will reduce the drag on growth to 0.6 percentage points, Tao says.
But it comes at a substantial cost. If testing is expanded to cover 70% of the population every two days, it would cost 1.8% of gross domestic product, says Nomura Holdings chief China economist Lu Ting. That amounts to $318 billion, based on last year’s $17.7 trillion GDP. If 50% of the population is covered with testing every three days the cost would be about half of that, Lu says.
Nomura says the new strategy has already turned some investors more bullish. They see the testing plan helping to contain infections, reduce lockdowns, increase demand, and thus restore economic normalcy, says Lu.
“The adoption of frequent mass testing by major cities and production hubs could enable a transition to shorter and more targeted lockdowns,’’ said Goldman Sachs analysts led by Kinger Lau in Hong Kong in a June 2 note. That would “potentially soften the economic costs of the ZCP [zero-Covid policy] in coming months.’’
Omicron Challenge
But can mass testing work against a highly infectious variant like Omicron, not to mention potentially even more infectious future variants?
Nomura says it can’t and that cities may continue to face frequent partial or even full lockdowns. It says cross-city travel and logistics will likely remain significantly impaired as cities may not trust each other’s testing quality and results. Wealthy cities could be especially isolated due to their mistrust of less affluent places, it adds.
An outbreak in Beijing this week underscores the difficulty of implementing the zero-Covid strategy. Millions of people in the capital now face testing after an outbreak of nearly 200 cases linked to a 24-hour bar in the city centre.
But the consequences of failure will be substantial for both China and the world. China contributes more than a fifth of global growth and its mammoth industrial complex is crucial to global supply chains.
Brink of Recession
Industrial output fell 2.9% in April from a year earlier and retail sales plunged 11.1% as the impact of sweeping Covid lockdowns left the world’s second-biggest economy teetering on the brink of recession.
“A recession in China driven by more extensive lockdowns could reduce Chinese imports further and cause supply-driven inflationary pressures and input shortages,’’ said analysts at research firm Eurasia Group in a June 9 note. “A sharp slowdown also raises the prospect of extensive corporate defaults, financial losses and financial market volatility that could have a major direct impact on the US economy, and indirectly affect the US outlook via spillovers on the global economy.’’
Official anxiety over the economy was highlighted by Premier Li Keqiang’s emergency video meeting with about 100,000 Communist Party cadres in late May.
“Since April, indicators such as employment, industrial production, electricity consumption and freight have fallen significantly, and the difficulties are greater in some aspects, and to a certain extent, than when the epidemic hit us severely in 2020,’’ Li said, while urging cadres to do everything they can to prevent a second-quarter contraction.
Li’s best hope though may not be that cadres focus on the economy, but that the mass testing strategy they also oversee quickly turns things around, enabling China to end sweeping lockdowns and get back to work.
And the early indications are promising. Shanghai’s manufacturing activity has almost recovered to pre-lockdown levels, suggesting growth momentum should start to firm in the coming quarter, Goldman’s Lau said in a June 13 note.
And May economic data improved from a month earlier as exports and credit exceeded expectations, with Goldman now expecting growth to accelerate to 5% in the third quarter from 1.5% during the current three months.
“There’s no reason to believe it won’t work,” says Trivium’s Loeb. “Will it grate on the population? Will it further alienate China internationally? Yes and yes. But, if success means containing the spread of Covid without crippling the economy, it’s really the only option.’’
- By Kevin Hamlin and Frank Chen
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