China – Health Crisis Tests Regime’s Credibility

A health crisis arising from the coronavirus outbreak is testing public faith in a state bureaucracy that is the linchpin of CCP’s iron grip on power. The epidemic comes at a particularly inconvenient time for President Xi Jinping, who was already struggling to manage a damaging trade war with the US, an economic slowdown that has fueled fears of a debt fiasco, and a political crisis in Hong Kong that poses a threat to the special administrative region’s status as a leading financial hub and could jeopardize China’s chances of achieving a future peaceful reunification with Taiwan.

The government’s top-down response to the coronavirus threat has included draconian measures to isolate those infected by the virus and deflecting blame for deaths and mistakes onto lower level officials. Although the government is cooperating with the WHO, critics accuse Xi and his colleagues of hiding the true extent of the crisis from the Chinese population, aided by a compliant state media.

The strategy may help to prevent an erosion of trust in the top leadership of the CCP but even that goal will become harder to achieve as the negative economic impact of the epidemic becomes apparent. In any case, leaders in Beijing run a risk of undermining the credibility of mid-level party figures and discouraging the independent decision-making that is crucial to managing a crisis, with negative implications for sustaining the legitimacy of one-party rule over the longer term.

The CCP plenum held in November produced little of note, signaling the government’s intention to maintain a steady course with regard to trade and investment policies. The government also affirmed its commitment to modernizing government, which in the Chinese context means continuing to root out corruption (focusing in particular on figures perceived to pose a threat, however minimal, to the president’s unchecked exercise of power) and digitalization of the state bureaucracy.

The eruption of the health crisis in late December has obviously prompted a reordering of priorities. But given the evidence that the epidemic is delivering a pounding to the

economy, both stimulus measures and investor-friendly reforms will be on the agenda at the annual Two Sessions meeting of the Chinese People’s Political Consultative Conference and National People’s Congress next month.

Business confidence plunged to 35.7 in February, from 50.0 in the previous month, and the purchasing managers’ indexes for manufacturing, non-manufacturing, and services plummeted to all-time lows far below the 50.0 mark dividing expansion from contraction. The automotive industry has taken a massive hit so far, with illness forcing the shutdown of production plants and retail sales of cars falling by 92% (year-on-year) in the first half of February.

A combination of fiscal stimulus and the restoration of some semblance of normalcy may help to revive economic activity by mid-year, but annual real GDP growth is forecast to slow to less than 5.5% in the best-case scenario. If containment of the coronavirus requires a prolonged extension of restrictions on public movement, the prospects for a second-half revival will dim considerably.

Since 1979, The PRS Group Inc., has been a global leader in quant-based political and country risk ratings and forecasts. This commentary represents a sneak peek from our upcoming political risk reports. For more information please contact us at (315) 431-0511 and sales@prsgroup.com, or explore a subscription to PRS Online and/or ICRG Online today to receive political risk updates.

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