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Ahead of the expected extension of Xi Jinping’s term atop the Chinese Communist Party on Sunday, there is little optimism that China’s Zero-COVID strategy will be up for amendment anytime soon.
On Sunday, the 20th National Congress of the Chinese Communist Party will be convened to, in addition to other matters, extend the leadership term of Xi Jinping. Indeed, according to the Brookings Institution, Xi has managed to consolidate power to become the most powerful leader of his nation “since Deng (if not since Mao)”. As the vow to “not lie flat” in the fight against COVID has become a hallmark of Chinese pandemic policy under Xi, this bodes poorly for hopes of a rethink on Zero-COVID restrictions.
“The expectation is that he will likely be, and therefore investors should concentrate on what will happen to the other leadership members of the CCP,” Gordon Ip, Chief Investment Officer, Fixed Income at Value Partners Group, told SeekingAlpha. “I think it’s fair to expect that the Zero-COVID policy will likely stay. How the policy will work in practice is another issue, but it will likely remain, as will the Common Prosperity theme. There may be some adjustments and fine-tuning during the Congress, but we will probably see these two phrases – Zero-COVID and Common Prosperity – repeated.”
Tourism Tamp
Most immediately, the maintenance of this policy will keep a lid on tourism and leisure spending in the nation.
Shares of Macau casino operators have been the most obvious casualty of these restrictions, with shares of Las Vegas Sands (NYSE:LVS) Melco Resorts (NASDAQ:MLCO), MGM Resorts (NYSE:MGM), and Wynn (NASDAQ:WYNN) each feeling the impact of each policy move. Just recently, the Zhuhai government reported just five confirmed cases of COVID-19 and immediately ordered widespread nucleic acid testing and was assigned a high-risk status by neighboring Macau.
Both airlines and lodging companies have been hit by the effective closing of the nation’s borders as well. According to the Global Times, the current volume of international flights to and from China is only about 4% to 5% of pre-pandemic levels.
“While the [Asia Pacific] region experienced the strongest year-over-year growth, remaining travel restrictions in China continue to hamper the overall recovery for the region,” the IATA said in a statement in early October.
US airlines with routes to the country, including Delta Air Lines (DAL), United Airlines (UAL), and American Airlines (AAL) have each noted the adverse impact on revenues stemming from the restrictions. Meanwhile, Deutsche Lufthansa (OTCQX:DLAKY) and Air France KLM (OTCPK:AFRAF) have also noted the region as a sore spot holding back an overall recovery from the pandemic. Airbnb (ABNB), meanwhile, closed its operations in the company due to the lingering restrictions.
To be sure there have been shoots of hope in recent months, including the implementation of an e-visa system for mainland visitors to Macau and a loosening of restrictions in Hong Kong.
“Hong Kong and Macau have recently tried to open for tourism. However, Hong Kong welcomes international visitors under the Zero Plus Three initiative. Meaning when a foreigner comes to Hong Kong, they don’t need to stay in quarantine in their hotel. Instead, they can remain in their own accommodation for three days and then after multiple testing for three days, they can exit quarantine,” Ip commented. “What happens to Hong Kong and Macau following the Zero Plus Three initiative may hint at what would likely occur inside China. So even though Zero COVID is likely to stay, on a practical level, we’ll still see some movement. And I feel that slowly but surely the restrictions could start to ease, and the economy could start to recover fully.”
Mainland Chinese authorities hinted at such a shift on Saturday, suggesting that the week-long quarantine imposed upon arrivals from Hong Kong could be cut to just a matter of days. Still, the policy change remains speculation at this point.
Overall, the uncertainty remains a factor holding back many of the travel-oriented companies that have relied upon the world’s most populous nation for some time. As such, executives remain reticent to forecast a rapid recovery with Zero-COVID likely remaining in place.
“Greater China has had a kind of a classic pattern during COVID where the second certain markets open up, the larger markets open up, demand really pops,” Marriott (MAR) CFO Leeny Oberg said at the Bank of America Securities 2022 Gaming & Lodging Conference in September. “But then you have to really be watching the newspaper because they can close them right back down again.”
Supply Chain Reaction
The impact from Zero-COVID moves well beyond China’s borders, however.
Namely, global supply chains that often touch China have been thrown into chaos amid the sudden shutdown of major economic centers in the country over the course of 2022. For example, a recent report from Bain & Company indicated that ocean freight costs jumped “ten or twenty times the pre-pandemic price in the spot market” during the depths of Shanghai’s lockdown and spurred on congestion at ports across the globe.
“As a result of the persistent zero-Covid policy, congestion in Chinese ports increased significantly this year, with container dwell times on the import-side soaring due to difficulties with inland connections and closed factories in the region,” ING Economics wrote on Saturday. “This creates production backlogs, leading to a wave of export traffic through the port later and affecting global ports and sailing schemes as well.”
Additionally, numerous automakers experienced the pain of production halts earlier this year. Toyota (TM), Tesla (TSLA), and Honda (HMC) each noted the production pauses at factories early in the year, hampering the overall results for each manufacturer. As the potential for these production pauses to pop up again remains, Honda Motor (HMC) is expected to reorient its supply chain away from China, echoing moves made in the apparel industry in years prior.
Finally, the nation’s semiconductor industry has been hit notably by the pandemic restrictions.
According to The Diplomat, sudden and compulsory shut-downs stemming from even small outbreaks of COVID-19 triggered crises in supply chain logistics for critical regions to the semiconductor industry. This impacts both China’s domestic industry and the numerous chip companies that operate in the region or supply to the country. That uncertainty adds to the latest moves from the Biden administration to hinder China’s semiconductor industry. Per reports, chip-equipment makers such as Lam Research (LRCX) and Applied Materials (AMAT) will halt operations in China while numerous American executives departed their posts in the nation.
As the Chinese economy remains somewhat fragile amid growing Sino-American tension, youth unrest, and a still-reeling real estate sector, the addition of pandemic tamps on economic growth are not encouraging for investors. However, with the political apparatus likely to remain in place after Sunday’s congress, the drivers of restrictive policy do not appear as though they will disappear any time soon.
Read more on the new semiconductor regulations and their impact.
