CHINA may end its Covid Zero policy earlier than previously expected, said Goldman Sachs, with chances growing of a messy and slow exit as infections spread and residents protest virus controls.

The investment bank forecasts a 30 per cent probability of China reopening before the second quarter of 2023, saying there is some chance of a “disorderly” exit.

“The central government may soon need to choose between more lockdowns and more Covid outbreaks,” Hui Shan, Goldman Sachs’ chief China economist, said late Sunday (Nov 27). Local governments have struggled to “balance quickly” controlling the spread of the virus while obeying recent measures mandating a more targeted approach, she said.

China’s economy has been roiled by Covid Zero, with increasingly strict controls curbing people’s mobility and disrupting business activity. Although the government recently unveiled a 20-point playbook aimed at easing some of the strictest controls in China, many cities have continued to lock down communities to control the virus as cases surged to record levels.

The curbs prompted demonstrations in major cities, including Shanghai and Beijing, over the weekend, putting pressure on President Xi Jinping and his government to adjust their approach.

“I don’t expect Xi to publicly admit error or show weakness, but this wave of protests could cause the leadership to decide privately that the exit needs to proceed more quickly than previously planned,” said Gabriel Wildau, managing director at advisory firm Teneo Holdings in New York.

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Teneo said the social unrest could prompt the government to move faster in adjusting its zero-tolerance approach to combating infections.

Chinese stocks were among the worst performers in Asia on Monday as investors trimmed holdings, concerned that the protests are creating more uncertainty for the nation’s path towards reopening. The benchmark CSI 300 Index ended the day 1.1 per cent lower, the biggest drop in a month. The onshore yuan weakened 0.5 per cent to 7.1991 per dollar as at 3.08 pm local time, after depreciating as much as 1.1 per cent in early morning trading.

Eric Zhu and Chang Shu of Bloomberg Economics said: “Strict Covid curbs are costly for people’s livelihoods, and the protests underline discontent.”

Christopher Beddor, deputy China research director at Gavekal Dragonomics, outlined two alternate scenarios for a policy exit. An optimistic scenario would involve the continued use of many Covid restrictions “short of extended lockdowns”. The aim would be not to minimise cases, but to avoid overwhelming hospitals and reduce deaths, he said.

In a “messier scenario”, the cycle of local lockdowns and protests would continue for weeks, with some cities still attempting to contain the virus while it spreads out of control in others.

“In either case, China has arrived at the beginning of the end of Covid Zero,” Beddor said.

Dan Wang, chief China economist at Hang Seng Bank, said a “rapid or a reckless reopening” would be worse for China’s growth. If the Covid policy is relaxed too quickly, there is a risk of a jump in deaths, as was the case in Beijing recently.

“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 Sachs’ 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 per cent this year, slightly below the consensus forecast of 3.3 per cent in a Bloomberg poll of economists.

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

Chinese officials have 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 that lenders must hold in reserve from next Monday. The cut, the second this year, is aimed at “keeping liquidity reasonably ample” and “increasing the support for the real economy”, the central bank said. BLOOMBERG