China Probed Covid-19 Policy Leaks by Ex-Government Officials

China’s heightened scrutiny of the expert-network firms that investors and international businesses rely on for information about the country began much earlier than is commonly believed. 

Last autumn, in a previously unreported investigation, national-security agents showed up at some of those firms looking to track down leaks around China’s highly sensitive Covid policies and vaccine strategy. The investigators asked people at one consulting firm in Shanghai if they had arranged meetings or calls with experts who had inside knowledge of the country’s healthcare policy, according to a person familiar with the matter. 

The investigators presented a list of names of experts, as well as times and dates of meetings at which those individuals spoke, the person said. The list included a former policy researcher at a regional outpost of China’s National Health Commission, the person said, adding that the investigators wanted to know who had been asking for the information and what the consulting firm’s clients wanted to know.

The national-security visits show that Beijing’s concerns about information leakage around crucial policy decisions were building months before authorities rattled the foreign business community with raids on expert-network firm Capvision. Those raids were touted in a news program on state television in May that alleged some Western countries have stolen intelligence and information in sectors such as military, economy and finance.

Chinese medical experts’ insights were highly sought after by international and domestic investors in the second half of 2022, when Chinese stocks were unusually volatile and speculation was rife that China’s leadership was considering changes to a strict zero-Covid regime that had battered commercial and economic activity.

In October and November, Hong Kong’s Hang Seng Index—which is driven mainly by Chinese stocks—rose or fell by more than 5% on six different days.

It isn’t known if the investigations into Covid leaks are continuing. China’s State Council Information Office, which handles media inquiries on behalf of the Chinese government, didn’t respond to a request for comment. 

Chinese authorities’ crackdown on the loosely regulated expert-network industry has sent a chill through what had been a booming business in the country, where clients paid as much as $10,000 per hour to gain an information edge. 

In the U.S., expert-network firms have at times been caught up in major insider-trading cases, where paid consultants provided confidential information to hedge funds that traded on it. Such activities flouted the Securities and Exchange Commission’s rules around selective disclosure, leading to convictions of employees of expert-network firms and fund managers. 

In China, people who have interacted with paid experts say some of them aren’t as cognizant of what they can or can’t disclose in private conversations with investors.  

The recent investigations and raids on expert-network firms will deter investors from trying to get information about China, which could also make foreigners less eager to invest in Chinese companies, said Andrew Collier, managing director of Orient Capital Research in Hong Kong. 

The worry is that “if they ask any questions, their people could be thrown into jail,” he said.

Collier said China’s sharpened focus on national security also carries “an implied threat that any interaction with the West can be potentially dangerous for the state.”

The recent pattern of tougher enforcement has included a raid on U.S. due-diligence firm Mintz, questioning of staff at consulting firm Bain, the arrest of a Japanese pharmaceutical executive and a drumbeat of official warnings about espionage. It has raised concerns about the safety of doing business in the country, particularly back at headquarters, where China-related risks are getting closer scrutiny.

Capvision didn’t respond to a request for comment. Bain, which previously said it is cooperating with Chinese authorities, said it has no additional comment. 

Financial institutions, including banks and brokerages, have been among the biggest clients of Capvision and other expert-consulting firms. Hedge funds and asset managers will routinely pay to get tips, nonpublic information and unique insights that could help them profit from trading stocks. 

Last fall, the question was Covid, and expert-network firms were peppered with requests from asset managers and financial institutions, according to people familiar with the matter. The most sought-after experts were those who could speak about China’s Covid-19 policies and the country’s vaccine-approval process, which would help determine how quickly the country could open up.

The value of such information was made clear during a Citigroup event in early November in Hong Kong, where a former China government chief scientist spoke at an investment conference for the global bank’s clients.

Shortly after the markets opened on Nov. 4, Citigroup chief China economist Yu Xiangrong interviewed Zeng Guang, a former chief scientist at the Chinese Center for Disease Control and Prevention.

“For our international investors less familiar with Dr. Zeng, he was basically China’s Dr. Fauci,” Yu said at the start of the 50-minute talk, drawing a comparison with Anthony Fauci, the U.S. government’s infectious-disease official who guided the country through the Covid-19 pandemic.

Zeng, who left his government post sometime in 2021, said he didn’t represent any organization and that his views were his own. “Everything we talk about today should be internal communication only,” he said, adding it shouldn’t be shared online or with the media, according to a recording of the webinar that was reviewed by The Wall Street Journal.

Zeng then said he was optimistic that changes to China’s zero-Covid policy were imminent. He added that 90% of the Covid tests in China would be soon eliminated and that the border between Hong Kong and mainland China would open in the first half of 2023. 

“Now Covid-19 policy needs to follow economic development, not the other way around,” Zeng said.

Yu and Zeng then discussed China’s reopening timeline, the progress of China’s domestic Covid-19 vaccine rollout and how to shape the narrative around the pandemic from fear to acceptance, according to the recording.

On the day Zeng spoke, the Hang Seng Index surged 5.4%, while mainland China’s benchmark Shanghai Composite Index rose 2.4%. A Citigroup spokesman said the bank had no comment. 

Zeng’s comments were on the money. The following week, China shortened mandatory quarantine times and eased other pandemic-control measures. By early December, China had scrapped most Covid testing and quarantine requirements.

The stock markets continued a rally that lasted through early 2023. Market participants who looked back referred to the day of the Citigroup event as the “Dr. Zeng Guang Bottom.”

Zeng has continued making speeches and presentations, and last month attended an academic conference on medical disinfection and infection control in Shanghai, according to a Chinese state media outlet. He declined to comment. 

Write to Rebecca Feng at [email protected]