Operation China Reopening: Here We Go

December 2, 2022

You ever play this game? It’s called Operation.

Pretty simple really. Pretend you’re a surgeon with a pair of corded tweezer. Using the tool, you attempt to extract the organs or “thing” from the patient’s body without touching the sides of the opening. If you do, the metal tweezer completes a circuit and a buzzer sounds. The patient’s nose lights-up while your parents’ hope fade as their dreams of a doctor in the family vanish.

I remember playing it as a kid and knowing right off the bat that I’m destined for an office job. BZZZT! Your license has been revoked. BZZZT! Get tested for ADHD. BZZZT! Try being a lawyer. BZZZT! Hedge fund manager . . . definitely hedge fund manager. BZZZT! #Fail.

So why was I thinking about this game? Well as fate would have it, a few days after writing this . . .

Mind the Gap: China's Reopening & Oil

China did this . . .

After experiencing these . . .

BZZZT! BZZZT! BZZZT!

Human beings push-it. If there’s one immutable law in the world it’s this . . . we ALWAYS push-it. My kids do it, adults do-it, business leaders do it, and politicians do it. It’s human nature. In the beginning, COVID restrictions in China were largely implemented for public health reasons, but three years on, they’ve morphed into something entirely different. Applied broadly, indiscriminately, with maximum force, and little considerations of the consequences such policies have on the populace, political leaders quickly eschewed the tweezers and brought a pair of pliers to extract COVID.

Inevitably and predictably, what were legitimate public health reasons for such controls were perverted. Restrictions/lock-downs originally used to contain the spread of COVID, were used for social/political control. Power corrupts, and absolute power corrupts absolutely. The old adage still applies. Most people don’t mind pushing it, especially if you don’t get blamed for the fall-out, but if the buzzer sounds while you’re holding the pliers? Time to reconsider.

Local officials, tasked to enact the draconian zero-COVID policies (“ZCP”), initially bore the brunt of public ire. As ZCP dragged into its third year, however, dissatisfaction with the CCP and Xi Jinping specifically began to surface. Discontent was already high as restrictions tightened ahead of the CCP’s 20th anniversary celebration (and Xi’s reelection for a third-term), and they finally boiled over when hopes for ZCP easing were dashed when COVID cases rose. The tipping point occurred last week when an apartment fire in Urumqi killed 10 people after local officials welded doors shut in an insipid attempt to enforce restrictions.

Widespread protests at universities, Guangzhou, Shanghai, Beijing, etc. ensued. The government quickly increased police presence in the following days to quell any further protests and censorship activity were increased. Despite that, the CCP heard the message loud and clear.

ZCP had gone too far and for far too long.

Within days, China began to ease restrictions, as local authorities (no doubt prodded by the central government) were ordered to relax their enforcement efforts.

Interestingly enough, the protests/riots provide an opening for the CCP. It can give the populace what it wants (freedom of movement and economic recovery) without bearing the political consequences of an outbreak.

You want to get infected? It’s on you.

Now certainly it knows that it can’t be too cavalier about this. If deaths start to climb dramatically, then political backlash will once again occur. Hence we anticipated a vaccine push, and specifically for those over 80 years of age. Give them a booster shot (i.e., 3 total doses) and you’ll get a 98% efficacy rate. Lo and behold? China has begun targeting the elderly for increased vaccination. In Beijing, they’ve even set a target for 90% of people over 80 years old to be boosted.

All before the end of January 2023. Why?

Chinese New Year . . . Sunday, January 23.

Case counts will undoubtedly explode, though official data will be sketchy as we embark on this grand experiment to reopen because the government will also decrease the number of testing, distorting the headlines. Deaths though will be more obvious, but if the vaccination campaign is successful, then they should be minimized (if not in actual numbers, then at least in the reported figures as the government will undoubtedly massage those numbers).

Since we made the nonconsensus call about a China reopening, here’s another one.

It may be okay.

One thing we’re sanguine about is the possibility that things won’t actually be that bad. Here’s the thing about the Chinese vaccines that they’ve already administered . . . they’re not that bad. Compared to Western mRNA based vaccines, they’re not as prophylactic, but as “ineffective” as their reputations are, studies have shown that they’re decent, particularly if you get boosted. Furthermore, remember when the US experienced its Omicron surge in mid-2021? We were only about 1/2 vaccinated then, whereas China stands at around 90%, so what’s lacking in efficacy could be mitigated by broader coverage.

Even clearer for us, if they are successful at boosting everyone, this pandemic is over in China.

So if this reopening is successful, China’s reopening momentum will build. It won’t be like the Western reopening of 2021, however, because unlike us, China hasn’t directly injected fiscal stimulus into its consumers’ pockets. They’ve relaxed bank reserve ratios, short-term rates, and lending requirements, but have largely avoided fiscal stimulus in favor of monetary and regulatory measures. Accordingly, the populace will be slower to rebuild and reemerge. They will though simply because allowing more mobility and removing the uncertainty from an unexpected lockdown will help restart a frozen economy. In turn, Australia, Japan and Korea will further improve as China is their largest trading partner. Europe should also see additional benefits given China’s their third largest trading partner. Admittedly these are very broad brush strokes, but directionally that’s where we’re headed.

We anticipated a reopening, check. We expected a vaccination program roll-out, check. We expect this to actually work . . . cheee-yeah TBD. We expect oil demand to lift higher in the coming months . . . TBD. Still, what’s important here though is that the Overton window has shifted. People will become increasingly less scared about COVID as economic well-being takes precedence over health concerns (see for example China’s mouthpiece below).

The populace has spoken and the economic/social pain of not reopening have vastly exceeded the potential healthcare risks. The CCP’s been BZZZT’d!!!

So it’s up to YOU to protect yourself now, and it’s on YOU to get vaccinated.

Restrictions are relaxing, and China’s about to get lit.

That we’re pretty certain about.

BZZZT!

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