China: Overwhelming COVID cases could lead to ‘far more social instability,’ expert explains

China Beige Book International Managing Director Shehzad Qazi joins Yahoo Finance Live to discuss China's zero-COVID policy and the economic ramifications of the restrictions, supply chain headwinds for Apple, and China's largest problem when it comes to fighting COVID.

Video transcript

[AUDIO LOGO]

RACHELLE AKUFFO: Well, China's zero-COVID policy, which has created some uncertainty across global supply chains, is plaguing several of the country's tech giants. As Ines was mentioning there, companies like Alibaba, Tencent, and JD.com all plummeting during today's session. Lots of different strands to pull together. So what's the big picture macro outlook?

Well, joining us now is Shehzad Qazi, Beige Book International Managing Director. Shehzad, good to have you back on the show. So as we're seeing these mounting upticks in COVID cases in China, record-breaking, in fact, does it make you wonder what the markets missed when they sort of highly anticipated that the reopening would be faster than expected?

SHEHZAD QAZI: Yeah, I think looking back to the last couple of weeks, I have to say that Wall Street and some of these major banks really oversold the exit from zero-COVID. I think the announcement of the 20 rules were seen as the signal which-- which says zero-COVID is coming to an end rather than seeing it as the further entrenchment of zero-COVID, perhaps for the long haul. The real signal that markets should be on the lookout for is the government putting an end date on zero-COVID, and not just a series of rules around which zero-COVID is managed.

AKIKO FUJITA: I mean, with that said, are we likely to see that any time soon, especially given the case counts going up?

SHEHZAD QAZI: I think Beijing cannot announce the end of zero-COVID before it is able to have access to sufficient mRNA vaccines, inoculate the population, and do booster-- rounds of booster shots, especially in the major cities, and especially among that vulnerable adult population that we hear so much about because they do not have the hospital capacity to deal with anything else.

With the rising cases at this time, announcing the end of zero-COVID is nowhere imaginable. What you're seeing right now is lockdowns in multiple cities, and even places like Beijing, which is under de facto lockdown even though it's not being called a lockdown right now.

RACHELLE AKUFFO: So, Shehzad, what does this mean for China's 5.5% GDP growth target? How on Earth is it supposed to get there? Do you see any sort of path for that becoming a reality in the near term?

SHEHZAD QAZI: No, absolutely not. I mean, the 5 and 1/2% GDP growth rate was not realistic. I think one could say that starting from the second quarter of the year. We ourselves, almost since the beginning of the year, were seeing that that was wildly unrealistic. And over time, we've seen other China watchers move closer to our target of something in the 2% zone or so in reality.

I think Beijing, again, very realistically realizes that the growth target is not achievable. They've sort of essentially abandoned it. The real question is, how does this influence growth targets that are set into the future? And how much emphasis do we continue getting from China about hitting a certain growth target when not only are you looking at a structural slowdown within the economy, but you're looking at this everlasting-- for now everlasting at least-- impact of repeated lockdowns and hardcore restrictions on the movement of people in the operating of-- the operation of businesses?

AKIKO FUJITA: What is the larger end goal, you think, for Xi Jinping? Is it stability at the cost of growth? I mean, you talk about where you think that the economy is headed, I mean, 3%, some have put it sub-3% in terms of growth, but you've also got high youth unemployment. Clearly, these protests are just one example. But there is growing frustration that the government is just keeping this policy in place without a whole lot of explanation. Is the stability more important for the government right now than the economic growth?

SHEHZAD QAZI: Number one is absolutely stability but making sure that you are not in a situation where you get widespread outbreaks, I mean, outbreaks that would be just unimaginable, which would lead to large number of deaths, which would just completely overwhelm hospital capacity because that would instantly lead to far more social instability. These protests would look absolutely like nothing compared to what could happen.

So that-- social stability is absolutely key. And the economic growth question is tied into that because I think the economic fallout from letting go of zero-COVID in the absence of vaccines, which is the core problem for China today, it would just wreak havoc. It would create very serious amounts of global supply chain problems.

Apple and others would be in deep, deep trouble. So I think the alternative right now is very, very bad, which is why I keep coming back to the point that access to vaccines is key, inoculation is key before anything can be done on the zero-COVID front. And I think that's really what-- how Beijing is approaching it.

RACHELLE AKUFFO: And, Shehzad, what could we be looking at in terms of the global supply chain fallout? You mentioned Apple. You also have people sort of banking on China when it comes to things like oil demand as well. How far-reaching could some of these domino effects become?

SHEHZAD QAZI: Yeah, I think some of the commodities trading, if you will, around the idea of China reopening, again, seems to be suffering from the same type of optimism or hope rather than waiting for a more data-driven approach. And I think maybe there's a bit of overplaying going on there as well. Look, the reality is that repeated lockdowns are going to continue to create some amounts of supply chain stress, for some industries-- for some companies a little bit more, for some companies a little bit less.

We're not at a place today where you're seeing large-scale port shutdowns. We don't even have ports operating in a bubble capacity right now, now although there's a chance that that could happen. So we're not looking at 2020 or parts of 2021. Yet supply chain risk is predominant, and corporate headquarters, whether they be in Silicon Valley or elsewhere, need to very seriously start thinking about their supply chain risk from China. It's very clear that they haven't done so as yet, not at least at a level that they need to be doing.

AKIKO FUJITA: OK. No question a lot of assessment now happening as a result of these case counts. Shehzad Qazi, China Beige Book International Managing Director. Good to have you on this Black Friday.