China plans to scrap zero-COVID policy and what it means?

Over the last two days, metal stocks are rallying sharply and are among the major gainers in the market. The one reason that has been driving this shift is the decision by China to finally give up and abandon its rather impractical zero-COVID policies. What does that mean? China will no longer subject inbound travellers reaching the shores of China to quarantine measures from 08th January. This will literally enable China to emerge from its 3 years of virtual isolation or what can be called a self-imposed global isolation. This was due to a rather flawed and badly designed Covid Zero policy that had virtually battered the Chinese economy and stoked historic public discontent. Finally, the government had to give in.

The entry into China is going to become a lot simpler going ahead. Now, people arriving in China will only be required to obtain negative COVID test results within 48 hours of departure. That almost sounds like a breeze compared to the current requirement of 8 days isolation. The Chinese government has also promised to facilitate visa applications for foreigners wanting to travel to China for businesses, studies or even for family reunions. More importantly, even the outbound tourism which dwindled to almost zero, during the pandemic, will resume in an orderly fashion. China has also promised to remove the flight restrictions in a phased manner.

Above all, what China has done is to downgrade the level of management of COVID from the top level to the second highest. That is tantamount to removing the legal justification for aggressive Covid Zero restrictions. Clearly, China realizes that the loss of staying isolated far outweighs the risk of opening up. Even in the coming days, the National Health Commission will continue to monitor the spread of the latest BF.7 variant and keep doing simulations on a regular basis. However, the priority has now shifted from preventing and controlling the infection to treatment. The focus will now shift to ensuring health for all, preventing severe disease and enabling stable orderly transition to a more open market and economy.

In addition, the government has committed that even the Chinese Centre for Disease Control and Prevention was likely to reduce frequency of reporting cases. So, instead of daily reporting, the CDCP may shift to monthly reporting. This is also likely to enable other countries to gradually ease the restrictions on Chinese citizens and on Chinese flights to and from their respective countries. China has been a big centre for tourism and also a magnet of tourist spending in other countries. That is likely to change immediately, but at least the tone has been set so that China can regain its tourism mojo.

Harsh pandemic measures had raised a series of protests across China and the situation had almost gone out of control in most places. With rising discontent over Covid Zero rules, not only were there protests but details of such protests also spilled across the world. This has forced China to rapidly dismantle many of its harshest pandemic measures. Some worry that such a drastic move could again lead to the return of infections but that is a tolerable problem to live with. China has seen its GDP growth slip by nearly 200 bps below that of India and it would not want to lose its competitive edge in manufacturing and also its competitive edge among emerging markets across the world.

This is a change that China needed badly. After all, the second largest economy in the world had bene virtually cut off from the outside world since the year 2020, when COVID first reared its head. Back then, China had imposed a blanket ban on overseas travel and inbound travel. While the outright restriction were lifted later on, the intricate web of testing and bureaucratic requirements around international flights had been kept intact, which acted as a disincentive. Over the next few months, this is likely to give a boost to metals demand, commodity prices and also give a boost to the economies that depended largely on Chinese tourism.

There are going to be short term concerns, although in the long run, things should be better for China and the world. If cases increase and residents frequently stay at home, it could result in disrupting a raft of activities. However, it must be said that this policy shift paves the way for a fuller recovery of the Chinese economy once the first major wave of infections pass. China, on its part, has pledged to revive consumption and support the private sector in 2023. So, China wants to come back as the pivotal economy for the global supply chain in the next few months. For now, the signals are clear that the focus is on boosting gross domestic product and the first target would be to get to 5% GDP growth. That is good news, not only for China, but for the entire world economy.