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

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

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

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

Local authorities’ struggle to fund the test drive has added financial pressure as the world’s second-biggest economy faces the worst coronavirus outbreak since the pandemic began. Authorities have imposed lockdowns across much of the country, including the largest city and financial hub, Shanghai.

The measures have led to a slump in economic activity, with April retail sales falling 11.1 percent from a year earlier and industrial production falling 2.9 percent, according to official data released this week.

According to Dongwu Securities, the test mandate could cost as much as Rmb 1.7 trillion ($250 billion) in 2021, or 9 percent of China’s tax revenue per year.

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

Jilin authorities said in January they expect tax revenue to fall 8 percent this year and healthcare spending to rise 6.9 percent compared to 2021.

The city has suffered a double-digit drop in tax revenue and a double-digit increase in healthcare spending for the first four months of this year after local authorities imposed a lockdown in March and tested 4 million residents multiple times in an attempt to contain the outbreak on people infected with the virus are familiar with the situation.

“We were not ready for such frequent and large-scale testing when we made the budget earlier this year,” a local official said. “We need to look for alternative sources of funding to meet our priorities, and poverty reduction is currently not [a priority].”

The need to fund testing has prompted Quanzhou to scale back its Rmb185 billion infrastructure investment plan this year. The city reported an 8.2 percent decline in fixed asset investment in March, compared with a 6.6 percent increase nationwide.

A local official attributed the drop in part to a need to use construction funds for testing. “The central government wants us to eliminate the pandemic and push ahead with infrastructure construction,” the person said. “We cannot do both and the priority is to create a Covid-free city.”

Local governments are “siphoning and testing important resources from economic growth,” said Andrew Collier, managing director at Orient Capital Research. “Their economies will be in 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 speed up.

Dozens of cities, including the tech hub of Hangzhou, require residents to show negative test results within 48 to 72 hours before entering public spaces like restaurants and supermarkets. The measures were interpreted as a signal that regular mass testing across China could become permanent.

Japanese bank Nomura said a persistent test every 48 hours would cost up to 1.8 percent of China’s GDP.

Alongside the liquidity crisis, experts said it was unclear how effective the testing measures were in curbing the transmission of the virus.

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

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

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