GAM Investments’ Jian Shi Cortesi gives answers to some of the burning questions clients have been asking about China.
What is behind China’s zero Covid policy?
The Chinese government is faced with a trade-off between Covid deaths and economic slowdown. On Covid death, the challenges include:
- Due to successful containment measures in China in the past two years, fewer than 0.1% of Chinese have been infected with Covid, and China has only seen a few thousand Covid deaths (compared to 1 million in the US). This likely makes the Chinese population highly vulnerable to Covid compared to countries that are on the way to achieving herd immunity.
- The most vulnerable segment of the Chinese population are not eager to be vaccinated. Only 60% of people aged 60 and above have received a booster shot, which means that 100 million old people in China are not vaccinated.
- The proportion of critical care unit (ICU) beds is seriously insufficient in China. According to survey data from the Chinese Society of Critical Care Medicine1, the ratio of ICU beds to hospital beds nationwide is only 1.65%, which means that there are only 3.43 ICU beds per 100,000 people.
Based on the 2-3 deaths per 1000 people we have observed in many western countries, my estimate is that abandoning zero Covid measures in China could lead to 3-4 million deaths in the country (based on 1 million US Covid deaths with a 300 million population. China has four times the population) and serious pressure on hospitals. This is the scenario China wants to avoid.
Will the mRNA vaccine be a game changer for China?
China is getting closer to approving its first mRNA vaccine. At least six domestic mRNA vaccines are in clinical trials at the time of writing.
mRNA vaccines are shown to trigger a stronger antibody response compared to China’s Sinovac vaccine. However, an mRNA vaccine is unlikely to be a game changer for China; three shots of Sinovac vaccine have already been shown to be more than 90% effective against Covid death.2
Therefore, the key for China is not mRNA, but rather to increase the vaccination rate among older people. Booster shots coverage was only 60% for people above 60, as stated above, and only 20% in those aged 80 and above.3 To motivate older people to get vaccine shots, the government is now offering various cash incentives.
When will China loosen the zero Covid policy?
While it is hard to predict the exact timing when China will stop the zero Covid policy, we believe the trend is towards loosening. It has just reduced the inbound tourists quarantine time from two weeks to one week, for example.
China will eventually abandon the zero Covid policy when cities have adequate medical resources and high vaccination coverage, especially in older people and other vulnerable groups.
What do we expect from the Party Congress this autumn?
The Chinese Communist Party (CCP) is expected to convene its 20th national Party Congress in October/November. The Party Congress will produce China's new top leaders for the next five years.
As the Heritage Foundation report put it, while Xi is widely expected to be re-elected as the head of the state, the outcome is not guaranteed. Xi derives his power from the consent of the broader CCP leadership, which, as with previous leaders, is earned through performance and compromise.
Priorities presented during the Party Congress will help set China’s political, economic and foreign policy trajectory for the coming years.
What is China doing to support the economy and stock market?
- China is the only major economy that has been cutting interest rates this year.
- Loosening property purchase restrictions and mortgage lending to support the property market.
- Supporting healthy growth of internet and aiming to boost the global competitiveness of the Chinese internet.
- Increasing VAT tax rebates, meanwhile allowing small businesses to defer social security payments.
- Doubling the amount of preferential loans to mid-small enterprises. Allowing individuals and small businesses to defer loan payments.
- Removing transportation restrictions for industrial logistics. Increasing domestic and international flights.
- Increasing consumer spending in auto and housing, by exempting RMB 60 billion of auto purchase tax for passenger vehicle buyers, and improving property policies to encourage buyers.
- Increasing coal production to ensure energy security.
- Improving unemployment population aid.
What is the risk of a military conflict in Taiwan?
The People’s Republic of China, governed by the CCP, defines its territory as China plus Taiwan, but it does not control Taiwan. In Taiwan, the constitution says it is part of the Republic of China and defines its territory as Taiwan plus mainland China. This is the result of the previous civil war. The CCP hopes that eventually mainland China and Taiwan can be reunited through peaceful talks such as those between East and West Germany. However, in recent years some politicians in Taiwan have been pushing to change the constitution to redefine Taiwan as a separate sovereign entity. For mainland China, this is equivalent to declaring independence. Should Taiwan do this, the Chinese government has openly said it will use military force to take over Taiwan. However we believe the current Ukraine war serves as a warning and actually reduces the likelihood of a Taiwan conflict.
- When we monitor Taiwan media coverage, Taiwanese people are not sure if the US will fight for them in the event of a war. We sense that Taiwan is less likely to push for independence than before.
- Considering the sanctions and economic disruption faced by Russia, China is unlikely to start military action without Taiwan declaring independence.
The US has a very strong influence on Taiwan and has strong motivation to prevent it from changing the constitution, allowing for continued peace. Should Taiwan decide to change its constitution, it would put the US in a very difficult situation as it would be faced with a dilemma – it can either fight with China or it can do nothing – and neither option is particularly desirable.
3Sources: http://www.ecns.cn/news/cns-wire/2022-05-07/detail-ihayamfc5318034.shtml, https://www.who.int/china/health-topics/ageing#:~:text=By%202019%2C%20there%20were%20254,over%20the%20age%20of%2060.&text=Older%20man%20in%20hospital%20being%20assisted%20by%20nurse%20in%20China, https://www.statista.com/statistics/1306112/china-elderly-population-covid19-vaccination-rate/
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. There is no guarantee that forecasts will be achieved. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. Assets and allocations are subject to change. Past performance is no indicator for the current or future development.