The Fault in China’s Stars

No matter how much the Chinese regime is questioned today, it is one of the essential pillars of the global economic framework. It is a significant consumer of raw materials and a producer of commodities for almost every country around the world. But the coronavirus has unleashed a weak link in the structure of governance in the country, and this economic downturn has the potential to shake the very foundations of the country.


The economy is invariably one of the prime reasons for the collapse of political systems around the world. There are examples abound across the spectrum, but authoritarian states still have a higher share. To get a gist of this rationale, have a look at this graph by the Pew Research Centre.


fig. 1  The results of a poll on the current economic situation, conducted by the Pew Research Center


Most of the countries where people perceived the economy was terrible saw a change in leadership soon. Japan PM Yukio Hatoyama was forced to step down. Spanish PM Jose Luis Rodriguez had to call a snap election, and his party lost badly. There was even an assassination attempt on Pakistani Prime Minister Yousuf Raza Gilani. 


For decades, the Chinese leaders have ruled the country based on collective welfare – financed by a booming economy. In the post-Mao era, the Chinese people and the Communist Party of China (CPC) have adhered to an implicit social contract: The people tolerate the party’s political monopoly, as long as the party delivers sufficient economic progress and adequate governance. The CPC’s poor handling of the COVID-19 outbreak threatens this tacit pact. 


As the Chinese economy boomed, it also created a vast urban-rural divide in the country. Now, the situation is so dire that China risks turning into an Asian version of Latin America – a highly unequal society in which elites, primarily in eastern cities like Shanghai, enjoy high standards of living while the rest are left to fend for themselves. Although Beijing boasts of hundreds of millions of its citizens lifted out of poverty, China’s uneven growth also threatens to push some 200 million beneath the UN-defined poverty line. China today has one of the highest Gini coefficients in the world (The Gini coefficient is a measure of income inequality, the larger it is, the more difference in income between affluent and poor households). In China’s case, this is reflective of the worsening urban-rural divide in the country from a few decades ago, when it had one of the smallest Gini coefficients in the world.



fig. 2  A comparison of income inequality levels by region, 2015


The coronavirus pandemic has already derailed economies around the world. The Chinese economy is not an exception to this trend. As the demand for goods continues to go into a death spiral, it should ring alarm bells for an export-dependent China. Collapsing shipments, plunging commodity rates, wildly fluctuating cargo costs, and a hollowing out of jobs markets for significant trading partners are all ominous signs for China’s industrial base.


fig. 3  Decline of Chinese industry, 2009-2019


The lack of accountability over the Coronavirus issue has the potential to trigger a mass exodus of firms from the country. Furthermore, competing economies like India and Vietnam are relaxing their labour laws, which provides an additional incentive for these firms to outsource a considerable amount of their operations out of the once-sparkling Chinese manufacturing hubs. While those at the helm of affairs believe that this “supply-side” shock may be overcome by domestic demand, the future undeniably looks grim. It is widely predicted that the local market may be too slow to gain traction due to psychological scars, bankruptcies, and job losses caused due to the pandemic. 


fig. 4  Declining employment figures in Chinese manufacturing, 2018 onwards


While President Xi Jinping faces backlash at home, the Communist Party has been swift in abating criticism and also suspended many local officials. But Xi’s failure to appear on the frontlines of the fight may have diminished his credibility as a populist leader.


Interestingly, the reverberations anticipated to be at the extremities of all these incidents aren’t entirely unusual and have a noteworthy historical precedent. As late as the 1980s, anyone in the West never considered the Soviet system to be unstable. In 1983, Princeton University professor Stephen Cohen described the Soviet system as remarkably stable. Even the CIA held the same beliefs. Fast forward to 1991, and the USSR had dissolved. 


It is an established fact that the Chinese economic model is vastly different from that of the USSR and it may not meet the same fate, but some non-economic indicators can help one understand what can’t be seen directly. Like the Soviet Union in the 1970s, China is now coming to the end of a long labour-force boom and its workforce is slowly ageing. The CCP leaders hope that a wide array of investments into new regions, like the ‘One Belt, One Road’ (OBOR) project, will keep the existing economic miracle going on, but some experts worry that these might just be piling on debt without yielding any major returns.


Many fear that China’s OBOR plan may fall short of its main objectives. The idea that infrastructure projects in Central and Southeast Asia could absorb a large portion of China’s excess industrial capacity is too optimistic. Building a new high-speed rail line or state-of-the-art airport is easy enough but constructing an “economically feasible” high-speed rail line is much more complicated.


fig. 5  One of China’s many ‘ghost’ cities


At this juncture, it is beyond doubt that the Chinese economic growth since the 1980s has been spectacular. From slumbering rural decay to a prospering super-power, China’s economic model is something that even many developed countries around the world may find hard to mimic. Aggressive central planning, cheap labour, devalued currency and a robust factory system form the basis of the ascendancy of Chinese exports on the global stage. Innovation is a prime driver of growth in this country, and as of now, it wouldn’t be wrong to consider that the charges alleging that China hasn’t surpassed this stage (where it could have the same fate as the Soviet Union) are all but abstract speculations. Chinese communism is far more business-friendly and tailored to suit China’s needs than its Russian counterpart. It is more people-centric than ideology-centric. In the last couple of decades, the Chinese economy has seen the rise of firms like Alibaba. However, we are still a long way from having a more balanced power equation in the country. (Which ironically is one of the primary ideals of Communism according to Marx)


Li Wenliang, who told the world about the coronavirus, summed up the situation in China perfectly.

“There should be more than one voice in a healthy society.”

So will the flawed power model continue to reap benefits for China? Only time will tell.



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