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
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.
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.