Political Economy Factors Point to a Long-Lasting Zero COVID Policy Stance

When will China relax its “Zero COVID” policy^[1] and ease related travel restrictions? What guideposts should MNC executives be monitoring for policy cues?

Insights for What's Ahead 

• The negative consequences of China’s Zero COVID policy on the China economy and business environment are increasingly evident. As the global COVID-19 pandemic stretches into year three, China’s Zero COVID policy is bearing increasing downside pressure on the Chinese economy and on the business environment. Economically, Zero COVID is undermining Chinese consumption and employment growth—two critical drivers of the China opportunity set. For foreign investors active in China, the near shutdown of talent mobility into and out of China—and the resulting disruptions to the globalized decision making, project management, process coordination, and human resourcing activities that rely on it—are the major operational pain points. For many firms, alignment between headquarters and the China organization is suffering as a result and crimping both efficiency and morale in China.^[2]
• Zero COVID impacts on mobility will become increasingly problematic for MNC business in China. For many western MNCs, remote connectivity has sufficed to maintain status quo business activity amidst the Zero COVID policy. But, as time marches on and people change jobs, even maintaining status quo operations is becoming more difficult, much less the undertaking of new strategic initiatives and projects that require global expertise mixes, deep situational awareness, intensive teamwork, and the strong consensus and trust problem-solve for China-specific complications. When and how the Zero COVID policy evolves is thus very material to business, and to strategic investment decisions for China.
• Political considerations strongly support China maintaining the Zero COVID policy indefinitely. Business should prepare for a long-haul management challenge. How Zero COVID evolves will depend heavily on the leadership’s weighting of the political versus economic stakes involved. At present, political factors stack heavily on the side of China maintaining its Zero COVID policy stance. This leads us to the base-case assumption that it will likely be 2023, if then, before there is any significant relaxation to the current policy. Companies should plan on a long-haul scenario, with appropriate contingencies for earlier-than-expected policy easing. 
• Vaccine and/or therapeutic developments are the most likely exit route for China from Zero COVID. Indigenous mRNA vaccine and therapeutic developments should be monitored closely, as well as changes to China’s importation policies for foreign product. There are some positive signals emerging in this regard, most recently with China’s conditional approval of the new Pfizer therapeutic, Paxlovid. Mass deployment timeframes need to be factored into business planning assumptions.