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Paul and Brett's Alpha

November 2022

Re-Gifting

This month’s missive is somewhat delayed relative to our usual schedule of getting it out early in the month. We began compiling the material for this section of the factsheet before the end of the, as is customary, but our travel schedule meant that we did not work on it over the days straddling the month end.

This delay has proven to be fortuitous, given the chosen topic was China’s Zero COVID Policy (ZCP). All the views expressed below are our own. Other people may well choose to interpret the available data and historical record differently, and that is their choice; such is the joy of living in a democratic country where the right to free speech is protected.

As readers will be aware, the ZCP has suddenly and unexpectedly become a rapidly evolving topic owing to unprecedented demonstrations in at least 20 Chinese cities (as with anything in China, we have no idea what is really going on because the narrative is sanitised/controlled by the “great firewall” and oppressive surveillance). The original topic was going to be an explanation of why a relaxation of the ZCP seemed very unlikely.

Now this is happening, Aesop’ s fables spring to mind: be careful what you wish for. Equally, the motivation for this action may not be what one first thinks. The comments below reflect the situation as of 7 December 2022 and, given the speed with which things are moving, some of this content may become out of date quite quickly.

China gifted COVID to the world and, whilst the debate over its origins rages in the background, it cannot be denied that the severity and rapidity of the virus’ spread in Wuhan was not made as clear as it should have been to the wider world in December 2019/January 2020. Again, readers can decide for themselves who they think is to blame for this. Our view is that the World Health Organisation was pressured by (its major donor) China to play the outbreak down.

Even in mid/late January when it became apparent that a novel coronavirus was causing severe respiratory illness, the outbreak was believed to be localised and many thought it could be contained as SARS was. The global pandemic emergency was not declared until March 2020, by which time the horse had already bolted and SARS-CoV-2 had spread across the globe.

As the majority of humanity looks back on the pandemic as a largely historical event, with the return to normality most obviously epitomised by the football festival of the World Cup (there are some suggestions that it was TV coverage beamed into China and the realisation that the rest of the world was living very differently that started the protests), some may feel a degree of schadenfreude that China has continued to shuffle along in a permanent rolling lockdown as the rest of the world has moved on.

This perpetual state of emergency has incurred massive curtailments to free movement that have clearly decimated the economy, especially for the young; youth unemployment is very high and the housing market is imploding. Those brave enough to talk to foreign journalists speak of feeling hopeless.

Again though, we would caution against such a smug view. This is not karma, it’s just another terrible policy decision writ large. China is not hermetically sealed off from the rest of the world. Viruses are ever changing and the petri dish of several hundred million unvaccinated and previously unexposed people amongst this 1.4 billion populous could yet deal us all another nasty surprise; the gift that none of us want.

Vaccines, variants and values

Readers will doubtless have a range of views on the topic of re-opening and learning to live with the virus; the UK went earlier than many but the subsequent epidemiological data broadly supports this decision in our opinion. As China’s policy pivot amidst growing economic consequences and civil unrest surely demonstrates, this was an inevitable and necessary step. You cannot lock people down for ever.

There will always be vulnerable people who need to take precautions, but the virus must be allowed to circulate amongst the wider population to provide that background immunity to keep symptoms mild. As brilliant as the vaccines are, they reduce severity not transmission and offer 4-6 months of optimal protection and that protection wanes faster in those with no background exposure to the virus.

The challenge for China is threefold. Firstly, its inflated sense of national pride promoted it to go it alone on the vaccination front. However, we have empirical data from Chile, Peru and Brazil that neither Sinopharm’s BBIBP-CorV vaccine nor CanSino’s single-shot Convidecia were comparably efficacious to Western vaccines (mRNA or Astra’s Vaxzevria). Convidecia was finally granted an emergency use licence (EUL) by the WHO in May 2022, 18 months after the first such licence was granted to Pfizer/BioNTech. Sinopharm was granted an EUL in May 2021 and SinoVac’s CoronaVac in June 2022.

From what foreign media in China have been able to report, the perception of the vaccines inferiority is widespread inside the country. There are now seven domestically produced and authorised vaccines (five inactivated virus, one viral vector and one viral subunit vaccine) and very little is known about the real-world efficacy beyond what we learned in South America early on in the pandemic.

The second challenge, which may well be related to the first, is that vaccine take-up has been low amongst the most vulnerable group –the elderly. Whilst about 90% of China’s population is vaccinated (primary series: so two doses of BBIBP-CorV or a single-shot of Convidecia), the timing of these vaccinations is unknown (the national campaign began in December 2020 and two billion doses had been given by August 2021, so it seems fair to assume the majority of that 90% was done last year), and there is very little data on the durability of protection offered by these inactivated vaccines, since no-one else is using them.

Even with the more potent and effective mRNA vaccines, we know their protection wanes after time and boosting is necessary in elderly/vulnerable populations. If you are an elderly American, you have likely now had your fifth dose of mRNA vaccine and that last booster will have been an updated bivalent formulation that more adequately reflects the current situation, which is some 300-odd circulating variants that are derived from the highly differentiated “omicron” (B 1.1.529) lineage that emerged in South Africa in late 2021 and caused a global second wave of infection in Q1 2022. There is no approved Chinese vaccine containing omicron lineage material, although several such mRNA vaccines are under development.

The uptake of booster vaccines in China is much lower. We have struggled to find clear data on this topic. On 28th November, a Chinese government official said that only 40% of people over 80 had received more than their primary series (and around 70% of those over 60), whilst also claiming that the primary series was still offering protection to the elderly (which we personally doubt is true to any meaningful extent if you received your shot in early 2021). China has ~265mn over-60s and >35mn over-80s.

For reference, 96% of the deaths in the March/April 2022 Hong Kong omicron wave were people aged 60 or older and 70% of these were unvaccinated. Over the first five months of the year, more than 9,000 COVID fatalities were recorded in Hong Kong. In contrast, China claims (and presumably the population believes) that only ~5,250 people have died in mainland China since the pandemic began! (There are 7m people in Hong Kong, vs. 1.4bn in mainland China). One could reasonably argue that, as far as we know, around a third of the 265m elderly people in mainland China (i.e. 89m) are as good as unvaccinated.

Whilst one can criticise China’s vaccine development and rollout, it is difficult to deny the effectiveness of the COVID surveillance that has gone on for the past two years. You need a PCR test and linked smartphone app to travel anywhere, even within your home city. This has kept the background level of circulating infection very low. We could reasonably postulate there are hundreds of millions of people in China who have never been naturally exposed to SARS-CoV-2.

In contrast, the UK ONS estimates that at any given time 1.6% or one in 60 people are infected with SARS-CoV-2. This is actually low at the moment and will rise in the coming weeks. Since omicron lineages became dominant in early 2022, the estimated positivity rate has averaged around 3%. With an infection cycle lasting about a week, it is not unreasonable to imagine that the virus passes through us all at least once every year. Because of repeated exposure and vaccination, most of these cases are mild and a lack of mass testing means many of us don’t even realise that we have had it.

The third challenge is one of infrastructure. We spend a lot of our time talking to people about healthcare and it is interesting that most people perceive China to have an advanced healthcare system. To the extent they have seen any images of a Chinese medical facility, it is in a Tier One city like Shanghai and would appear very modern. However, this is not the reality for the majority of citizens.

A cursory examination suggests China to scores well versus OECD peers: 2.5 doctors per 1,000 people vs. 2.0 in the USA and 6.7 hospital beds per 1,000 people versus 2.9 in the US. However, beds mean very little; it’s just a place to lay down. Similarly, not all doctors are the same: being a primary care physician (PCP) is one thing, but having secondary and tertiary interventional medicine is what keeps people well. All a PCP can do is make recommendations and prescribe drugs.

The US has four times the density of Intensive Care facilities compared to China and yet it still struggled hugely during the first wave of COVID to meet demand. Indeed, one could argue that the whole ZCP approach is not merely another opportunity for an authoritarian dictatorship to enhance control and retain power, but the logical policy conclusion of a country that knows it could not possibly cope with an uncontrolled outbreak of COVID.

Various groups have sought to model what might happen in China during an omicron wave, based on what happened in Hong Kong as the nearest cultural proxy, whilst adjusting for the lower vaccination and booster rates and lack of hybrid immunity (i.e. ongoing natural exposure) within mainland China. The law of big numbers inevitably comes into play: for example, the UK predictive health analytics company Airfinity forecasts China could lose 1.3 million to 2.1 million people if it lifted the ZCP.

In summary then, China is nothing like the rest of the world. Its vulnerable population is not adequately vaccinated, it has minimal recurrent exposure to SARS-CoV-2 and lacks the infrastructure to be able to cope with a mass outbreak of the virus, especially now that it is dealing with the highly transmissible variants arising from the omicron lineage. These are the three tenets on which we built our (incorrect) assumption that the ZCP would persist until the country had developed its own omicron-derived mRNA vaccines and deployed them (which we were going to suggest would be some time in 2024).

These mRNA vaccines are probably not that far away. There are several in development, the most advanced of which is AWcorna/ARCov (also known as the Walvax COVID-19 vaccine). This has been licensed in Indonesia under an EUA since September 2022. In contrast to the Pfizer and Moderna mRNA vaccines, it primarily targets the receptor-binding domain of the W1 spike protein rather than the whole protein itself.

Phase III clinical trials are ongoing and even preliminary results have not yet been published, so it is unclear on what basis the Indonesian regulator made its approval decision. The Indonesian drug agency (BPOM) has suggested that the virus has an efficacy of around 71%against omicron (whatever that means – presumably avoiding hospitalisation and death).

Protests, Politics, Power

Why then are we now seeing a pivot toward a more relaxed attitude to the virus? Officially, it is because the omicron (“BA.5”) lineages are less lethal than previous strains and thus warrant a different approach. A Chinese government spokesperson even went so far as to suggest that the terms “COVID-19” and “COVID” should no longer be used to describe the illness caused by the omicron lineage virus, since it is such a different (i.e. milder) proposition. Leadership within central government for this initiative appears to have come from Vice Premier Sun Chulan (who is soon to step down).

This comment about omicron being “less pathogenic” is patently untrue, as Hong Kong’s Easter 2022 omicron wave amply demonstrated. COVID has always been a mild disease for the majority; the problem is that a significant minority suffer considerable morbidity and mortality. Even in heavily mRNA-vaccinated Western countries, where omicron lineages dominate a small proportion of deaths are still attributed to COVID (the condition still accounts for around 300 deaths per week in the UK for instance, or about 2.5% of weekly deaths).

With regard to China, we have little real-time data on which omicron lineages are circulating in China; the country is less transparent than we are in the West, making it is even more difficult to assess the validity of these comments. The omicron family has continued to mutate and to evolve, increasing transmissibility and, to some extent, immune escape. This is what drives the recurrent waves of the disease.

The “BQ.1” and BA 2.75/omicron X” are the current variants of interest and have increased immune escape potential from prior exposure/vaccination versus previous strains. China has experience of SARS-CoV-2 in an unprotected population from Wuhan of course and that was grim enough. However, that was the W1 strain. It is estimated that the basic reproduction number (R0) for W1 was 2.4-3.1. In contrast, reported R0 values for omicron in the initial outbreaks have ranged from 8-24!

Japan, which has been praised for its robust control of COVID, is experiencing a new wave of omicron at the moment and this is gathering pace despite ongoing social measures (and very high compliance with them) and high rates of vaccination and boosting with the bivalent mRNA vaccines. Perhaps in time we will see that a new BA.5 derived variant is driving this new wave.

It has been estimated that the R0 of omicron has increased further by about 10% over the past six months, but the RE continues to be lowered by a combination of vaccination and behavioural/legislative modifications in various countries. Simply put, this is now a virus that is so transmissible it could not be contained by anything less than the draconian policies enacted in China, and even then they have struggled to stop outbreaks.

We have no idea if these strains are more lethal to a population lacking vaccination or prior exposure, since no such population exists outside China. In this context, we find the comments from the Chinese government nothing short of breath-taking. Why would the CCP be willing to let this genie out of the bottle in such an uncontrolled manner?

Perhaps the answer is an economic one. The country’s development goals are increasingly challenged by a rapidly slowing economy and rising unemployment as consumers spend less and China is seen as an unreliable partner for manufacturing and supply.

Or perhaps the answer is political. The protests that swept across China in late November and early December represented the most serious challenge to the authority of the Communist Party (CCP) since the 1989 student protests that led to the Tiananmen Square massacre, in which it is alleged that 2,600 protestors were killed.

Rather than resort to military action, the CCP appears to have quelled the current wave of dissent through a clever pivot. Various jurisdictions have begun to ease testing and quarantine requirements and visibly removed infrastructure such as COVID testing booths.

Testing booths were removed in Beijing on Friday 2 December and on Saturday 3 December, Shenzhen, Chengdu and Tianjin announced they would no longer require people to show a negative COVID test result to use public transport or enter parks. Guangzhou and Zhengzhou also announced an end to daily mass testing for those who do not need to leave home frequently. Haizhu district went further, saying only those in certain employment sectors will be required to test daily. As of 7 December, we are aware of 20 local authorities publicly announcing rollbacks of prior COVID containment measures that impact daily life for non-infected citizens.

Initially, the most noteworthy aspect of this development to our minds was its apparent direction from local government officials rather than at the national policy level. It is difficult not to conclude that certain local officials had been given an impossible task – rollback onerous requirements while also preventing an uncontrolled outbreak. This continues to be a rapidly evolving situation though and by Wednesday 7 December, the central government had issued a list of guidelines for local authorities to follow, leaving the populous in no doubt as to who is directing the policy shift (and thus responsible if it all goes wrong).

The End Game

The loosening of COVID restrictions is going to go one of two ways. Either the country will pull off a miraculous dodge and gradually move toward a Western style “living with the virus” approach without a massive wave of infections, morbidity and mortality or it will experience a huge COVID wave as Hong Kong did.

In light of the latter, what would the government do? Surely it would be forced to respond with the reimposition of previous measures or possibly even a return to the draconian lockdowns of before. The CCP could blame the local regions for their lack of care; heads will roll, but not at the top (Sun Chulan is gone either way).

This may not work, however. The central government has clearly said omicron is less dangerous and has now laid down rules that limit the restrictions local government is allowed to impose to contain outbreaks. If one were a local official facing the blame for a wave of COVID, it would be very tempting to point the finger upward.

Even if a worst case scenario comes to pass, would a populous terrified by news stories of a plague wave on their doorsteps be so willing to criticise the government or gather in numbers to protest? One doubts this and, even if it were to happen, the government would have a public health justification for quelling such gatherings.

Either way, we will not have to wait long for an answer, since we know from prior history that the omicron lineage of the virus will spread very rapidly. Even if there is less testing, the spike in cases and latterly hospital admissions will tell.

We sincerely hope, against all rational expectations, that this situation unfolds positively. The worst case scenario would be a huge outbreak that leads to not only significant morbidity and mortality in China, but also a novel variant which then triggers another wave of COVID beyond China’s shores.

Such a scenario will be very difficult to manage with the global economy already on its knees, not to mention the psychological impact of going back to lockdowns having only recently moved beyond several years of painful disruption. Once again, the world stands by as a vast and unprecedented social and public health experiment takes place before our eyes. The problem with genies is that they are much harder to get back into the bottle than to summon out of it.

This is our final missive of the year. We wish all of you and your families a happy and relaxing Christmas and we all hope for a saner and more positive geo-political and macro-economic backdrop in 2023. You never know…

We always appreciate the opportunity to interact with our investors directly and you can submit questions regarding the Trust at any time via:

shareholder_questions@bellevuehealthcaretrust.com

As ever, we will endeavour to respond in a timely fashion and we thank you for your continued support during these volatile months.

Paul Major and Brett Darke