There's a really rather shocking stat out today that more than half of Europeans are on track to catch the Omicron strain of Covid in the next six to eight weeks. That's the assessment of the World Health Organization's Europe director, Hans Kluge, based on the seven million cases chalked up in the first week of the year.
We're into a new phase of the pandemic, where a wildly contagious but clearly milder form of the disease is doing the rounds. That's new, but here in Hong Kong and China, we are sticking to the same old "zero-Covid" playbook. It's a mistake, and a costly one.
China has imposed its strictest lockdown since the original Wuhan outbreak in the city of Xian, a former Chinese capital that's home to 12.9 million people in the metro area (as well as, of course, 8,000 Terracotta Warriors). Xian's real-life citizens are as free to move about as the frozen-in-time force protecting China's first emperor in his afterlife. One member of each Xian household is allowed out once to get groceries every two days.
The "zero-Covid strategy" has kept cases low, very low in China. But it has not succeeded in reducing them to zero. The virus is still doing the rounds, and rearing its head now and then.
Tianjin, a similarly-sized city of 14.0 million in the metro area, is now reporting an outbreak, right on Beijing's doorstep. Its initial Omicron cases are in people who show no signs of having traveled outside the city, but appear to be the third generation of transmission. So the city is stopping travel to other cities and provinces. Mass testing is starting. And the virus is embedded already.
Tianjin is also a major port for goods leaving Beijing, and the north of China. Ningbo, just south of Shanghai on China's central coast, has also had a partial lockdown, and is a major source of trade out of the heavily industrial Yangtze River Delta. Omicron cases are cropping up, too, in Shenzhen and here in Hong Kong, suggesting trade out of the top economic center for China, the Pearl River Delta, is also about to get drastically slowed. Henan Province in central China is also contending with a case cluster, although not yet of Omicron.
Shanghai is the world's busiest port, according to the World Shipping Council, while Ningbo ranks third behind Singapore. Seven of the nine busiest shipping ports are in China, if you include Hong Kong. The backlog effect on trade of multiple lockdowns could be immense, with China accounting for 17.6% of the world's export growth so far this year.
Each Chinese city affected requires virtual closure, while everyone is tested. And often tested again. Xian has just gone through its seventh round of testing. It has been locked down since December 22. There have been 2,060 fresh Covid cases in Xian in the last month. The peak seems to have passed, with only eight new cases on Monday, the last official count. But people still can't move around.
This kind of situation is only really possible in a dictatorship. And with that dictatorship heading for a coronation that's cast as a re-election in November, when President Xi Jinping will seek an unprecedented third term, the Chinese Communist Party is desperate to point to its great success in beating the virus.
Only it hasn't beaten the virus, and it's apparent from two years of experience that it likely never will. It is in a quandary. Abandoning the sequence of outbreak-lockdown-emergence-outbreak-lockdown would constitute an admission that zero-Covid ultimately failed. It keeps cases manageable, for sure, but what are the residents of Xian, with 0.0160 cases per capita in this latest outbreak, going to make of all they've given up in what's going on a month of lockdown, if China surrenders that strategy?
The indications are that China will get tougher on the lockdowns across the country rather than easing up. The Lunar New Year holidays are approaching, with travel under normal conditions an epic migration around the "Spring Festival," with the Year of the Tiger beginning February 1.
It will likely be a third year that many migrant workers either give up their jobs, or don't see their families. The nuclearization of the Chinese family has picked up pace, with urban residents urged to stay near work, and sometimes compensated for not heading to ancestral homes for multigenerational gatherings. Henan Province, one of the three main Covid outbreak sites at the moment, was the greatest source of travelers in 2020, with 16 million people heading to other provinces, plus a huge reverse flow. It's unlikely those trips can occur.
The winter Olympics are also approaching in Beijing, to be held February 4-20. The original plan was for the Chinese public to attend. It's unclear who eventually will - but the indication with early ticket distribution is that it will be highly restricted, possibly only with members of the military and Communist Party officials attending.
Optimists are jettisoning any ideas that life might get easier in China around the Games. The investment bank Nomura says it had assigned a "small probability" to the chance of China extricating itself from zero-Covid after the Olympics and the annual National People's Congress, which takes place in March. Now, though, "we think the likelihood is almost nil," the Japanese bank's Asia economists Ting Lu and Jing Wang say.
So it looks like retail sales and the service sector will take a bashing once again. Nomura says other estimates for Chinese growth are too optimistic, with strong downward forces for both Q1 and Q2. The consensus forecast of 5.2% growth for China in 2022 is almost a full percentage point too high, in the bank's eyes, with it predicting a 4.3% rate of growth that risks slipping.
Watch for downgrades for Chinese growth in the weeks and months to come. Zero-Covid could well persist past Xi's coronation in November and through March 2023, the next National People's Congress, an event that would complete the leadership progression. There's a 50% chance of zero-Covid ending at the end of this year, 50% chance of zero-Covid persisting through March or later, Nomura estimates.
India, with a slightly smaller population than China, is reporting 1.5x as many cases in a day (194,720 for Tuesday) as China has reported since the start of the pandemic (117,077). I bet we'll soon see India's daily rate at double the cumulative Chinese total.
Yet for investors, India is much more fertile ground at the moment. Indian leadership is far from perfect, with a worrying Hindu-nationalist stance, but conditions for commerce are considerably better than in stop-start China. A long Indian bull market rally may be petering out in terms of strength, but risks are on the upside for a Sensex index that's already up 23.3% in the last 12 months, and 3.3% in 2022.
Given the ominous shadows, Chinese shares are down 1.5% so far in 2022, and 13.4% lower in the last 12 months, in the form of the CSI 300 index. Hong Kong stocks were the world's worst performers last year, are on a rolling 12-month loss of 13.7%, but have at least notched up gains in 2022, up 4.8% at this early stage. I wouldn't expect that to continue, since Hong Kong has "imported" the Chinese zero-Covid stance in a so-far futile effort to open the borders.
Hong Kong is in an increasingly "risky" situation, Nomura says, an international city with no international access. Investment into China, meanwhile, is extremely hard, with no foreign nationals able to enter to conduct site checks. And both the domestic economy and outbound trade stand set for yet more disruption.
It's time to abandon zero-Covid and adopt the live-with-Covid strategy deployed, sensibly, elsewhere. But there's no sign that will occur, to great cost inside China, and to investors everywhere.