Analyst: Lockdown in Shanghai will rock China's economy
President Xi Jinping told a meeting of senior economic officials Tuesday that "all out efforts" must be made to boost construction to increase domestic demand and promote growth.
He said that the nation's infrastructure was still "incompatible" with the needs of national development and security, according to state-run Xinhua News Agency. Xi called for more projects in transportation, energy and water conservancy, as well as new facilities for supercomputing, cloud computing and artificial intelligence.
Hedidn't elaborate on how much China plans to spend on the new infrastructure push. According to the most recent government statistics, infrastructure investment already increased 8.5% in the first quarter of 2022 from a year earlier.
The comments by Xi — who rarely sets outdetailed economic plans,leaving that to his Prime Minister Li Keqiang — indicate that Beijing is growing increasingly worriedabout the country's worsening growth outlook, and is falling back on a policy it had downplayed in recent years to ease pressure on local government finances and promote growth through consumption.
But Covid lockdowns have brought the world's second biggest economy "near breaking point," Société Générale analysts wrote earlier this week. Tough restrictions in Shanghai and other major Chinese cities are just the latest blow, however. China was already feeling the impact of a real estate slump and a crackdown on private enterprise.Unemployment hit a 21-month high in March.
A number of investment banks have slashed their forecasts for Chinese growth in the past month. And the International Monetary Fund last week said it expected growth of 4.4% this year, down from a previous forecast of 4.8%, citing risks from Beijing's strict zero Covid policy. This is well below China's official forecast of around 5.5%.
"The [Tuesday's] meeting suggests to us that Chinese policymakers have been increasingly aware of the strong growth headwinds from Covid restrictions and continued property downturn, and [are] thus becoming more determined to ramp up policy easing measures," Goldman Sachs analysts wrote on Wednesday.
Citi analysts, meanwhile, believe China's infrastructure investment is likely to surge by 8% in 2022, sharply higher than the 0.4% increase seen in 2021.
"The infrastructure push is real," they wrote Wednesday in a note. "The turning point for real policy actions may have arrived, and stimulus will likely come through more obviously from late Q2."
This isn't the only move made by Chinese policymakers this week to calm nerves and boost growth. On Monday, the People's Bank of China cut the amount of foreign exchange banks must hold as reserves to 8% from 9%. This move would effectively increase the supply of dollars in the market, and analysts widely believe the decision is intended to stema rapid drop in the yuan.
The Chinese currency has weakened rapidly in recent days, plunging to the lowest level since November 2020, as rising Covid-19 cases in Beijing sparked fears that the Chinese capital could join Shanghai and other major cities in lockdown.
Chinese stocks also slumped deeper into a bear market earlier this week, with the Shanghai Composite Index down 21% so far this year, making it the second worst performing market in the world after Russia, according to data from Refinitiv Eikon.
The market rout comes as China remains determined to maintain its strict Covid restrictions despite the hefty economic price. The financial and manufacturing hub of Shanghai has been in lockdown for about a month, forcing businesses to shut down and worsening global supply chain disruption.
Beijing started mass testing on Monday for its 21 million residents to contain a "fast and furious" outbreak, the city government's spokesperson said.
Beijing refuses to allow Western shots even though development of homegrown ones lags.
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Covid vaccination at a mobile site in Beijing on April 9.Photographer: Chen Zhonghao/Xinhua News Agency/eyevine/Redux
Weeks into aCovid-19 outbreak in Shanghaithat brought China’s financial hub to a standstill, the government of President Xi Jinping has demonstrated its willing togo to extremesin its quest to contain the virus. One thing Xi has so far been unwilling to do is deploy a powerful tool against the highly contagious omicron variant: mRNA vaccines. Those shots could reduce the chances of elderly and other vulnerable Chinese getting seriously ill or dying—and possibly help the country transition away from its “Covid Zero” stance.
Lining up the necessary supplies shouldn’t be hard because Shanghai Fosun Pharmaceutical Group Co. in March 2020 agreed to buy a stake of 0.7% in BioNTech SE and to market the mRNA vaccine the German company co-developed with Pfizer Inc. in China. Before the close of that same year, the two companies had arrived at a plan to distribute 100 million doses in China, once they got the green light from the government. Yet the drug regulator has yet to grant approval.
“Worldwide data clearly indicates mRNA is the gold standard,” says Joerg Wuttke, president of the European Union Chamber of Commerce in China, which wrote to the Chinese government in April urging it to allow the shots. “Why waste time and wait, for what?”
Share of Population Fully Vaccinated Against Covid-19
As of April 24
Source: Compiled by Bloomberg
The wait, many analysts believe, is for a local company to come up with its own mRNA vaccine. Since the start of the pandemic, Xi’s government has touted self-reliance in fighting Covid, promoting domestic vaccines based on inactivated versions of the virus and barring all foreign ones from the market. Slightly more than 88% of China’s 1.4 billion people have received two doses of those shots.
Opening up to foreign-made mRNA shots risks embarrassing Xi and other officials, says Allison Hills, senior consultant in London with Eradigm Consulting, which advises biotech and pharmaceutical clients. “For them to say now we are accepting BioNTech,” she says, “it’s tantamount to saying ours are not as good.”
Clinical trials have shown the inactivated vaccines from China’s Sinopharm Group Co. and Sinovac Biotech Ltd. to be less effective in stopping infections, though the gap in protecting against severe disease and death is narrower.
Last year, optimists hoped China’s go-it-alone strategy would lead to the speedy approval of a locally made mRNA vaccine, co-developed by Walvax Biotechnology Co., Suzhou Abogen Bioscience Co., and the Academy of Military Medical Sciences. Upbeat about their chances, the partners invested in a new facility to ramp up production once Beijing gave the green light, with state media reporting production would start by August 2021. However, results of early trials were disappointing and the vaccine is unlikely to reach the market before the end of 2022, according to Bloomberg Intelligence.
An exhibitor shows two packets of an mRNA vaccine co-developed by Walvax Biotechnology at the China International Technology Fair in Shanghai in April 2021.
Photographer: FeatureChina/AP Photo
One reason for the delay could be the different approach the Walvax group took. Unlike the shots from Pfizer-BioNTech and Moderna Inc., the Chinese vaccine targets a part of the coronavirus spike protein that binds to cells in the body, according to Sam Fazeli, senior pharmaceutical analyst with Bloomberg Intelligence in London. For vaccine developers, focusing on this smaller area, called the receptor binding domain, can reduce costs and may facilitate manufacturing. It can also add uncertainty, given that this particular domain is a focal point for mutations in newer variants.
“Walvax’s problem is the majority of the mutations with omicron are in that receptor binding domain,” says Fazeli. “The risk is that their vaccine’s efficacy is likely to be much more compromised compared to other vaccines.”
Walvax, which didn’t respond to a request for comment regarding the design of the mRNA vaccine it co-developed with Abogen, says it has partnered with a Shanghai-based biotech startup called RNACure Biopharma to develop another mRNA vaccine targeting variants, including omicron. This one encodes a full-length spike protein that covers major mutations from variants. The companies are seeking approvals to begin human testing.
Walvax’s difficulties have raised the stakes for other Chinese companies working on vaccines using the same technology. In early April, China gave permission for CanSino Biologics Inc. and CSPC Pharmaceutical Group Ltd. to each begin first-phase trials for their mRNA shots.
Other drugmakers are further along: Shanghai-based Stemirna Therapeutics Co. has tested an mRNA candidate in Laos and plans further testing in Brazil. It hopes to get emergency-use approval in Southeast Asia and South America. Beijing-based AIM Vaccine Co., which has a Phase 2 trial of its mRNA vaccine under way in China, expects to apply for conditional approval by the end of the year, according to spokesperson Lingna Ding.
Early data from Hong Kong’s winter omicron wave show why mRNA vaccines could be valuable in China. A preprint study by researchers at the University of Hong Kong in late March concluded that two doses of the Sinovac vaccine underperformed BioNTech’s shots, especially among the elderly. For prevention of severe disease, BioNTech’s vaccine effectiveness in people 80 and older was 84.5%, compared with just 60.2% for Sinovac; for protection against death, there was a gap of about 20 percentage points, with BioNTech at 88.2% and Sinovac at 66.8%.
The study, which was funded by the Chinese government, found no significant gap for those who had received three doses. That cohort, however, was small, as only about 10% of seniors had received boosters and government vaccination teams dispatched to nursing homes—sites of the worst outbreaks—only offered Sinovac shots.
Another study by Hong Kong researchers, published in January in the journal Nature, concluded that governments primarily using Sinovac’s vaccines should consider mRNA vaccine boosters in response to the spread of omicron.
Given the strong performance of mRNA vaccines, providing them as boosters should help people who have received two doses of Chinese shots, says Jyoti Somani, senior consultant for the Division of Infectious Diseases at National University Hospital in Singapore, where the government has approved China’s inactivated-virus vaccines as well as mRNA shots developed elsewhere. “It looks like you are getting a much broader immune response when you mix and match,” she says. “What is clear is that we need both.”
That argument is winning support inside China. Zhong Nanshan, a pulmonologist and influential government adviser on Covid, in March co-authored a road map for China’s reopening that identified better booster coverage, with different vaccine types, as essential. Ding Sheng, dean of Tsinghua University’s School of Pharmaceutical Sciences, in March said that existing Chinese vaccines weren’t protective enough against omicron and that the government should encourage companies to introduce more effective shots.
Fosun’s chief executive officer, Wu Yifang, told reporters at a briefing on March 23 that China’s drug regulator is still weighing whether to approve the BioNTech shot. Authorities in February gave the green light to Pfizer’s antiviral treatment, Paxlovid, filling a need because Chinese drugmakers don’t have any antivirals of their own. In the same way, regulators might eventually lose patience with Chinese vaccine makers and open the door to BioNTech’s shots.
With no mRNA vaccines of any kind on the horizon, Chinese health officials may have to focus on better deploying the shots now available, targeting vaccine holdouts, especially among seniors, and improving booster rates. Approximately half the population has received booster shots. That compares with about 30% in the U.S. “Any of the vaccines would be a good thing,” says Colin Pouton, a professor at the Monash Institute of Pharmaceutical Sciences in Melbourne.
The Covid Zero policy is making that more difficult, with millions of residents stuck in their homes in Shanghai and other cities. “We have economic damage, we have social tension, we have basically a whack-a-mole outlook,” says Wuttke. “Two years have passed and China has no mRNA vaccines to offer.” —Bruce Einhorn
The Chinese currency traded at 6.57 to the US dollar in offshore trade, after plunging to its lowest level against the greenback since November 2020 on Monday. The Shanghai Composite index closed down 1.4%. It has now lost about 22% since its recent peak in September 2021.
The yuan — also known as the renminbi — has lost more than 3% against the US dollar in the past week alone as rising Covid-19 cases in Beijing spark fears that the Chinese capital could join Shanghai and other major cities in lockdown.
China's strict adherence to its zero Covid policies, coupled with a crackdown on Big Tech and private enterprise, a real estate slump and risks related to Russia's war in Ukraine, have triggered an unprecedented flight of capital by foreign investors in recent months.
The yuan's fall over the lasttwo monthsis in sharp contrast with its performance during the pandemic last year, when it was one of the strongest currencies in the world.
Therapid decline comes as China remains determined to maintain its strict Covid restrictions despite the hefty economic price. The financial and manufacturing hub of Shanghai has been in lockdown for about a month, forcing businesses to shut down and worsening global supply chain disruption.
The yuan has declined rapidly in the past week, down more than 3% against the US dollar.
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The Shenzhen Composite — a tech-heavy index — has fallen 31% since the start of the year, just behind Russia's Moex, which has dropped 42%, according to Refinitivdata. The benchmark Shanghai Composite is also among the biggest global losers, falling 21% year-to-date.
The People's Bank of China tried to calm nerves Monday with another promise to boost the economy.In an unprecedented move, it cut the amount of foreign exchange banks must hold as reserves to 8% from 9%. This move would effectively increase the supply of dollars in the market, and analysts widely believe the decision is intended to stem the yuan's rapid drop.
The yuan's offshore rate was little changed Tuesday, while its value on the onshore market was up by just 0.1%. (Onshore, the yuan is allowed to trade only within a narrow band of 2% from a daily midpoint rate set by the central bank. It can trade more freely offshore.)
"The [renminbi] has been too expensive given China's economic weakness," Société Générale analysts wrote on Tuesday.
They added that the economy is "near breaking point" because of the widespread lockdowns that have disrupted production, hindered consumption, and placed strains on supply chains.
"It seems that threats to China's growth outlook ... trumps all as far as financial markets are concerned," said Jeffrey Halley, senior market strategist for Oanda, in a note.
In its latest China Strategy report, Goldman Sachs estimated that China's tech stocks have lost $2 trillion in market cap worldwide since their peak levels 14 months ago. That's equivalent to 11% of China's GDP in 2021.
