Updated: Apr 27, 2020
This blog post is based off recent comments Country Acuity shared with Euromoney Country risk on China - full article is here - Special risk survey: Coronavirus dampens enthusiasm for China
We recently discussed the implications of coronavirus -COVID 19 on China's country risk profile. One of the questions that we discussed was how big of a risk is this? Is this China's Chernobyl moment as even the Financial Times recently opined - Xi Jinping faces China’s Chernobyl moment.
Most analysts, commentators, and some China watchers are voicing increasing concern if the social contract between the Chinese Communist Party -CCP and its citizens have been broken due to COIV 19, the deaths, the human tragedy and also the socio-economic difficulties millions are undergoing. Then, most draw a parallel to the USSR post Chernobyl. I find this extremely puzzling. China in 2020 is nothing close to the USSR in the late 1980s.
But yes, change in systems like this can occur very abruptly, and in hindsight the signs will be all around. To a certain extent, this is as perfect a storm to hit China in recent times, slowing economy (pre-Trump and trade wars, remember, 2015 and currency dip and mass financial press hysteria about a China crisis?), trade war, military adventurism, technology transfer restrictions, more scrutiny of Chinese deals, the swine flue, Hong Kong, Taiwan...and then who knows about the inner workings of the CCP and various power dynamics. So yes, COVID 19 hits China at a very vulnerable juncture in its journey. Xi's efforts to centralize power has further eroded governance norms and practices. Leaders who don't entertain any dissent breed sycophants and charlatans, see the early stages of that in the US. Having said all that, China in 2020 is not the USSR of 1986.
China in 2020, is not the USSR in 1986-89. The Soviet economy was in real trouble, China's economy does face some challenges, but the challenges are of different magnitudes. China today has vastly greater economic, financial, technological, and geopolitical capabilities and capacity to act.
On the political front, China's capacity to manage and control appears underestimated. Traditional modes of control are now augmented by technology, 'big brother.' The CCPs ability to surveillance and control have not been degraded, in fact, it is likely that the coronvirus and local authorities alleged failures will be used to further entrench the surveillance state.
Some Western journalists and analysts, in part, out of hope (that's a topic for a separate discussion btw), expect the cries of dissidents and weibo or twitter activists and the death of the medical doctor in Wuhan to usher slow regime change. Even though there has been centralized power under the current leader in China, one must not forget that at the end of the day, ...the Party must go on!
One caveat here is for how long the virus induced clampdown on the economy lasts. If its relatively short lived, even if it does hit macro growth to the 4-5% range, one of year slowdown, still is unlikely to lead to system collapse. If though it is sustained over a number of years, then the fundamentals, have changed, it is a different equation then.