Zero Covid Trap

Over the past couple of weeks, we have met with a broad array of Chinese corporates. In the past, we have seen headline macro data from a country that is somewhat inconsistent with the message we hear from companies operating on the ground: the bottom-up data did not fit the top-down narrative. In the case of China, we have been surprised by the across-the-board negative impacts from the Covid lockdowns, where management painted an often-bleaker picture than official data showed. As an example, we expected to hear about the negative operating environment of a QSR operator, who on average had a quarter of their thousands of locations closed in April. But we were shocked by the bizarre tale of workers having to live at outlets in order to open them for delivery and takeaway. It was also concerning to hear that in infrastructure, where growth has remained positive, there are still liquidity issues and labor shortages as workers could not get to worksites due to mobility restrictions. And a company operating in the environmental sector said that they too were impacted as urban waste transport to their waste-to-energy facilities was being disrupted. There seems to be virtually no segment of the economy that is immune. All corporates thought things will get better in 2H, and we continue to believe that the government will step in to support growth in the coming months and quarters. But no amount of fiscal stimulus or monetary policy loosening will kickstart growth as long as strict lockdowns are the primary Covid reaction function. President Xi needs to accept that the cornerstone of his Covid policy, i.e. aggressive mobility restrictions, has not worked and a new approach is needed. The clock is ticking on the countdown to the National Party Congress this fall, where Xi hopes to extend his grip on power. He needs a Covid policy pivot sooner than later.