China could double down on its zero-Covid approach amid concerns about omicron, analysts say

• "The spread of highly transmissible variants may ultimately make the strategy untenable. But in the short-term, the authorities are more likely to double down," said Mark Williams, chief Asia economist at Capital Economics,
• To be sure, the WHO has said it remains unclear whether the omicron Covid variant causes more severe disease than other strains, such as delta.
• China has stuck with its zero-Covid strategy even as many countries moved to live with the virus and lifted some restrictions.

China could double down on its zero-Covid approach as the new omicron variant reignites concerns about another Covid wave in the global pandemic and wreaked havoc across global markets last week, analysts say.

"The spread of highly transmissible variants may ultimately make the strategy untenable. But in the short-term, the authorities are more likely to double down," said Mark Williams, chief Asia economist at Capital Economics, in a note Friday, adding that it will have "implications" for China's zero-Covid strategy.

"Intermittent local lockdowns will continue to hit activity directly, while worries of being flagged as a close contact will keep many people at home," he said.

The newly identified omicron variant, also known as B.1.1.529, was first reported in South Africa. It was designated as a variant of concern by the World Health Organization on Friday due to the large number of mutations. "Preliminary evidence suggests an increased risk of reinfection with this variant, as compared to other [variants of concern],'" the UN health agency said.

To be sure, the WHO has said it remains unclear whether the omicron Covid variant causes more severe disease than other strains, such as delta.

Helen Zhu, managing director at Hong Kong-based investment firm Nan Fung Trinity echoed similar sentiments about China's response.

"If omicron turns out to be a major threat, I think China will certainly continue to lengthen the period of staying isolated," she said on CNBC's "Street Signs Asia" on Monday.

China has stuck with its zero-Covid strategy even as many countries moved to live with the virus and lifted some restrictions. Countries initially took an aggressive approach through mass lockdowns and strict social restrictions, but they gradually abandoned that strategy as the highly infectious delta variant spread quickly and lockdowns became less effective.

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In a report on Monday, Morgan Stanley said the new omicron strain could cause further delays to reopening — not just in China, but also in Hong Kong and Taiwan.

"These economies have largely maintained a Covid-zero strategy. With the emergence of this new variant, the near-term economic impact is likely to be limited — but this means any reopening efforts will likely be pushed out further, delaying a stronger rebound in consumption growth," the bank's economists wrote.

Impact on trade and shipping

China's ultra-strict zero-Covid strategy involves mass lockdowns — even if just one or a handful of cases are detected. It also includes extensive testing, heavily controlled or closed borders, as well as robust contact tracing systems and quarantine mandates.

The Asian giant has also implemented strict checks at its ports, including monitoring ships and cargo, to prevent cases from slipping into the country.

With the new variant, any possible tightening of measures will hit the capacity of exporters, according to Williams.

"For exporters, tight controls on air and shipping crew as well as possible port shutdowns will place further limits on their capacity to meet orders," Williams said.

Meanwhile, a study by Peking University mathematicians said that China could face more than 630,000 Covid-19 infections a day if it dropped its zero-tolerance policies by lifting travel curbs.

In the report published in China CDC Weekly by the Chinese Centre for Disease Control and Prevention, the mathematicians said China cannot afford to lift travel restrictions without more efficient vaccinations or specific treatments.

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