China’s Great ‘Zero-Covid’ Guessing Game

It is the great economic guessing game about China: When will the Chinese government ditch its zero-tolerance approach to Covid-19?

Companies and manufacturers are worrying about their profits, while uncertainty is rippling through financial markets. Global leaders and policymakers are sizing up Beijing’s moves as part of their own growth calculations, given China’s central role in the global economy.

The answer comes down to one man — the country’s top leader, Xi Jinping. His word is all the more sacrosanct since securing a precedent-defying third term at the Communist Party’s congress late last month, where he stacked his leadership with loyalists and set out an agenda that shook global assumptions about the trajectory of the world’s second-largest economy.

The lack of visibility into his thinking has left the world trying to divine whether even the smallest signals could indicate the government is fine-tuning its “zero-Covid” policy to limit the harm to the economy. After the congress, China’s financial markets took a dramatic plunge over concerns about Mr. Xi’s power play. Shortly thereafter, speculation about loosening Covid restrictions sent them soaring.

Each day seems to bring new disparate data points for the markets to digest. Low-level health officials urge less drastic enforcement of existing measures, while top officials repeat that they are staying the course.

The authorities are facing a dilemma. Nationwide, daily cases are at a six-month high, with China reporting more than 8,100 new infections per day. Under the usual playbook, officials are resorting to more lengthy lockdowns and costly mass testing to try to stop the spread.

And in China, nothing will be certain until Mr. Xi stops trumpeting “zero Covid” or clearly articulates that the country is changing direction.

In a world beset by war in Ukraine, skyrocketing inflation and rising fears of a global recession, China could have been a bright spot for growth. While most countries dealt with widespread infections and mass deaths in the first year of the pandemic, China kept the virus largely in check with snap lockdowns and quarantines, and its economy thrived relative to the rest of the world.

As new Covid variants have proven milder and vaccines have become more widespread, the rest of the world has moved on from strict policies. China has stuck to the same heavy-handed approach, concerned a large numbers of deaths could come with a policy change, and reluctant to import more potent foreign vaccines.

With each new outbreak and infectious strain of Covid-19, the uncertainty grows over how and when Mr. Xi will dismantle his pandemic policy.

“China has this boot on the neck of economic activity, and we’re past the point where the boot made sense,” said Jude Blanchette, an expert on China at the Center for Strategic and International Studies. “The problem is, the most authoritative voice continues to reiterate no change.”

Easing Covid policy matters for the economy. People are staying home, fearful that they might cross paths with someone infected and be sent to a long quarantine under heavy guard. China continues to isolate not just those sick with Covid but anyone who has come in contact with them. Many stores and eateries have closed.

The world’s largest iPhone manufacturing complex in the north-central Chinese city of Zhengzhou went into a lockdown in mid-October and again this month. Some employees fled the 200,000-worker facility with stories of food shortages flooding the internet. Apple this week warned that its sales would be short of expectations because of the drastic measures.

The warning, and China’s latest Covid situation, was described by one analyst as “an absolute gut punch” for the company ahead of the most important holiday season.

The Chinese financial markets, at times, appear disconnected from reality. Investors hoping for a change in policy are pouncing on any information, often rumors or thinly sourced reports, sending the markets on a roller coaster ride.

Rosy reports from Wall Street banks, pointing to the opportunity for rewards when China opens up, have also helped to fuel rallies. A report from Goldman Sachs this week predicted Chinese stocks could jump by 20 percent “on (and before) reopening” from the pandemic.

Often, investors are seizing on official signals, even if the Chinese government isn’t actually revealing much. At a news conference last Saturday in Beijing, for example, senior health officials declared that they were “unswervingly” committed to zero-Covid policies, but within reason.

While much of the country remains committed to the zero-Covid strategy, there are signs that the approach is reaching its limit. The financial pressures are mounting on local governments that are running out of money to pay for Covid control measures like mass testing. The social costs, too, are amplifying as more and more people are caught in lengthy lockdowns, their anger, frustration and discontent slipping through internet censors.

Authorities have quietly responded to some of the excesses, including reining in neighborhood guards who resort to violence to enforce the restrictions. Police in a Shandong Province community announced on Tuesday that seven guards there had been detained for beating and dragging people, in a statement that quickly went viral on the Chinese internet and was not censored.

Officials are also offering tiny hints that they might consider a new approach if medical advances could ease the pressure on China’s health care system.

The city of Shanghai recently began offering a new inhaled Covid-19 vaccine developed by Chinese pharmaceutical group CanSino Biologics, which officials have said could significantly enhance immunity and appeal to a portion of the population still hesitant to vaccines. More than a dozen cities are expected to offer the vaccine soon.

Two Chinese pharmaceutical companies are close to gaining approval on mRNA vaccines based on technology first developed and approved in the United States. China has also made progress in drafting distribution agreements with foreign drug companies, and developing and acquiring Covid treatments, including a homegrown antiviral pill.

Citing such developments, Zeng Guang, a former chief epidemiologist at the Chinese Center for Disease Control and Prevention, told investors last week that the conditions for China to open up and loosen its policy were improving. His comments, made at a private investor event held by Citigroup, spread quickly online and prompted a rise in financial markets. A spokesperson for Citi declined to comment.

For investors, it is hard to tell whether these small signals will translate into a broader easing of Covid controls, said Richard Harris, the chief executive of Port Shelter Investment Management in Hong Kong.

“They’re trying to play both sides at the same time without giving in on the central cause, which is a Covid-zero policy,” he said.

Many investors are sitting on the sidelines waiting for more concrete evidence.

Winston Feng, the portfolio manager at MassAve Global, said he was looking at how authorities in the southern city of Guangzhou are handling a sudden spike in cases in recent days. Last year, officials responded to relatively few cases with severe restrictions on people’s movements, sending robotic trucks with food into districts under lockdown. This time around, he said, officials have launched mass testing requirements but so far have avoided a citywide lockdown.

“The nuance here is how much of that experimentation is now being conducted,” Mr. Feng said, adding that he expected China to take small measures to reopen but also impose renewed restrictions if needed to bring local outbreaks under control.

“There will be moments,” he said, “when you feel like you’re taking two steps forward, one step back.”

Zixu Wang and Li You contributed research.