Dr. Fauci Diagnoses China’s Bad Economic Habits

Dr. Anthony Fauci is earning himself prominent placement on any list of foreign experts China is annoyed to hear offer critiques of its “zero-Covid” debacle.

There was a time when economists called President Xi Jinping’s obsession with lockdowns a “strategy” to curb infection rates in the most populous nation. These days, they’re calling it what it really is: an overwhelming headwind damaging growth prospects for Asia’s biggest economy.

Or a “disaster,” in the words of White House medical adviser Fauci. In recent interviews with Foreign Policy magazine and German talk show Maischberger, Fauci opined that massive lockdowns of the kind in Shanghai, Guangzhou and Beijing are fine at first to stamp out infection.

But they’re the epidemiological equivalent of a tourniquet. Lockdowns and doing nothing else to improve the quality of vaccines and employ more creative mitigation won’t work.

“China did well in the beginning—it’s a disaster now,” Fauci told Foreign Policy.

And an avoidable disaster at that. As 2021 was stumbling toward 2022, geopolitical experts like Eurasia Group CEO Ian Bremmer worried Xi’s Community Party would make precisely this error. As Bremmer argued in January: China’s stubborn embrace of lockdowns is out of step with the Omicron phase of the pandemic.

“China’s zero Covid policy, which looked incredibly successful in 2020, is now fighting against a much more transmissible variant with vaccines that are only marginally effective,” Bremmer warned.

We can debate why Xi is doubling down on lockdowns. Bad headlines highlighting surging infection rates could complicate Xi’s quest for a precedent-shattering third term later this year. Bigger outbreaks could spotlight how China’s homegrown vaccinations are subpar. Xi may worry changing strategies would be seen as an admission of failure—or weakness.

But weakness is already showing up in China’s economic data. This week, Fitch Ratings cut its forecast for China’s 2022 gross domestic product to 4.3% from 4.8%. That’s well below Xi’s 5.5% target.

Nor is GDP likely to hit that level next year, says Fitch Chief Economist Brian Coulton. Fitch, he says, expects 5.2% 2023 growth “on the assumption that the government will phase out its ‘dynamic zero-Covid’ policy only gradually over the course of next year.”

Yet, as Fauci warns, hints of such a phaseout are few and far between. The problem with Omicron is that all evidence points to its current—and future—sub variants becoming increasingly transmissible. This suggests a Whack-A-Mole cycle whereby Xi’s government throttles back on lockdowns in some metropoles while racing to re-implement them in others.

Just as with personal health, bad economic habits die hard. This cycle is sure to keep China in the global headlines for all the wrong reasons. This includes another kind of “contagion” as slowing mainland growth and volatility in Shanghai shares unnerving markets everywhere.

“Given China’s importance in global supply chains and importance to global growth prospects, further disappointments in the nation’s growth may lead to more contagion risk,” Johnny Chen and Clifford Lau at William Blair Investment Management, told Bloomberg. “We see countries with high trade linkages to China as being the most vulnerable.”

Admittedly, Fauci is an imperfect messenger. During the 2017-2021 Donald Trump era, Fauci became a political lightning rod like few others for favoring a stronger Covid-19 response than the former U.S. president’s inner circle.

But he’s not wrong about where Xi’s Covid policy is taking China in the second half of 2022. Nor should Asian neighbors or investors downplay the ways in which slowing Chinese growth will reverberate in all corners of the global economy.

These concerns can be seen in the extreme volatility in Shanghai stocks and the yuan’s 5% decline this year. A rising yuan had been one of the wonders of the 2020-2021 Covid period. Its reversal speaks to waning confidence on the part of global investors that, frankly, Xi knows what he’s doing.

The Covid absolutism dominating decision making seems more about state control and Xi’s 2022l ambitions than where China is heading in 2025. This latter year is when his “Made in China 2025” vision to lead the future of artificial intelligence, biotechnology, electric vehicles, renewable energy, semiconductors and other key sectors becomes operational.

Instead, Xi’s team spent considerable time and political capital since late 2020 going after China’s top tech innovators. Starting with Alibaba Group founder Jack Ma, regulators acted to rein in a who’s-who of the nation’s internet company billionaires. The state sector, meantime, maintained its central role, particularly in financial circles.

On Covid, too, Xi appears to be working at cross purposes with what’s in the best interest of China’s huge economy and the 1.4 billion people relying on it to become more competitive and productive.

Fauci isn’t an economist. But the critique of the west’s most famous living medical doctor reminds us that Xi forgot the Hippocratic Oath of economics: first do no harm to a traumatized economy.