Author: Neil Thomas, University of Chicago

The spread of COVID-19 from Wuhan to the world is the story of 2020. Since emerging late last year, the virus has traversed the globe, infecting well over a million people and killing over 65,000. Following an initial cover-up by Chinese authorities, the worst of the pandemic is over in the country, but its economic fallout still presents a political challenge.

China’s leader Xi Jinping has called the virus a ‘big test’ for the Chinese Communist Party (CCP). If one measures success as halting new infections, then the CCP passes with flying colours. Strict quarantine policies have cut the number of new domestic cases to near-zero, allowing normal life to gradually resume. A good argument can be made that the CCP’s extreme yet effective response has reassured many citizens. But China’s trials are far from over.

Lockdowns of major population centres for much of the first quarter caused deep slumps in domestic output, consumption and investment, with businesses struggling to return to full capacity. As major states around the world curtail non-essential economic activity to ‘flatten the curve’ of new infections, an impending slowdown will disrupt supply chains and dampen demand for Chinese exports, which equate to almost 20 per cent of China’s GDP.

A recession is any politician’s worst nightmare, but it would be particularly unnerving for the Chinese government, as Beijing has made continued growth a pillar of its authoritarian legitimacy. One of the CCP’s two underlying ‘Centenary Goals’ is to achieve a ‘moderately prosperous society’ by doubling the size of the economy between 2010 and 2020. Growth of 5.6 per cent this year is required to hit that target, but analysts are predicting China can only manage 2.9 per cent.

While Xi has declared an interim victory over the virus, dealing with its consequences will be the real test. Questions such as how to avoid economic calamity without aggravating financial risk, how to defuse record unemployment before it undermines social stability and how to maintain public confidence in the CCP should keep Chinese leaders awake at night.

Xi’s need to come up with good answers is particularly acute because his fundamental priority, announced at the Third Plenum in November 2013 and reinforced at the Fourth Plenum of October 2019, is to ‘advance the modernisation of China’s system and capacity for governance’. The looming post-coronavirus crisis will test the system that Xi has built over the past seven years. The credibility of his personal political project may well be at stake.

His basic approach to governance reform has been to consolidate policymaking power into CCP bodies under his control and to strengthen policy implementation through improving administrative procedures and tightening oversight of local officials. The hope is that such ‘top-level design’ can overcome vested interests in China’s political economy that undermine reforms designed to address critical social, financial and ecological issues.

So far, Xi’s agenda remains on course. There is no indication yet, for example, that his ‘tough battle’ against unsustainable debt will be undone by reckless outlays, as current counter-measures focus on responsible fiscal stimulus, monetary easing and regulatory relief. Local officials blamed for the delayed response, including the CCP heads of Wuhan city and Hubei province, were purged. And the centralised approach to curbing the virus shows that Xi’s system can mobilise resources and enforce order.

But there’s only so much that Beijing can do to affect international trade, investment and finance. If the government cannot keep China’s economy healthy in the coming months then internal discord at the strict management and harsh repression that accompany Xi’s governance may continue to grow. The outpouring of netizen anger following the COVID-19-induced death of whistleblowing doctor Li Wenliang would probably be dwarfed by the discontent of millions suffering through an economic crash.

It’s still too early to say how well Beijing will weather the gathering storm, but Xi may face some difficult choices. Broadly speaking, he could double down on his agenda, which would likely mean slower growth and necessitate sterner discipline. Or he could countenance large-scale stimulus, which might salve the economic pain but would slacken many of his signature governance reforms.

Either way, a slump could shift the contours of CCP governance if it deepens popular dissatisfaction to the extent that elites worry for the stability of the regime. In this case, Xi may see his political capital diminish ahead of the horse-trading over leadership appointments preceding the 2022 Party Congress.

So, even though Beijing trumpets its ability to ‘assume the responsibilities of a great power’ in the global fight against the virus, efforts to stop its spread are naturally motivated by economic self-interest as much as they are by ambitions for diplomatic influence. Xi knows there are tough times coming.

Neil Thomas is a China analyst and an Adjunct Lecturer in the Harris School of Public Policy at the University of Chicago.

This article is part of an EAF special feature series on the novel coronavirus crisis and its impact.