Commentary on Political Economy

Saturday, 23 January 2021


New Covid infections pose challenge to China's growth and Xi's leadership

The leader has declared victory over the virus, but a fresh outbreak is complicating the narrative

Red lanterns hung in Wuhan ready to mark the start of the lunar new y next month.
Red lanterns hung in Wuhan ready to mark the start of the lunar new year next month. Photograph: Getty Images

When Britain was in its second lockdown last November and the economy was contracting, China’s quarterly growth rate was hitting 6.5%. Figures last week showed that for the full year, the world’s second-largest economy could boast a growth rate of 2.3% while all its rivals in Europe and the Americas were going backwards.

The trend could be traced back to Beijing’s efforts to tackle the virus – albeit after a period of denial – and keep infection rates among the lowest in the world.

But the week-long new year public holiday from 11 February will be a stiff test of Beijing’s ability to keep the pandemic in check and its economy growing.

Officials have told the many hundreds of millions of people who traditionally travel to visit relatives – and this year celebrate the year of the ox – that they should stay at home to keep the infection rate under control.

A spiral of cases in Hebei province, which surrounds Beijing, has dented President Xi Jinping’s claim that the virus was beaten last year and only the west mishandled events to allow a second wave. Xi has gambled on rural migrants being tested before returning home, and on local officials being able to deal with isolated outbreaks via a mix of threats and modest compensation payments.

China’s ministry of transport says it expects new year holiday travel to be 40% down on 2019, but that still means millions will be taking public transport in a short space of time.

China expert Diana Choyleva of forecaster Enodo Economics says she will be watching to see if China can get to March without a fully fledged new outbreak of Covid-19: “Xi has boxed himself in. A second lockdown would undermine the narrative that the virus is already beaten. And he can’t lock down again without ruining a second year of celebrations and possibly the 100th anniversary of the Chinese communist party in July. That would not just be a blow to the party, it would slow the economic recovery as well.”

Consultancy Capital Economics has pencilled in a growth rate for China of 10% this year, despite a downturn in travel. “The hit to consumption and services should be mostly offset by factories being able to put more staff to work over the holiday than usual,” says senior China economist Julian Evans-Pritchard.

Choyleva adds that the anniversary of the CCP will mark a bigger turning point than many observers expect. All bets are off after July, she says, when Xi is expected to embark on a further consolidation of his position, clamping down on corporate corruption and private sector monopolies.

China’s factories are, she says, also reliant on orders for electronic and electrical goods from locked-down consumers in Europe and the US. “Once lockdowns lift in the west and vaccines allow people to eat in restaurants and use services, demand for Chinese goods will decline,” she says.

Evans-Pritchard agrees that waning demand for Chinese goods will hit firms – and coincide with increased borrowing costs. The People’s Bank of China has already reversed the looser borrowing rules brought in last year, and he expects it to extend this with formal interest rate increases.

For much of the past decade, China’s regional authorities have tried to wean themselves off income from heavy industry, most of it state-owned. But each time there is a crisis, officials reach for any policy that delivers an immediate boost to heavy industry (such as steel or car production). Debts from failed investments have climbed to dangerous levels and carbon emissions are increasing too. Last year was no exception. And reversing the trend is becoming harder.

Enodo’s Nigel Inkster, who is a former deputy director of MI6, says in his new book, The Great Decoupling: China, America and the Struggle for Technological Supremacy, that the party-state could kill the golden goose of private enterprise – and the innovation that will drive incomes up and carbon emissions down – in its demand for control.

“Security and stability trump all other considerations,” he said last week. “Absolutely everything is about ensuring the Communist party remains in power. They will trample over whoever they need to trample over.”

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