Coronavirus exposes fundamental flaws in China’s economic growth model, and Beijing cannot fix it

The outbreak of the novel coronavirus, which has killed over 1,000 people and infected over 40,000, has highlighted the good and bad sides of a state-controlled system
China was able to build a hospital in a few days, but only after the outbreak of the virus had been under reported or even covered up

Zhang Lin

Published: 11:35am, 11 Feb 2020

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The outbreak of the novel coronavirus, which has killed over 1,000 people and infected over 40,000, has exposed fundamental flaws in China’s governance system and its growth model – the excessive concentration of power, information and resources in the hands of a powerful state.

But given the path of China's political and economic evolution, it is difficult for China to loosen its grip on power as a response to so-called black swan events such as the coronavirus. The most likely outcome is that Beijing will continue to strengthen centralised control, which in turn is a greater threat to China’s prospects than the virus itself.

When it is done right, a centralised political system means the government can deliver positives such as rapid economic growth, but it also make it possible for the government to place emphasis on the wrong things, which has the potential to lead to uncertainty and even disaster for society.

There is precedent that China tends to enhance centralisation as the solution to a problem that has stemmed from over control. The “new normal” concept, which was adopted by the state in 2014, dissociated the political legitimacy of the Chinese government from economic growth, therefore reducing the pressure on local Chinese authorities to deliver. And while the concept had the good intention of seeking high quality growth, it has, in reality, made the local authorities less friendly to the private sector.

The most likely outcome is that Beijing will continue to strengthen centralised control, which in turn is a greater threat to China’s prospects than the virus itself

To achieve high economic growth, local governments have had to free up market forces and allow the private sector to thrive, but without the pressure, they do not have the incentive to conduct the necessary political and economic liberalisations to entertain private investors.

As a result, the central government is increasingly reliant on state-owned enterprises and state money to maintain social stability and to deliver environmental improvement, while the private economy is gradually marginalised and local autonomy is weakened.

Many private business owners in China have noticed a change that they are not welcomed or loved in a “the state control all” system, as China has suffered huge capital outflows as many wealthy Chinese people, and even the urban middle class, have scrambled to move money out of the country. On the other side of the coin, private investment at home has plummeted.

Seeing a persistent economic slowdown and potential social problems including unemployment, the central government responded with a renewed effort to increase the degree of centralisation and control efficiency. It implemented “mixed ownership reform” in 2016, opening the door for state-owned capital to take over private enterprises. China’s value-added tax reforms and financial deleveraging have also significantly curtailed fiscal and financial autonomy of local governments.

This excessive control from the central government leads to weak economic performance, but Beijing responded by enhancing its control. The trade war between China and the United States further prompted Beijing to find new ways to maintain its state-led political and economic system instead of changing it.

In such an increasingly centralised system, decision-making power is concentrated at the top, but information is filtered through the different levels of governments. If the top decision makers prefer stability than anything else, the system will just automatically suppress and filter out information that can paint a different picture. That is the direct cause of the coronavirus outbreak, which was seriously under reported or even covered up for weeks before January 20.

That is the direct cause of the coronavirus outbreak, which was seriously under reported or even covered up for weeks before January 20

The efficiency of the Chinese system at the implementation level is obvious – it can build up a huge hospital in days, it can lock down a city with more people than London or New York with no notice, and it can seal off a vast country into fragmented closed communities – but the system’s fundamental flaws in its undemocratic, unscientific and non-transparent decision-making process are also easy to see.

And it is even harder to fix. Many economists referenced the 2003 severe acute respiratory syndrome (Sars) epidemic as an example of how China’s economic growth can recover quickly from the coronavirus outbreak.

But they are blind to the fact that the context of the Chinese economy is completely different now that it was 17 years ago. In 2003, China was integrating into the world and was dismantling its state sector economy, but now China is seeing disintegration and the private economy is in retreat.

they are blind to the fact that the context of the Chinese economy is completely different now that it was 17 years ago

The outbreak has eliminated many halos of China's model: the formidable Chinese manufacturing system is unable to produce enough medical equipment; the long-term low inflation of consumer goods can disappear overnight, and the government’s all pervasive management failed to halt an epidemic that could have been avoided.

But there is little prospect that Beijing will decentralise its power, a choice that is set to push China’s economy further down towards the edge of depression.

Zhang Lin is a Beijing-based independent political economy commentator

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