China’s government could be the coronavirus’ biggest victim. The crisis effect on China could be much like the coronavirus itself: Not universally dangerous, but especially so to those whose health is compromised already. While China has long appeared economically and politically robust, several factors have sapped its strength, increasing its vulnerability.
The coronavirus arrived with the new year; by the Chinese New Year, it was already a crisis in China. Moving into March, it threatens to be a global one. If it does not yet qualify as a pandemic, it certainly qualifies as a panic.
Although it does not have a generally elevated mortality rate, it is particularly dangerous to those with other serious conditions. The threat of coronavirus to such people is analogous to the one it poses to China’s communist rulers.
Growing internal pressures have beset China for some time. It began its meteoric economic rise as a low-cost producer, possessing a seemingly infinite source of cheap, dependable labor. No more. China’s days as a low-cost producer are gone and will not return. The investment now flows elsewhere.
China’s authoritarian communist government could guarantee a relatively reliable return. Of course, that same government extracted economically onerous terms — forced technology transfer, intellectual property infringement, and investment restrictions — from foreign investors in return for its surface reliability. The global business world found itself forced to accept them in order to have access to the world’s largest and fastest-growing economy.
When President Trump acted on what the rest of the world knew, China’s façade of reliability began to crack. Trump’s tariffs dramatically raised the cost of China’s exports, and China’s retaliatory tariffs did the same on imports. Suddenly, China was not the reliable market it once seemed. Once again, investors had reason to look elsewhere.
China’s stability once was a given. Its communist government’s political monopoly guaranteed it, even as it relaxed its economic monopoly over the last four decades. Then came Hong Kong. Beijing’s overreach ignited scenes unthinkable since Tiananmen Square — and on a larger, longer scale. While coronavirus has replaced it in 2020’s headlines, Hong Kong was China’s 2019 headline. And it was another reason for foreign investors to look elsewhere.
Even China’s vaunted economy concealed internal weakness. While it raced forward, many overlooked how much was due to government “investment,” in addition to real foreign investments. China’s state-run enterprises are over-leveraged, and China’s good economic numbers conceal much bad debt. China desperately needs to eliminate inefficient state enterprises, reduce overall government subsidies, and write off bad debt. To understand such a scenario’s danger, just look back to America’s financial crisis.
All these factors had signaled to foreign investors to diversify away from China — even before coronavirus. Coronavirus accentuates all these preexisting economic weaknesses. This is particularly true of its over-leveraged state-run enterprises.
The OECD (warns that coronavirus will slow China’s economic growth from 2019’s 6.1 percent to below 5 percent. This means the government must resort to intervention to bolster growth. Of course, the enterprises most in need will be the weakest, and these will be those already dependent on too much government support. Instead of reducing these enterprises’ dependence on the government, slowing growth increases the government’s dependence on them.
The deterioration in broad economic numbers would speak loudly to any government. In China, they shout. The communists took control in 1949 in large part because the Chinese people were dissatisfied with the nationalists’ economic failure and corruption. The communists have maintained a self-enforced bargain with the people ever since: political monopoly for economic prosperity.
With the abandonment of its rigid economic ideology, China’s communists have been gaining on prosperity for decades, but that lead has been shrinking. With coronavirus, that lead becomes dangerously thin while also raising a host of questions about the performance of the country’s political monopoly.
Coronavirus will not be the single thing that topples China’s communist government, but it accelerates and accentuates those factors that one day could. The question is not whether China will catch the coronavirus (it already has); the question is whether the coronavirus will capture China’s communist government.