China’s Markets React to Xi’s Third Term

Welcome to Foreign Policy’s China Brief.

The highlights this week: Chinese stocks fall as cautious investors react to the Party Congress, how the latest lab leak story misinterpreted official Chinese documents, and why British Prime Minister Rishi Sunak will maintain a hard-line position on China.

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Markets in China melted down after the 20th National Congress of the Chinese Communist Party (CCP) ended last week, and the yuan hit a 14-year low. Investors reacted cautiously to the announcement of Chinese President Xi Jinping’s third term, as well as the emphasis on security over economic growth in Xi’s speeches and the exclusion of pro-economic reform figures from power.

Chinese stocks rallied on Tuesday based only on an unsubstantiated rumor swirling on social media: that a committee had been set up to examine how China could end its zero-COVID policy, with a supposed target date of March 2023. There is no evidence of such a committee; Foreign Ministry spokesperson Zhao Lijian denied knowledge of its existence, ultimately curbing the stock rally. But traders are desperate for any hope of reopening.

The CCP’s top leadership is likely trying to find a way to ease the zero-COVID policy, but it will depend on Xi’s willingness to do so. Ending the policy is a classic example of a wicked problem: Information is incomplete, the circumstances are changing, and any supposed solution risks create new challenges. Although China has pushed hard to reach its remaining unvaccinated population, the potential for COVID-19 to spread unchecked among 1.3 billion people is overwhelming, especially given the relative underperformance of Chinese vaccines.

On top of that, China’s health care system is already under strain because so many resources have gone into COVID-19 control, causing a shortage of medical staff and disrupting the pharmaceutical supply chain. Readjusting to a policy that emphasizes treatment rather than containment would be a huge endeavor. Chinese officials are also now under even more intense pressure to demonstrate ideological and personal loyalty, and their inclination is to keep up the status quo—not because it’s good, but because the alternatives could be worse.

Furthermore, China is still grappling with new outbreaks and resulting lockdowns. City authorities have imposed waves of new restrictions but have avoided calling them lockdowns, thanks in part to the fiasco in Shanghai earlier this year. China’s case numbers are still minuscule compared to most countries, but flare-ups like the one in Guangzhou, now recording more than 100 cases a day, are causing concerns among officials.

A gulf has opened up between countryside residents—generally less subject to restrictions and still supportive of the policy—and city dwellers, who are increasingly angry and resentful. As has been the case since the start of the pandemic, migrant workers—already marginalized and irregularly housed—are among the worst-affected groups by lockdowns and other restrictions, which can eliminate their regular income. An outbreak last week at a Foxconn iPhone factory in Zhengzhou led workers to flee out of fear of being trapped in quarantine.

Guaranteed income for people in quarantine could alleviate this problem. Most aid has gone to businesses, and although local governments have offered some help for individuals during lockdowns, it has often run through existing welfare systems that don’t cover migrant workers. The central government would have to take on this responsibility, given the dire state of local government finances.

The Chinese stock market is not likely to drive China to end its zero-COVID policy. It represents a small part of the country’s economy—and is manipulated by the government—and as a result has underperformed compared to China’s economic growth in recent decades. But the rest of the picture now isn’t much better. October property sales by the biggest developers were down 28 percent compared to last year. Prices have fallen only marginally, but no one is buying, and the crisis-in-waiting continues to escalate.

As Zongyuan Zoe Liu writes in Foreign Policy, the zero-COVID policy might be the least of China’s economic problems in the long run. In the near term, political pressure and the looming winter mean that reopening is months away, at best.

Lab leak story falls short. Last week, U.S. Senate Republicans released a report pushing the idea that COVID-19 originated from a lab leak, pointing to the Wuhan Institute of Virology, but it offered little new information to back this up. A ProPublica-Vanity Fair collaboration published on Friday hyped the Senate report and claimed it offered new evidence—but it turned out to be based at least in part on mistranslation and misinterpretation.

Biosafety experts have slammed the ProPublica-Vanity Fair story as misunderstanding routine work, but it is also an exercise in the dangers of misreading Chinese material. The article is based almost entirely on the account of Toy Reid, a U.S. State Department political officer; Reid says he can read “party speak” that “[e]ven a native Mandarin speaker ‘can’t really follow.’”

Although there is an art to reading between the lines of Chinese political language, it’s not impossible and is a very common skill among native speakers. The key document cited is an article in a newsletter issued by the Chinese Communist Party branch at the lab—effectively the equivalent of a corporate newsletter, not a “memo” or “report” as described in the piece. (You can read the whole thing here.) Furthermore, Reid misrepresents the newsletter’s content, turning a piece of puffery into evidence of sinister failings.

For example, the article says, “Even at the BSL-4 lab, they repeatedly lamented the problem of the three ‘nos’: no equipment and technology standards, no design and construction teams, and no experience operating or maintaining [a lab of this caliber].”

But this is a misleading version of the original lines: “At the outset of construction, the Wuhan P4 Laboratory faced the dilemma of the three nos: no equipment or technical standards, no design or construction teams, and no experience in operations and maintenance—but with party members from the Zhengdian lab party branch leading the charge and bravely pushing forward, [the lab] achieved the three yeses: a set of mature/well-developed standards, a seasoned operations and maintenance team, and invaluable construction experience.”

The ProPublica-Vanity Fair story also reports that the use of pishi (written instructions or commentary) indicates that Xi and Chinese Premier Li Keqiang took a special interest in the Wuhan lab in November 2019. It takes only a little searching to find that other safety documents issued by local authorities routinely use the same language about pishi, like this warning in March 2019 issued by a Shenzhen bureau about an incident in faraway Jiangsu province.

Semafor reported that the scale of immediate correction from native speakers and professional translators prompted ProPublica to contact translators to check the material the day after the article came out. Unfortunately, given how politicized the origin of COVID-19 has become, we can expect more of this in the future.

Semiconductor loopholes. New restrictions on U.S. involvement in Chinese semiconductor manufacturing don’t appear quite as all-encompassing as the industry initially feared. Rather than banning all U.S. individuals from involvement, the rules concentrate only in U.S. personnel in specific roles. But the new restrictions join existing export controls, which add more difficulty for Chinese firms that now must reach out to U.S. officials directly or risk being blacklisted.

The moves seem like the opening shots in a new phase of the technological and trade struggle between the United States and China that could potentially involve their allies. U.S. Vice President Kamala Harris was recently in Japan trying to get Tokyo on board.

On FP Live this week, Jon Bateman, a senior fellow in the Technology and International Affairs Program at the Carnegie Endowment for International Peace, spoke with FP editor in chief Ravi Agrawal about Washington’s bold plan to restrict Beijing’s semiconductor imports.

U.K. remains firm on China. When former British Prime Minister Liz Truss stepped down after just about six weeks in office, officials in Beijing may have breathed a sigh of relief. But her successor, Rishi Sunak, has picked up her hard-line approach—despite once being seen as a relatively pro-China figure mostly interested in business deals rather than human rights issues. Now, as prime minister, Sunak says he aims to ban Confucius Institutes in the United Kingdom.

Sunak took a considerably more hawkish approach during his losing leadership bid against Truss earlier this year, seeking to head off accusations of being soft on Beijing. He hasn’t had any great change of heart, but the U.K. Conservative Party is deeply divided after successive changes of leadership, and Sunak needs any support he can get—including from the group of sternly anti-Beijing politicians typified by new security minister Tom Tugendhat.