This is a guest post by George Magnus, an independent economist and commentator and research associate at the China Centre at Oxford University and at the School of Oriental and African Studies, in which he warns of the destabilising impact the Coronavirus will have on the world’s relationship with China.
Frosty doesn’t begin to describe the current relationship between China and the US, and a growing list of other countries.
No one can say for sure how the complex pieces of this geopolitical kaleidoscope will settle. There is no question, though, that the coronavirus pandemic has opened up a new and dangerous front in tensions between China and the West, which will cast long shadows over the global system long after the worst of the pandemic is behind us.
It has also rocked China’s economy in ways that no one predicted, compounding the structural headwinds that were in any event pointing to a decade of much slower economic growth. More suddenly than we could have expected, China now has a major unemployment problem. From an economic perspective, we may have arrived at what we could call ‘Peak China’. Put another way, it’s the moment when a major demand shock and balance sheet and other growth-sapping economic factors are colliding.
It is worth pointing out that a rising China in Asia and the world over the last decades has been founded on growing economic strength and self-confidence in an extraordinary globalisation from which it benefitted greatly. Nothing in this last sentence is the same in a post-pandemic world. The so-called trade war was already stirring a much more unfavourable external environment for China from the standpoint of trade and foreign direct investment. The pandemic has jolted governments around the world to re-think China relations, and confirmed the doubts of companies already reconsidering supply chain strategies and the vulnerability of sole-source suppliers.
Decoupling in some Washington circles, and self-reliance in others in Beijing are opposite sides of the same coin, and speak to a deep chill and fault line in trust relations. Under better circumstances, these were making China more prickly and truculent in its relations with others. Economic insecurity and other consequences of the pandemic are now adding a sharp frisson to international relations in which narrative, pushback and riposte are contributing to create what we might call a more virulent China Pique. Perversely, Peak China is likely to make this worse.
It is worth noting though that before the pandemic hit the world out of the blue, the much fabled and inexorable rise of China in the global economy had come up against a familiar rival. China’s share of world GDP had risen, as is well known, from about 3 percent in 1980 to about 16 per cent in 2019. Less well known is that America’s share of world GDP which had fallen from 25.6 to 20.4 per cent by 2010, bounced back to almost 25 per cent last year.
There’s no beating about the bush about China’s decades-long accomplishment, but in the last decade, it wasn’t at the expense of the US. The coronavirus pandemic will play havoc with everyone’s economic numbers in 2020-21 but it should no longer be regarded as a shoo-in that China will be the world’s largest economy any time soon. I thought this before because of slower growth in China and what I think will be a significant depreciation in the Yuan. Peak China and the US economy’s extraordinary capacity to cycle between decline and optimism don’t hurt the argument.
Meanwhile, the structural headwinds China was facing anyway in the 2020s, arising from over-indebtedness, demographics, low productivity and weak institutions, have just become a whole lot bigger and more intractable. I looked at all of these in some detail in my book ‘Red Flags: Why Xi’s China is in Jeopardy’, and can only confirm that post-pandemic, they will all be bigger problems than before partly because the economy will be weaker, and partly because policy-makers will have fewer options and be less willing to risk their principal obsessions – ‘stability maintenance’ and control.
Over-indebtedness is already hampering the government’s response to the current crisis, and exacting a toll on future economic growth. The Yuan, as stated, is likely to depreciate, perhaps considerably so in the next two to three years. China is still ageing faster than any other nation on Earth and the weaknesses and shortcomings in its social and healthcare insurance systems are being exposed by the current crisis, adding to the need for responses that will place additional downward pressures on growth.
Fundamentally, China needs reforms to income and wealth distribution, social security, local government finances, the tax system, urban registration and labour mobility, property rights and ownership, and the balance between SOEs and the private sector. These would ensure this crisis didn’t go waste, but few are anywhere near the agenda of the leadership.
Some of the damage to the economy from the pandemic, especially as it affects the climate for employment and SMEs, will not be repaired quickly. If, as some analysts think, China’s unemployment rate is now somewhere either side of 20 per cent and graduate employment prospects are the worst ever, there are truly reasons for worry. If SMEs, many of which take on a high proportion of graduates, are going to continue to suffer economically and be sidelined politically, the outlook for entrepreneurship and commerce is not propitious.
Where was China’s pandemic stimulus?
One of the surprising things about China’s responses to the coronavirus crisis has been its relatively weak policy response, certainly compared with Western countries. True, the People’s Bank of China has been active in offering liquidity, and lowering reserve requirements and interest rates. Yet, we have seen nothing close to the quasi-fiscal lending programmes thrown at the economy in 2008-09 (14 per cent of GDP) and again in 2014-15 (credit growth surged to 20-30 per cent), the latter precipitating the financial crisis in 2015-16). There has been much in the way of temporary bridge financing, and a plethora of measures aimed at supporting firms and boosting infrastructure, and doubtless there will be more.
At a Politburo meeting on 17 April, chaired by Xi Jinping, the leadership reaffirmed a commitment to expand domestic demand, and ‘resume work, resume production and resume business’. However, the part of domestic demand that was singled out was infrastructure investment, which was regarded as having a stronger multiplier effect than consumption or trade, and being less restricted by the coronavirus epidemic. While there may be some initiatives to support consumption (some local governments have distributed consumption vouchers), much of what the government is likely to back is bond issuance and other schemes to help finance both traditional and new infrastructure investment.
We haven’t seen, as in the West, significant direct measures to support income for workers so as to prop up demand. China’s social insurance system is stronger than it was but is not strong. Unemployment coverage is limited, and its benefits meagre. The bulk of China’s 280m migrant workers are not eligible, and much less than half the urban labour force is covered. What the government has done is to persuade state-owned enterprises not to shed workers, and offer cash to some firms to cover their unemployment contributions, but these measures are more band-aid than demand stimulus.
China’s more sotto voce economic outlook doesn’t mean the end of GDP growth, its fabled middle class, or its ability to develop new and innovative products. Yet, the economic platform which gave rise in the last decades to high expectations and self-confidence, burgeoning prestige, and such prominence in the international hierarchy may no longer be able to support such a heavy weight.
While Chinese politics are murky at the best of times, and few really understand the machinations of the Communist Party, it seems reasonable to assume that a heightened sense of economic insecurity in an authoritarian society will lead to a more closed and more edgy China.
New geopolitical front
At the current time, an industry has erupted seeking explanations for how China’s demographics, culture, animal husbandry, and regulatory environment combine to create an environment in which zoonotic diseases flourish. China isn’t the only country in which major epidemics have hatched but Covid19 is the latest in a series.
While animal markets may be the proximate focus for most people, the issue almost certainly lies in the nature of China’s regulatory state. It has laws aplenty, of course, but regulations exist in a political environment featuring weak laws, inadequate legal institutions, few civil society institutions, misinformation, secrecy and censorship. Many of these shortcomings have featured in commercial relations for years, but now in public health, they are personal, and not just for Chinese citizens.
Beyond these matters, the most sensitive suggestion, propagated by the Trump Administration, is that it ‘has seen’ evidence purporting to show that the coronavirus emanated accidentally from a laboratory (the Wuhan Institute of Virology) that everyone knew had been investigating coronaviruses. Much of the US Administration is now pursuing investigations directly or indirectly related, even though neither US intelligence nor Anthony Fauci, the Chair of the US National Institute of Allergic and Infectious Diseases, is persuaded.
The more the White House repeats the allegation without showing evidence or proof, the less plausible the charge rings. Yet by the same token, the less willing China is to entertain any thought of a WHO-led or impartial and independent enquiry into the causes and consequences of the coronavirus so that the world can learn how to avoid mistakes in future, the less the speculation will go away. In this sense, the Communist Party is its own worst enemy.
See below, for example, how it compares with the United States in the World Bank’s Global Governance Indicators:
Its craving for stability and control, and its institutionalised demand for good news and the suppression of discussion, lay behind decisions to censor, and cover up crucial information, and mislead and deceive for six-to-seven crucial weeks before Wuhan was locked down on 23 January.
It has tried strenuously to deflect attention away from this period.
One strategy was to supply badly needed global public goods in the form of masks, medicines, ventilators and other equipment to various countries in Europe, including the UK and Italy, and the US. Many countries welcomed them though some, including the UK, Netherlands, Spain and the Czech Republic found that defective equipment made some goods unusable. China also moved to organise crisis responses in several countries in central and eastern Europe, the Middle East and Africa.
Another was to step up to global governance and leadership in health, and other areas, exploiting the plight of the US and the political distancing of the Trump Administration from global bodies. China’s influence in the WHO was doubtless helped by the White House’s recent abrupt decision to suspend funding. Yet, China has also been pressuring the UN to adopt its technical internet standards and protocols, as well as telecommunications technologies. It was recently elected on to a panel of the UN Commission on Human Rights. And had it not been for US intervention, it would have provided the head of the World Intellectual Property Organisation.
The irony of having China play such prominent governance roles in these areas, specifically in international agencies, is extraordinary.
Yet another has been to accuse the US and others of being incompetent or inferior in their Covid crisis responses. Foreign Ministry officials, including the now well known Zhao Lijian, and diplomats have engaged in ’Wolf Warrior’ diplomacy (named after the 2015 film) to deflect western criticisms of China concerning management of the pandemic. Party officials have charged clumsily that the US military and Italy were responsible for the virus, stepped up military activities in the South China Sea, and raised the level of intimidation against both Taiwan and Hong Kong.
Nevertheless, China’s diplomatic offensive looks largely to have backfired. US law-makers have sought to introduce various bills looking to sanction China’s leaders, launch formal investigations, remove China from US pharmaceutical supply chains, and pressure Beijing to change animal hygiene regulations. There has also been pushback by France, Germany, Sweden, the EU, Japan, India, Brazil, South Korea, Singapore, a score of African nations, including Ghana and Nigeria, and the UK where the Foreign Secretary Dominic Raab, has said there’s no going back to ‘business as usual’ in the China relationship, and Conservative back-benchers have demanded a reversal of a decision to consider admitting Huawei to part of the 5G communications rollout.
In the US, President Trump can be expected to milk anti-China sentiment for all it is worth as he battles for the presidency in November. The sentiment though crosses party lines, and the Democratic party will certainly play its own card as it sees fit.
In China, the Communist Party also seems in no mood for compromise. According to a recent Reuters report, a Ministry of State Security think-tank reported to the Communist Party leadership last month that global anti-China sentiment was at its highest since the Tiananmen Square crackdown in 1989, and that, worst case, China would have to be prepared for conflict.
This may seem alarmist, but President Xi Jinping has primed his country already. In 2019, as trade war tensions were brewing, he referred to the ‘Chinese Dream of the Rejuvenation of the Chinese People’, a few times highlighting long struggles ahead and about the ultimate victory of socialism over capitalism. No one can know how this rhetoric will play out as circumstances evolve, especially inside China.
At the end of my Red Flags book, I wrote that China faced daunting economic challenges but that we should never ignore what these might imply for the Communist Party’s politics and survival instincts and for its governance system at home and abroad. The pandemic can be seen as another significant red flag pointing to a brittleness in Xi Jinping’s China, which would make it more unpredictable and volatile.