Political Risk in Asia - China's Shifting zero-COVID Policies

SVA is pleased to continue its series of political risk analysis pieces, each of which focuses on a key regional issue, and so seeks to highlight the changing risk outlook for businesses dealing with the Asia-Pacific region.

This piece focuses on Beijing’s shift away from a “zero-COVID” stance, with an examination of how the shift may prove bumpy, and pose new risks to business, even if it boosts longer-term economic prospects.

The end of “zero-COVID” in China – Opportunities and Risks for Business

Beijing’s decision to scale back COVID-19 restrictions ahead of the Chinese New Year travel period should prove popular, alleviate social ire, and reinvigorate the economy in the medium term.

However, the shift also promises to disrupt business operations, to usher in local variability in restrictions, and to worsen regulatory uncertainty, at least for a time – as US restrictions on travel from China have made clear.

Businesses will have to ride out this turbulent transition in the coming months, and should rein in expectations accordingly, conscious that this shift could add to tensions between the US and China.

What happened

The National Health Commission in mainland China on 7 December 2022 announced the lifting of restrictions aimed at curtailing the spread of COVID-19. Asymptomatic carriers of COVID may now isolate at home, and the number of tests required by people to travel or enter certain locations will fall. Then, on 28 December 2022 the central government relaxed many other restrictions.

The decision boosted markets, with shares on Hong Kong’s Hang Seng Index rising 4% after the announcement in early December. Travel is also on the rise. The Chinese authorities have issued new passports, and travellers are flying out of the country in large numbers. However, market enthusiasm has since dampened, and the US and other states have sought to restrict inflows from China, wary of a new wave of infection, but potentially inflaming anti-Chinese feeling.

The upside

The policy shift should alleviate popular anger, which became overt in protests in Shanghai, Chengdu, Beijing and other cities in early December 2022. Of course, the Chinese government had already hinted at a relaxation to come; on 11 November 2022, the central government tentatively issued new parameters for officials dealing with COVID restrictions – but the protests appear to have expedited matters.

The timing of the changes is notable, ahead of Chinese New Year (on 22 January 2022), which will allow many migrant workers to return home for perhaps the first time in three years. Moreover, the shift comes as a major change in personnel is under way, in the wake of the 20th CCP Congress and ahead of the March “twin meetings” when government positions are formalised. Incomers to posts will be able to blame their predecessors for mistakes.

The economic upside is also real. China is the last big economy to move towards reopening, and faster growth is likely. Expansion should ease the slow-motion financial crisis under way in the property sector, alleviate pressure on local government finances, and perhaps partly compensate for a slowing “export engine”; exports fell 8.7% year on year in November 2022, to USD396 billion, and imports fell by 10.6% to USD226 billion.

The risks to come

Notwithstanding these boons, investors should still withhold judgment. After all, this policy shift is resulting in a vast surge in infections, with certain models suggesting that 60% of the population could catch COVID in a few months (although the models have proven wrong time and again). The numbers of deaths are sure to rise, especially after large scale travel ahead of Chinese New Year, and in the context of mid-winter cold.

The rapid spread of infections is affecting business operations, too, most directly through staff illness. Indeed, the problem of absenteeism is amplified by the concentration of much production in “factory towns” – such clusters are vulnerable to local outbreak. Key intermediaries are also under strain. Logistics providers, for instance, are struggling to maintain services in the face of driver absences, leading to delays in delivery of crucial components.

In this context, officials could tighten restrictions, perhaps on a local (and undirected) basis, as villages and towns did in the early stages of the pandemic. Private businesses will only add to the confusion; some big factories are re-implementing “closed loop mechanisms”, to maintain operations. The result will be a bewildering and mutable patchwork of restrictions, which could prove hard to negotiate, and almost as disruptive as centrally mandated lockdowns.

How the people will respond is also unclear. After all, the propaganda apparatus had sought to induce deep fear about COVID until very recently. Now, the authorities claim the risks are scant. Even so, people are rushing to buy medicines, suggesting that their wariness will take time to dissipate – perhaps curtailing hopes of a burst of “revenge” spending.

A final concern is that the geopolitical outlook remains stormy. Businesses are not only conscious that tensions over Taiwan could flare up at very short notice, but must also deal with new efforts by the US, Japan, India, Malaysia and Italy to restrict access for Chinese travellers. Comparable “anti-Chinese” measures are likely elsewhere, which will prompt a response from Beijing.

Steps to reinstitute just-in-time supply chains seem unlikely, then. Rather, the trend towards economic decoupling will continue.

What businesses should do

As such, the shift away from zero-COVID policies in China is promising, but companies

should prepare for a bumpy transition, and manage expectations of any reversion to the “good old days”. Key steps to mitigate risks would include:

  • Anticipating a large-scale outbreak of COVID-19, which could result in people scaling back activity, or a return to stricter constraints, perhaps locally. Such planning should focus on the impact on operations, the risk to key systems, and the safety of staff. Disruption may also result in the de facto extension of the Chinese New Year holiday period.
  • Making provision for regional and local variability in the application of COVID-19 restrictions, to include decisions by private sector service providers (such as logistics companies). Key mitigating measures might include adding to inventories and examining prospective changes to supply chains or transport mechanisms, so as to take account of disruptions to road traffic, ports, and rail hubs.
  • Planning for greater regulatory uncertainty, deriving both from the localisation of anti-COVID efforts, and from the replacement of key officials in the coming months. Companies may lose access to counterparties, which could affect any response to changing conditions.
  • Expecting significant travel restrictions. The US has already required testing for Chinese travellers, as have Italy and Japan. The discovery of a new variant is liable to result in much stricter constraints on movement. Moreover, villages or towns in China may independently respond to outbreaks with local measures.
  • Monitoring developments closely, at all relevant levels, to ensure the business is in a position to respond to changing policy with alacrity. Companies may be able to draw on extensive local supply networks or financial links in gathering information.
  • Formulating measures to handle a rise in labour issues deriving from workers’ uncertainty about new rules, shortages of staff, or discomfort at demands to operate in certain ways, such as in workplace “bubbles”.
  • Assessing how surges in demand for goods or services could affect the price and availability of key inputs. Pressures will affect pricing and availability of goods both within China and overseas, meaning that planning should extend beyond China’s borders.
  • Reappraising public relations strategies, attentive to the risks that a clumsy statement on COVID policy could seriously harm a business’s reputation and brand.


SVA (www.stevevickersassociates.com) is a specialist risk mitigation, corporate intelligence and risk consulting company. The firm serves financial institutions, private equity funds, corporations, high net-worth individuals and insurance companies and underwriters around the world.

SVA has three core lines of business, which are: Business Intelligence and Political Risk; Corporate Investigations; and Special Risk. SVA also has a dedicated crisis management team which, for our retained clients, stands ready to assist companies during crisis situations.