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Is China's No. 2 Staging a Stealth Covid-Zero Protest?

Is China's No. 2 Staging a Stealth Covid-Zero Protest?

Saturday, 28 May, 2022 - 05:45

It’s not easy being second in command. China’s Premier Li Keqiang, sidelined for years by President Xi Jinping, should know this better than anyone else.

In recent weeks, Li has re-emerged with his own voice. He has been pressing officials to stabilize an economy ravaged by draconian Covid-related lockdowns, while Xi has continued to push the zero-tolerance policy.

The mixed messages have led to speculation that there’s a rift at the top in Beijing. Why can’t Li, widely expected to step down when Xi starts a landmark third term this fall, fade quietly into retirement?

Li’s unusually frank tone at an emergency teleconference with thousands of local officials Wednesday offered some clues. While he didn’t criticize the Covid-zero policy or suggest shifting from it, the message was clear: Don’t overdo Covid containment.

An economist by training, Li talked at length about fiscal constraints and discipline. Beijing no longer has the money to spare, he said, a rebuff to provinces appealing for financial help:

This year’s transfer payments to local governments are the largest in recent years… I am here to let you know the bottom line. There is a reserve fund managed by the premier for natural disasters. Other than that, municipalities must manage to raise funds on their own.

“Put your limited funds to good use,” Li warned, according to a copy of the speech transcript seen by Bloomberg Opinion.

China’s political system is lopsided. While Beijing holds the purse string, locals have the shovels. The burden of policy execution, from building infrastructure to stamping out Covid outbreaks, lies with municipal, county and provincial officials. When local party chieftains believe preventing Covid outbreaks is their only performance metric, they can spiral into fierce competition, bidding to outdo each other with mass testing and lockdowns, especially in a politically important year.

This scenario is already being played out. In a village near the port city of Tianjin, thousands of people were ordered into quarantine centers over just a few dozen cases. In tech hubs such as Hangzhou and Shenzhen, residents need a PCR test every few days to move around and enter public spaces. Hangzhou alone plans to build more than 10,000 testing booths.

These measures cost money. A mandate to test every 48 hours across major cities would soak up 8.4% of China’s fiscal expenditure, estimates Nomura Securities.

On the day of his speech, the National Healthcare Security Administration, which reports directly to the State Council where Li is the highest-ranking official, said it would no longer pick up the bills. In other words, if local governments want to conduct mass testing, they must pay for it themselves. Until now, Shenzhen billed 90% of its Covid tests to the national health insurance, reported Caixin.

And it’s not as if local governments are flush with cash. Municipalities get roughly one-third of their income from land sales. In the first four months of this year, the take from these transactions tumbled 30%. In other words, every yuan spent on mass testing and quarantine is an opportunity lost to build infrastructure and boost employment.

Money is tight everywhere. As the budget man, Li expects only 3% growth in fiscal receipts this year — less than the projected expansion of the economy — in large part because of an unprecedented 1.64 trillion yuan ($240 billion) value-added tax credit refund to improve small companies’ cash flows. “Tax cuts are meaningless now that businesses no longer have any sales. We therefore need to return VAT taxes collected in previous years to help them overcome their difficulties,” said Li in the speech.

It’s thus not hard to see that local officials squandering precious cash on endless rounds of Covid controls is bothering the premier. Sure, he could just lie flat and ease into retirement, but if you are a numbers guy, who has spent years working on budgets, wouldn’t you feel compelled to speak up too?


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