Goldman Says China May End Covid Zero Earlier Than Expected

(Bloomberg) -- Goldman Sachs Group Inc. said China may end its Covid Zero policy before April -- earlier than widely expected -- with some chance of a “disorderly” exit, amid tighter virus controls that have prompted protests across the country. 

The bank forecasts a 30% probability of China reopening before the second quarter of 2023, chief China economist Hui Shan wrote in a note late Sunday.

“The central government may soon need to choose between more lockdowns and more Covid outbreaks,” she wrote. Local governments have struggled to “balance quickly” controlling the spread of the virus while obeying recent measures mandating a more targeted approach. 

The economy has been roiled by Covid Zero, with increasingly strict controls curbing peoples’ mobility and business activity, undermining economic growth. The curbs have prompted demonstrations in major cities including Shanghai and Beijing over the weekend.

Economists at Commerzbank AG and elsewhere have cited “growing discontent” over Covid Zero as a sign of the pressures facing authorities. 

“The current situation highlights the challenge that China faces in maintaining Zero Covid while attempting to implement less stringent measures,” Commerzbank economists wrote in a Monday note.

Chinese stocks were the worst performers in Asia on Monday as investors trimmed holdings, concerned that the protests are creating more uncertainty for the nation’s path toward reopening. The benchmark CSI 300 Index fell as much as 2.8% in early trading, the steepest drop in more than a month. The onshore yuan weakened as much as 1.1% to 7.2435 per dollar, the biggest depreciation since May.

A recent 20-point playbook unveiled by the government seemed aimed at easing some of the strictest controls in China, but many cities have continued to lock down communities to control the virus as cases surged to record levels.

Figuring out how to quell the outbreaks while also implementing the new measures is “the source of confusion,” said Larry Hu, head of China economics at Macquarie Group Ltd. 

“Without clear guidance from the top, local officials are inclined to play safe by sticking to the existing Zero Covid stance,” he wrote in a report, adding that “it upset many people” who expected more loosening.

Hang Seng Bank Ltd. Chief China Economist Dan Wang said it’s “unlikely,” though, that there would be a gradual reopening given the quick rise in cases. A “rapid or a reckless reopening” would be worse for China’s growth, she said in a Bloomberg TV interview on Monday.

If the Covid policy is relaxed too quickly, there’s a risk of a jump in deaths, as was the case in Beijing recently, she said. “That could result in a very awkward position for a lot of local governments when it comes to the priorities in their industrial reopening.”

Goldman’s Hui said the worsening virus situation imposes downside risks to the bank’s growth forecast for the fourth quarter. The firm projects gross domestic product to grow 3% this year, slightly below the consensus forecast of 3.3% in a Bloomberg poll of economists. 

While there is a chance of an earlier reopening, Goldman still sees a second-quarter exit from Covid Zero as having the highest chance of happening -- around 60%, Hui wrote.

Chinese officials have also tried to stem the economic damage by rolling out more supportive policies, as early data for November suggested a slowdown in activity from the month before. Along with Covid-related disruptions, the ongoing property sector turmoil remains a big risk for China’s outlook.

The People’s Bank of China on Friday said it would cut the amount of cash lenders must hold in reserve for the second time this year, to take effect next Monday. The cut is aimed at “keeping liquidity reasonably ample” and “increasing the support for the real economy,” the central bank said.