After decades of less than stellar performance in bilateral diplomatic negotiations with Beijing on matters ranging from fair trade to free navigation of the seas, the United States, specifically President Trump, is now facing off directly with President Xi Jinping and winning battle after battle. What may be the most interesting result of the latest round of trade negotiations is not the specific Phase One concessions obtained, but the timing of the talks given the impact of the Covid-19 virus epidemic on China’s domestic economy. As Samuel Huntington and other political scientists have written, it is during times of great societal upheaval that real and lasting political change is possible. Could this be the catalyst for regime transformation in China beyond 2020?
In a recent speech by Xi to the Politburo Standing Committee of the Chinese Communist Party (CCP) he admitted the Covid-19 virus could threaten the health of the Chinese people, jeopardize the domestic economy, and undermine the Party’s ability to maintain social stability (Bǎochí wěndìng.) For all the Chinese bravado it is the threat of domestic chaos that appears to most concern Xi. Chaos that could, potentially, undermine the legitimacy of the CCP and Xi’s legacy. President Trump has refused to back down in his demands that China be held accountable for the theft of America’s intellectual property and unfair trade practices, nor has he been willing to cave to Chinese demands to remove immediately $550 billion in US tariffs.
That leaves Xi in a vulnerable position for several reasons. At the February 12, 2020, Politburo Standing Committee meeting he reported erroneously that China is on track to meet this year’s economic and societal goals, according to state media minutes from Xinhua Xinwen (New China News Agency). Xi’s claim does not reflect the ground truth outside the meeting hall where economic losses from the Covid-19 virus are expected to top four times the level of that felt from the SARS 2002-2003 epidemic. Nor does it account for the multi-year impact that may cause China to fail to meet its 10-Year economic growth plan. Xi has depended heavily on the strong economy to maintain political stability. The country’s GDP accounted for about 16% of the global economy in 2019 as compared to only 4% in 2003. Global corporations manufacturing in China today are taking notice of the epidemic’s potential impact on the market and other factors, including the slowing of economic growth in China in recent times.
No longer content with China’s rising labor costs, tariffs, and other challenges, foreign companies even before the recent epidemic, started offshoring production to other SE Asian nations. With the rapid spread of the Covid-19 virus many firms now are speeding plans to leave China for lower-priced labor markets such as Vietnam and Cambodia. Once gone it will be difficult for Xi, already facing heavy domestic and diplomatic pressure, to coax them to return. If the assets bubble bursts at the same time, there will be a cascading effect in the financial markets. In a worst-case scenario, China could suffer large-scale bankruptcies and teeter on the brink of economic collapse. According to Moody’s the Covid-19 virus already is impacting the world economy as travel restrictions and quarantines are expected to reduce it by $200 billion in the first quarter of 2020. According to a recent survey by Chinese academicians from Tsinghua and Beijing University, 85% of small- and medium-sized businesses say they cannot survive for more than 90 days under current conditions. For Xi it could be a disaster to his legacy and for the Chinese people.
Rapid economic growth in the last 15 years resulted in the country’s swift urbanization. Chinese New Year, a holiday when 288 million migrant workers typically travel home, has further complicated the response to the epidemic. Small- and medium-sized businesses, which account for over 65% of China’s GDP, are shuttered now for an extended holiday period due to the health emergency. Lower revenue and land sales income may further disrupt local government operations as small firms struggle to meet loan obligations in 2020. The risk for Xi Jinping is even greater if there is a default on the 99.1 trillion yuan in outstanding onshore bonds.
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The question remains if President Xi’s propaganda machine and the authoritarian Maoist-like measures enforced by the Party are enough to keep the people subservient during a long-term crisis and longer recovery that will claim many of China’s political and economic gains made over the last few decades. A fascinating comment made by one of the Chinese disappeared bloggers questions if Xi is a betrayal of the system or a product of it. The answer may predict the future of the Communist Party and China as a nation and hegemonic power in the east.
Photo: Xi Jinping, at Anhuali Community, Anzhen Street, Chaoyang District, reviewing virus outbreak. (Xinghua news agency)
DARIA NOVAK served in the United States State Department during the Reagan Administration, and currently is on the Board of the American Analysis of News and Media Inc., which publishes usagovpolicy.com and the New York Analysis of Policy and Government. Each Friday, she presents key news regarding China.