China diverts anti-poverty funds to Covid testing as crisis deepens

China’s cash-strapped local governments have been forced to divert funds from poverty alleviation and infrastructure to finance mass coronavirus testing as President Xi Jinping’s zero-Covid policy causes growing financial strains.

An official in the north-eastern city of Jilin said authorities had earmarked a “significant” portion of state-backed funds intended to reduce poverty to buy PCR tests, after an outbreak that has infected more than 26,000 people since March.

In the southern industrial hub of Quanzhou, local officials said an ambitious infrastructure investment plan had slowed in part because the authority reallocated funds to testing following an outbreak that has infected more than 3,000 people over the past two months.

The struggle by local authorities to underwrite the testing drive has added to the financial pressures as the world’s second-largest economy faces its worst coronavirus outbreak since the start of the pandemic. Authorities have imposed lockdowns across large swaths of the country, including its biggest city and financial center, Shanghai.

The measures have caused economic activity to plummetwith retail sales falling 11.1 per cent year on year in April and industrial production down 2.9 per cent, according to official data released this week.

The testing mandate could cost up to Rmb1.7tn ($ 250bn), or 9 per cent of China’s fiscal income in 2021, per year, according to Dongwu Securities.

Local governments have already been struggling, as the economy has been squeezed by lockdowns.

Authorities in Jilin said in January that they expected to report an 8 per cent drop in fiscal revenue and a 6.9 per cent increase in health spending this year compared with 2021.

The city has suffered a double-digit drop in tax income and a double-digit increase in health expenditure in the first four months of this year, after local authorities imposed a lockdown in March and tested 4mn residents multiple times to stem the outbreak, according to people familiar with the situation.

“We were not ready for such frequent and large-scale testing when we created the budget at the beginning of the year,” said a local official. “We have to search for alternative sources of funding to meet our priorities and poverty alleviation is currently not [a priority]. “

The need to fund testing has prompted Quanzhou to scale back its Rmb185bn infrastructure investment plan this year. The city reported an 8.2 per cent drop in fixed investment in March, compared with a 6.6 per cent increase nationally.

A local official blamed the decline partly on the need to use construction funds on testing. “The central government wants us to eliminate the pandemic and to step up infrastructure construction,” the person said. “We cannot do both and the priority is to create a Covid-free city.”

Local governments “are draining key resources away from economic growth and putting them to testing”, said Andrew Collier, managing director at Orient Capital Research. “Their economies are going to be in an even worse shape than they already are.”

Sun Chunlan, China’s vice-premier, said last week that residents should be able to walk to a testing station within 15 minutes so virus detection could become quicker.

Dozens of cities, including the technology hub Hangzhou, have started requiring residents to show proof of negative test results within the 48-72 hours before entering public spaces such as restaurants and supermarkets. The measures have been interpreted as a signal that regular mass testing could become permanent across China.

Japanese bank Nomura said testing every 48 hours on a permanent basis would cost up to 1.8 per cent of China’s GDP.

Alongside the cash crunch, experts said it was unclear how effective the testing measures were at curbing the transmission of the virus.

Nomura said the benefits of the mandate could be “limited” as cities might “continue to face frequent partial or even full lockdowns” because of the high transmissibility of the Omicron variant.

“Regular mass testing is completely unnecessary because the zero-Covid target is a mission impossible,” said Jin Dongyan, a virologist at the University of Hong Kong.

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