Covid-19 risks for China

Xi Jinping's global ambitions undented

The Covid-19 outbreak has not dented President Xi Jinping’s ambitions for the great rejuvenation of China. It has, however, amplified China’s risks, even as the Chinese Communist Party claims that the country’s response was successful and validates its political system. Xi Jinping’s political dominance, the end of collective leadership, and rise of the CCP’s role in all aspects of society and economy leave him particularly vulnerable should China fail to contain fall-out from the epidemic and expand the economy. Alternatively, should the party continue to prove its resilience and ability to suppress dissent, manage public perception and oversee an economy increasingly dominated by the state, Xi Jinping stands to gain domestically.

As Covid-19 cases decline in China and increase elsewhere, China’s leaders and propagandists are revelling in the CCP’s success in containing the virus. While China’s propaganda apparatus trumpets the country’s provision of technical and material assistance to its friends around the world, it reflects a tin ear for the concerns of recipient countries whose publics increasingly realise that the loss of manufacturing capacity leaves them dependent upon China’s conditional largesse.

While Xi Jinping’s status at home has been bolstered by the outbreak, domestic frustration with the government has grown and China’s image abroad has suffered. The initial cover-up and politicisation of public health, like all aspects of Chinese society, reflect the underlying fragility of the country’s system of governance. The outbreak revealed the shortcomings of the country’s medical system, which attempted to institute reforms in 2009, as well as the failure of the infectious disease reporting system developed after the 2003 outbreak of severe acute respiratory syndrome.

The average person in China was able to ignore curbs on individual freedoms when the social contract provided improving quality of life and material wealth. But urban lockdowns, intercity travel bans and social controls implemented by work units and neighbourhood committees reflected a pre-1979 society that Chinese citizens have no desire to return to.

The economic impact of the pandemic presents myriad risks to China and Xi Jinping himself. Xi is unlikely to achieve key, high-profile political-economic targets, including the goal of achieving a ‘moderately well-off society’ this year, which may hurt his stature within the party.

As China’s businesses begin to restart, China faces not only the lack of economic activity from its lockdown, but also a global economic slowdown. This will weaken demand for China’s manufactured goods, even as Chinese officials press firms to restart production.

Injections of liquidity for the banking system will worsen China’s debt-to-GDP ratio, which was more than 300% before the outbreak. China’s state-owned enterprises will become mired even deeper in debt, worsening the balance sheets of China’s banks. China’s four major asset management companies, founded in 1998 to off-load the bad debts of China’s banks in the aftermath of the 1997 Asian financial crisis, will probably be key players in a necessary restructuring.

While the financial sector in China grapples with the stresses brought on by Covid-19, how the Chinese public deals with an economic slowdown, and how the CCP manages the social risks of a weak economy will affect not only the party’s legitimacy in the eyes of China’s own people, but the global perception of China as well.

Xi Jinping, however, is fortunate to head an organisation that has proven itself to be extremely resilient.

Xi Jinping has positioned himself, and the CCP, to take credit for bringing the epidemic under control. His grip on power remains firm and potentially even enhanced as China characterises its ‘battle’ over Covid-19 as a victory. Whether the world shares that opinion is another matter.

Drew Thompson is a visiting senior research fellow at the Lee Kuan Yew School of Public Policy, National University of Singapore and a former US Defence Department official, responsible for managing bilateral relations with China, Taiwan and Mongolia.

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