China’s worst equity selloff since the start of 2020 reflects growing concern about President Xi Jinping that he cannot afford the political costs of a shift from a COVID Zero strategy that is hammering the economy.

In Shanghai, a week-long COVID-19 lockdown has worsened further, with workers in hazmat suits fanning out over the weekend to install steel fencing around buildings with positive cases. In Beijing, the process has only just begun, as authorities began shutting down a bustling area of ​​the capital on Monday to quell new outbreaks.

The threat of crippling China’s two largest and wealthiest cities with a strategy abandoned by most countries helped push the CSI 300 down 4.9%, the biggest one-day drop since the first lockdown like this in Wuhan two years ago. The spread of lockdowns worries investors that Xi is sacrificing the Communist Party’s reputation for pragmatic economic management to champion a political narrative that casts him as the world’s most effective virus fighter.

“This COVID situation is really throwing China into a very dark moment, perhaps the darkest moment in economic terms in the past two decades,” Junheng Li, founder and managing director of JL Warren Capital, said of the lockdown. Shanghai during an interview on Bloomberg Television. “It’s a crisis of confidence in the sense that you have the wealthiest city in China with this consensual disappointment and resentment towards a very insane policy.”

“People really don’t know what the clear path is to get China out of this COVID situation,” Li said.

The pressure is mounting as Xi prepares for a two-decade leadership reshuffle later this year that should secure him an unprecedented third term in office. Maintaining Xi’s reputation for sound decision-making seems increasingly central to this process, even if it comes at the expense of the economic growth that has helped underscore the Communist Party’s legitimacy since China took over. began to open up to the world more than 40 years ago.

Economists polled by Bloomberg last week lowered the annual growth forecast for China to 4.9%, betting against the government’s official target of around 5.5%. Foreign investors sold 4.4 billion yuan ($7 billion) of shares on Monday, leading to negative monthly inflows this month. The onshore yuan fell to its weakest level in 17 months on concerns over increased capital outflows.

Outgoing Chinese Premier Li Keqiang has in recent weeks called for a “sense of urgency” in implementing stimulus measures and – according to a local newspaper article – urged entrepreneurs and experts during from a forum last month to “tell the truth” and offer proposals rather than talk about achievements. Yet the party has increasingly signaled that “COVID Zero” is not one of the things to debate, despite the emergence of the more contagious omicron strain.

Ma Xiaowei, director of the National Health Commission, credited Xi with “setting the tone” for the country’s anti-epidemic policy in a front-page commentary to the party’s Study Times newspaper, making it more risky to challenge the strategy. Ma called for “taking a clear stance to oppose the mistaken thoughts of living with the virus.”

Over the weekend, Chinese netizens fought to evade censors to release a six-minute video titled “The Sound of April,” which included a montage of clips depicting Shanghai’s struggle over more than a month of confinement. Some users compared the video’s outpouring of support to the night two years ago when Wuhan doctor Li Wenliang – who issued one of the first public warnings about a new SARS-like illness – was hailed as a hero after dying of the disease.

For Xi, China’s ability to quell the first coronavirus outbreak in Wuhan provided a powerful response to criticism from the United States and other Western democracies, where debates over masks, vaccines and containment measures have been blamed for catastrophic virus outbreaks. China has so far acknowledged fewer than 5,000 dead, compared to nearly a million in the United States, a fact trumpeted daily by diplomats and state media editorials.

But Beijing has yet to approve the use of the highly effective mRNA vaccines developed by companies such as Pfizer Inc. and Moderna Inc., a step that could be seen as recognition of Western scientific victory. China has also failed to vaccinate much of its elderly population, raising the costs of any effort to let the virus circulate.

That risk was heightened by an outbreak in Hong Kong earlier this year that saw the Asian financial hub shift from a COVID haven to the place with the highest death rate of the pandemic. A month-long Chinese outbreak could result in 31,000 deaths to a quarter of a million fatalities, according to calculations by Bloomberg Intelligence.

“Even though China has praised its COVID approach to the haphazard handling of COVID in the United States, China has now also politicized the virus,” said Mary Gallagher, a political science professor at the University of Michigan. “It makes a policy change very difficult because it will involve a previous policy mistake. It’s just something Xi doesn’t want to do in the year he is potentially in the running for an unprecedented third term as president. and party leader.

China has also prioritized ideological tussles with the West over short-term economic pressures in its decision to defend President Vladimir Putin’s justification for invading Ukraine. The stance has prompted threats of secondary sanctions from the United States and warnings from European officials that Beijing risks undermining its relationship with Brussels.

Last week, Xi defended both his efforts to push back against American “hegemony” and his approach to the virus in a video address at the Boao Forum for Asia. “For humanity to achieve final victory against the COVID-19 pandemic, more strenuous efforts are needed,” he said.

A Shanghai district official took the war metaphor further in an April 15 speech explaining the fight against the virus. “This is a military order,” Baoshan Party Secretary Chen Jie said in remarks widely posted online. “There is no room for negotiation, we can only grit our teeth and fight for victory. We can also say that this is an all-out attack, a last-ditch battle for reverse the trend of the epidemic.

Such rhetoric has been used to justify ever more extreme measures to control population movements in Shanghai, which reported 19,000 cases and 51 deaths on Sunday. More than a month into the city’s outbreak, some residents of apartment buildings with positive cases have found themselves locked in green chain-link fences outside their exits, photos and posts show. shared on Chinese social media platform Weibo.

Meanwhile, a rise in cases in Beijing’s Chaoyang district – an area of ​​3.5 million people, including many expats, the central business district and most foreign embassies – has raised fears that the capital will soon experience its first major lockdown. Beijing municipal government spokesman Xu Hejian said late Friday that the current outbreak was “complex and stealthy”.

Changing policy now would be a huge loss of face for Xi, and could be worse in the short term as the virus spreads and more people die, said Richard McGregor, author of “The Party: The Secret World of China’s Communist Rulers”. .”

“They’ve been bragging for years that their system is superior to western democracies, but suddenly it seems that’s not the case after all,” said McGregor, who is also a senior fellow at the Lowy Institute in Sydney. “Who will dare say that to Xi Jinping?

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