Hong Kong Risks Everything With ‘Impossible’ Covid-Zero Goal

(Bloomberg) -- Hong Kong is doubling down on a Covid-Zero strategy that has failed almost everywhere else, battering its economy and threatening its status as an international financial center just as much of the world learns to live with the virus.

While countries from the U.S. to Australia are winding down pandemic restrictions, Hong Kong is imposing its toughest measures since Covid first emerged more than two years ago. From Thursday, gatherings of more than two people in public are banned, while no more than two households can mix in private. Violators face a fine of at least HK$5,000 ($642).

Many health experts say the curbs are unlikely to stop the highly infectious omicron variant from spreading. Daily cases jumped on Wednesday to more than 1,000, the highest on record and up from just 14 three weeks ago. Researchers from the University of Hong Kong say the figure may reach 28,000 in March.

The result is growing frustration among local residents, expatriates and business leaders with a government seen to be pursuing a futile policy in the hopes of appeasing China’s ruling Communist Party. Analysts at Fitch Ratings this week became the latest to cut their 2022 forecasts for Hong Kong’s economy, saying the city’s delayed pandemic recovery makes it among the weakest of the 120 economies it tracks.

“I believe most government officials know it’s impossible to maintain Covid Zero, but they can’t help because they have to follow China’s policy,” said Danny Lau, honorary chairman of the Hong Kong Small and Medium Enterprises Association. “Hong Kong is becoming more and more like a ghost city.”

Changing tack is not an option, according to the Communist Party’s flagship newspaper. Hong Kong must adhere to a Covid-Zero policy as any move toward living with the virus will severely damage the city’s development and health of its residents, the People’s Daily said in a commentary published on Monday. The central government is “highly concerned” about Hong Kong’s “raging” fifth wave, according to a late-night statement Thursday.

Mainland officials and experts will meet their Hong Kong counterparts in Shenzhen this weekend to discuss the worsening outbreak and measures to contain it, the South China Morning Post reported early Friday. China is prepared to send thousands of medical and lab personnel and millions of testing kits, the paper reported, citing a Beijing-based source. 

Hong Kong will seek permission to build a Wuhan-style temporary isolation facility, where all preliminary positive cases could be housed, HK01 reported on Thursday, citing people it didn’t identify.

While almost 82% of the city’s residents aged 12 or over have received at least one vaccine dose, that figure falls to just 35% of those aged 80 or above, making them more vulnerable to serious illness. A Hong Kong government representative had no immediate comment when reached by Bloomberg.

It’s been a bitter few years for the former British colony. The city saw the worst violence in decades in 2019 as pro-democracy protesters and police engaged in street battles. The emergence of Covid in 2020 and the imposition of rules limiting public gatherings to no more than four people helped quash further protests. China’s enforcement of a national security law later that year put an end to effective opposition. 

While the city’s adoption of a closed border policy and strict quarantine rules for residents returning meant Hong Kong remained generally Covid-free, it came at a heavy price in terms of tourism, business and the freedom to travel. 

The number of visitors to Hong Kong last year was “close to zero,” according to the city’s tourism board, compared with more than 65 million in 2018. On Feb. 1, just 282 passengers arrived in the once-bustling international finance center via all ports, according to Immigration Department data compiled by activist investor David Webb.

“Hong Kong is in the worst possible situation where it is closed both to the rest of China and to the rest of the world,” said Douglas Arner, a law professor at the University of Hong Kong and an expert on the city’s financial system.

The city’s $344 billion economy is under strain. Last month, DBS Group Holdings Ltd. cut its prediction for growth this year to 2.4% from 3%, citing the government’s Covid-Zero policies and an “alarming” drop in the labor force as residents depart for good. Morgan Stanley, Goldman Sachs Group Inc. and Bank of America Corp. also downgraded their outlooks in January, before the government unveiled stricter restrictions.

The economists are calling for more fiscal support at the government’s upcoming Feb. 23 budget to cushion the impact from the restrictions. BofA noted demand remained weak last quarter despite the government’s stimulus measures. Fitch said such policies will delay the city’s return to balanced budgets.

While the jobless rate has fallen to 3.9% from a 17-year high of 7.2% in February 2021, the new curbs will aggravate the burden on Hong Kong firms, especially in retail, travel and logistics industries. 

Even before the latest outbreak, businesses were feeling the pain. In the third quarter, 11% of commercial spaces in Hong Kong’s four main shopping districts was empty, compared with 7% in the same quarter in 2019, according to property agent Midland IC&I Ltd. Retail sales in December were 26% below the level seen three years ago before the unrest. 

The latest curbs have devastated business for bars and restaurants, said Allan Zeman, chairman of Lan Kwai Fong Group, a major landlord in the city’s bar district. “With omicron it’s not really possible I believe to get it down to zero cases, as we have seen throughout the world.”

Strict border controls are driving up prices for the city’s 7.5 million inhabitants, who rely almost entirely on imports for food. Flights bans from eight countries including the U.S. and U.K. have curbed the supply of fruit, flowers and food products. Making matters worse, anti-virus controls in mainland China meant truck drivers were unable to re-enter the city this week, prompting the supply of fresh produce to fall as much as 70%.

What Bloomberg Economics Says...

The tightening of social distancing rules are negative for growth, and without “dynamic clearing” it’s hard to reopen the border with mainland China to boost local retail and tourism. We have cut Hong Kong’s 2022 GDP outlook and still see downside risks to cut more. Capital flight is less of a concern as this is not crucially related to social distancing and Hong Kong’s local economy is never a key factor for capital flows.

Eric Zhu

The explosive rise in cases means the meticulous system Hong Kong used to quell earlier outbreaks is no longer sustainable. Choi Wai-kit, a cross-border truck driver, waited almost three days to be taken to a quarantine facility after he was informed he was a close contact to a positive case. He slept in his cab to avoid potentially spreading the virus. He repeatedly called government departments but was told they were short-handed and to continue waiting. 

“I understand the situation is very bad, but I don’t know how they could be so busy they couldn’t even send someone to pick up a close contact,” the 45-year old said.

The increasingly overloaded health-care system is forcing the government to relax measures that were some of the world’s strictest. Just over a month ago, more than 200 diners at a single restaurant were sent to a quarantine camp because of a cluster. Now that camp is being used to hold confirmed patients with mild symptoms, while close contacts can isolate at home. So far three people have died during the current outbreak, all aged more than 70.

With Covid Zero, Hong Kong is attempting to do what no other city has done without months in full lockdown, and none have achieved that with the omicron variant.

The government’s strategy makes less sense in the face of omicron and should consider reviewing it, said Anders Yuen, chairman of the Association of Hong Kong Nursing Staff.

“The approach only works when there are few Covid cases,” said Yuen. “It’s completely non-sustainable when there are over 1,000 cases a day.”

A city-wide, China-style shutdown is unlikely, according to Bernard Chan, a financier and convener of Hong Kong Chief Executive Carrie Lam’s advisory Executive Council.

“I don’t think we can ever go into a full lockdown,” Chan said in a Bloomberg Television interview Wednesday. “We just can’t do it in Hong Kong.”  

There is some hope that the government will relax curbs once the vaccination rate reaches its targeted 90% of the population. China could also use Hong Kong as a petri dish for how to eventually transition toward living with the virus, according to HKU’s Arner.

“There is an opportunity for the central government to take Hong Kong as an experiment to see how living with the virus goes,” Arner said. “Eventually the country is going to have to open up, at least in little pieces and you might as well do an experiment with Hong Kong which is largely cut off from the rest of the country.”

So far, Hong Kong officials are reiterating they will stick with their same approach. The government has repeatedly made it clear that reopening the border with mainland China is the city’s priority. Unless Beijing abandons its own Covid-Zero policy, that can’t happen until the city eliminates this outbreak. 

The risk for Hong Kong is that by slowing the spread, and not eradicating the virus, it just lengthens the duration of the outbreak -- potentially pushing the city to breaking point. 

“If you don’t get to zero, and it’s slowly smoldering in the population, the transmission will occur over a longer period of time, rather than a sharp spike,” said S.V. Mahadevan, director of South Asia Outreach at the Center for Asian Health Research and Education at Stanford University Medical Center. “You can’t hide from it forever. Eventually we will all get it.”

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