(Bloomberg) — China’s worst equity selloff since early 2020 reflects a growing concern about President Xi Jinping: He can’t afford the political costs of shifting from a Covid Zero strategy that is pummeling the economy. 

In Shanghai, a weekslong Covid-19 lockdown got even worse, with workers in hazmat suits fanning out over the weekend to install steel fences around buildings with positive cases. In Beijing, the process is just getting started, as authorities on Monday began shutting down a bustling district in the capital to quash fresh outbreaks. 

The threat of paralyzing China’s two largest and wealthiest cities with a strategy abandoned by most countries helped push the CSI 300 down 4.9%, the gauge’s steepest one-day drop since the first such lockdown in Wuhan two years ago. The spreading lockdowns have investors worried that Xi is sacrificing the Communist Party’s reputation for pragmatic economic management to defend a political narrative that portrays him as the world’s most successful virus-fighter.

“This Covid situation is really putting China into a very dark moment, perhaps the darkest moment in economic terms for the last couple of decades,” Junheng Li, JL Warren Capital founder and chief executive officer, said of the Shanghai lockdown during an interview on Bloomberg TV. “It’s a confidence crisis in a sense that you’ve got the most affluent city in China with this consensus disappointment and resentfulness towards a very non-sensible policy.”

“People really don’t know, what’s a clear path to get China out of this Covid situation,” Li said. 

Pressure is building as Xi prepares for a twice-a-decade leadership reshuffle later this year that’s expected to secure him a precedent-breaking third term in power. Maintaining Xi’s reputation for strong decision-making appears increasingly central to that process, even if it comes at the expense of the economic growth that has helped underline the Communist Party’s legitimacy since China started opening to the world more than 40 years ago.

Economists surveyed by Bloomberg last week lowered annual growth forecasts for China to 4.9%, betting against the government’s official target of about 5.5%. Overseas investors offloaded 4.4 billion yuan ($7 billion) of stocks Monday, taking monthly inflows negative this month. The onshore yuan slumped to its weakest level in 17 months on concerns about rising capital outflows. 

China’s outgoing premier, Li Keqiang, has in recent weeks called for a “sense of urgency” in implementing stimulus measures and — according to one local newspaper report — urged entrepreneurs and experts at a forum last month to “tell the truth” and offer proposals rather than talking up achievements. Still, the party has increasingly signaled that “Covid Zero” is not one of the things up for debate, despite the emergence of the more contagious omicron strain.

Ma Xiaowei, director of National Health Commission, credited Xi with “setting the tone” on the country’s anti-epidemic policy in a front-page commentary in the party’s Study Times journal, making it riskier to challenge the strategy. Ma called for “taking a clear-cut stance in opposing the wrongful thoughts of living with virus.”

Over the weekend, Chinese internet users fought to evade censors to spread a six-minute video titled “The Sound of April,” which included a montage of clips illustrating Shanghai’s struggle under more than a month of lockdowns. Some users compared the outpouring of support for the video to the night two years ago when Wuhan doctor Li Wenliang — who delivered one of the first public warnings about a new SARS-like illness — was hailed as a hero after dying of the disease. 

For Xi, China’s ability to quash the first coronavirus outbreak in Wuhan provided a powerful response to criticism from the U.S. and other Western democracies, where debates over masks, vaccines and lockdown measures have been blamed for catastrophic virus surges. China has so far acknowledged less than 5,000 deaths, compared with almost 1 million in the U.S., a fact trumpeted daily by diplomats and state media editorials.

But Beijing has yet to approve for use the highly effective mRNA vaccines pioneered by companies such as Pfizer Inc. and Moderna Inc., a step which could be viewed as an acknowledgment of Western scientific victory. China has also failed to vaccinate much of its elderly population, raising the costs of any effort to let the virus circulate. 

That risk was driven home by an outbreak in Hong Kong earlier this year that saw the Asian financial hub spiral from a Covid safe haven to the place with the highest death rate of the pandemic. A monthlong Chinese outbreak could result in 31,000 deaths to a quarter of a million deaths, according to Bloomberg Intelligence calculations.

“Even though China has lauded its Covid approach over the haphazard handling of Covid in the United States, China has now also politicized the virus,” said Mary Gallagher, a political science professor at the University of Michigan. “This makes a policy change very difficult because it will imply a previous policy mistake. That is simply something that Xi is unwilling to do in the year that he is potentially up for an unprecedented third term as president and head of the party.”

China has similarly prioritized ideological struggles with the West over short-term economic pressures in its decision to defend President Vladimir Putin’s rationale for invading Ukraine. The position has prompted threats of secondary sanctions from the U.S. and warnings from European officials that Beijing risks undermining its relationship with Brussels. 

Last week, Xi defended both his efforts to push back against U.S. “hegemony” and his approach to the virus in a video address to the Boao Forum for Asia. “For humanity to clinch the final victory against the Covid-19 pandemic, more hard efforts are needed,” he said. 

A district-level official in Shanghai carried the war metaphor further in an April 15 speech explaining the virus fight. “This is a military order,” Baoshan party secretary Chen Jie said in remarks widely circulated online. “There is no room for bargaining, we can only grit our teeth and fight for victory. It can also be said this is a total attack, a last-ditch battle to reverse the trend of the epidemic.” 

Such rhetoric has been used to justify ever-more extreme steps to control people’s movements in Shanghai, which reported 19,000 cases and 51 fatalities Sunday. More than a month into the city’s outbreak, some residents in buildings with positive cases found themselves penned in by green chain-link fences outside their exits, according to photos and posts shared on Chinese social media platform Weibo.

Meanwhile, a surge in cases in Beijing’s Chaoyang district — an area of 3.5 million people, including many expats, the central business district and most foreign embassies — raised concerns that the capital could soon see its first major lockdown. Beijing municipal government spokesman Xu Hejian said late on Friday that the current outbreak was “complex and stealthy.”

Changing policy now would be represent and enormous loss of face for Xi, and could be worse in the short term, as the virus spreads and more people die, said Richard McGregor, author of the “The Party: The Secret World of China’s Communist Rulers.”

“They have been boasting for years that their system is superior to Western democracies, but suddenly, it looks like it isn’t after all,” said McGregor, who’s also a senior fellow at the Lowy Institute in Sydney. “Who is going to dare to tell Xi Jinping that?”

©2022 Bloomberg L.P.

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