The negative economic consequences from the virus outbreak, in addition to the economic punch the Chinese economy is taking from the trade war with the United States, will accelerate the shift of some businesses and foreign direct investment to Southeast and South Asia to create an alternative production network.
This is not good news for a regime that has bet its political life on the Faustian bargain that citizens will forgo political rights in exchange for a stable socio-economic environment in which their lives improve tangibly year by year.
The question for China watchers is whether Xi and the Chinese Communist Party will weather this viral storm and emerge strengthened from the crisis or whether Xi and the CCP will be damaged beyond repair, resulting in a cascade of unpredictable consequences for China, Japan and the world.
As of Thursday, Xi has responded forcibly to the COVID-19 crisis. At the national level, the response by Xi and the CCP, while harsh, has been responsive and necessary to prevent the epidemic from spiraling further out of control.
At the political level, local officials have already been replaced by Wang Zhongli, head of the Communist Party in Jinan, the capital of Shandong province. He has been appointed the new party chief in Wuhan, the center of the outbreak. Shanghai Mayor Ying Yong is replacing Jiang Chaoliang as party secretary in Hubei province, of which Wuhan is the capital. Both are close allies of Xi.
By placing long-standing and trusted allies in the epidemic’s epicenter, Xi is sending the strongest message to Chinese citizens that he and the party are not equivocating as to their commitment to quickly get control of this viral outbreak.
By quarantining entire cities, extending the Lunar New Year holidays and mobilizing all of the state’s resources to stem the spread of COVID-19 beyond the immediate epicenter, Xi and the party have gained some political capital with Chinese citizens. For many, it reinforces the narrative that a one-party system is the sole political system that can effectively marshal the resources to deal with a crisis of such magnitude.
The potential lesson for Xi and the party here is to double down on the centralization of power in order to steer China through the increasingly complex labyrinth of challenges it is going to face in the coming years and decades.
This narrative is becoming more difficult to maintain as holes are beginning to appear in the great fire wall that allows the Chinese state absolute control of the media, social media and the spread of information.
Savvy Chinese citizens are finding ways to critique not only the local response to COVID-19 but also Xi and the party themselves. Coded text referring to the mismanagement of the outbreak, prominent scholars such as Tsinghua University’s professor Xu Zhangrun’s releasing photos on social media (to avoid censors) of his hand-written critical essay titled “Viral Alarm: When Fury Overcomes Fear,” odes to the late whistleblower Dr. Li Wenliang, who died from COVID-19 after being forced to sign a policy document stating that he violated Chinese law and was guilty of “seriously disrupted social order” are the tip of the iceberg when it comes to displeasure as to how the COVID-19 epidemic has been handled.
Chinese netizens are even questioning why their government is spending huge amounts of money abroad in mega-projects like Xi’s signature initiative, the Belt and Road initiative, when their social welfare system is inadequate to manage the COVID-19 crisis.
The silenced majority in China are fully aware and resent the power consolidation that has occurred under Xi. They understand that the tangential link between the frozen decision-making process by Wuhan officials and the calamitous response to the outbreak is related to their fear of being targeted by Xi’s often politically motivated anti-corruption campaign.
There is also the economic shock that has come in the wake of the outbreak. The temporary shutdown of the economy has meant that the income normally generated during the Lunar New Year holiday plunged to record low levels.
Simultaneously, the quarantine of Wuhan and Hubei province, the home of an important automobile manufacturing hub for many global brands, new high-tech industries in places like Optics Valley, and high-tech industries (including opto-electronic technology, pharmaceutical, biology engineering, new material industry and environmental protection), has disrupted supply chains and, saliently, confidence in the China-centered global production network.
The high-tech sector and service sectors have also been negatively affected. Apple and other high-tech firms have shut factories, and retailers such as Starbucks have closed indefinitely or scaled back services. Crucially, both represent industries that current economy policies are focused on expanding as China transitions away from a manufacturing-heavy economy to a high-tech and service-based economy.
These disruptions seen alongside the increased costs of doing business in China associated with the U.S.-China trade war will accelerate the selective decoupling process that has been occurring.
This is consequential because once supply chains reconfigure to deal with the increased costs of doing business in one country or another, they rarely shift back. Those firms that shifted their supply chains prior to the “phase one” trade deal have not returned to China. We should not expect supply chains that shift in the wake of the COVID-19 epidemic to return to China either.
This has weighty consequences for Xi and the party. If supply chains shift away from China, so does the infusion of technological know-how that comes with foreign firms doing business in China. This would slow or impede China’s efforts to move up the economic-value chain and make it more difficult to achieve the Made in China 2025 strategic development goals.
More importantly, this consequential disruption in the China-centric global production model could derail the CCP’s twin goals of realizing “socialist modernization” by 2035 and building “a modern socialist country that is strong, prosperous, democratic, culturally advanced and harmonious” by 2049.
In the eyes of many in the global community, the rapid spread of COVID-19 in China has been largely linked to the deepening authoritarian rule under Xi and how that has eroded the decision-making process to respond flexibility and appropriately to local crises.
The likelihood that Xi and the party come away from the COVID-19 crucible unscathed is highly unlikely. Chinese citizens are already voicing their concerns about the fragile social welfare system, and, ironically, like the Hong Kong protests of 2019, there is a steady increase in demand for transparency, accountability and freedom of speech.
Xi and the party may be able to manage some of these demands in the short term. However, the real conundrum for Xi and the Chinese leadership is how to maintain stable economic growth as China faces an onslaught of downward pressures on the economy.
For Japan and other countries that have important economic relations and often political differences, with China, the COVID-19 epidemic is unsettling but it is also an opportunity to rebalance their bilateral relations with China.
Overdependency on trade with China, on Chinese tourists and on students has led to the real risk of having an economic portfolio that is too concentrated on one country and in this case, being uniquely vulnerable to a black swan event in China that can have serious economic consequences.
Japan and other states need an Indo-Pacific security and economic policy that includes China but is not solely focused on China. Working with middle powers and institutions such as Australia, ASEAN, India, Canada and others can help states both maintain a strong relationship with China but also a balanced one.
Stephen R. Nagy (@nagystephen1) is a senior associate professor at International Christian University and a visiting fellow with the Japan Institute for International Affairs.