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“China will be a different country after the coronavirus crisis”

China has been battling the spread of the coronavirus for weeks. Some regions have begun to relax transport and travel restrictions in response to a call from state and party leader Xi Jinping. He on Sunday called on companies to get back to work and safeguard jobs as far as they could: provinces with low infection risks should revive business, while those still at risk should remain focused on containing the epidemic. 

Three questions to MERICS Executive Director Mikko Huotari 

Xi Jinping wants China to go back to work. Is the country getting back to normal? 

No, the crisis is entering a crucial phase. There is still huge uncertainty about what will happen. State and party leader Xi Jinping said at a Politburo meeting on Friday that the "turning point" hasn’t been reached and the situation in affected areas remains very serious and complicated.  

China’s leadership is doing everything it can to restart the economic engine. It cannot afford the country’s economy to remain paralyzed – and neither can the global economy, for that matter. There is a huge tension between the imperatives of "getting back to work" and of maintaining the strictest measures to avoid new contagion at all costs. Party officials and company executives once again have to contend with an immense dilemma and are under huge pressure. 

Xi personally pledged to ensure preferential treatment for companies critically important to global supply chains – but this is not so much comforting as more a sign of the scale of the problem. 

The WHO has so far avoided talking about a pandemic and financial markets have been fairly stable – at least until this weekend. Will the effects of the crisis be limited to China? 

The WHO’s assessment can change at any moment, and global financial markets tend to suddenly react like frightened rabbits to trends that have been foreseeable for some time. Even when infections were "only" limited to China, markets should have seen a downward correction.   

It is obvious that we are now entering the "global" phase of the crisis – the international effects are being felt with some delay. They will reach far beyond the problem of the virus spreading to many regions around the globe, Europe included. Now that the flow of containers shipped from China before the crisis is drying up, a wave of supply-chain disruptions is beginning to be felt. This is affecting pharmaceuticals supplies in Europe, for example, and other regions are beginning to encounter difficulties with the supply of all sorts of intermediate products.  

Globalization “made in China” is coming under pressure. The weakness of Chinese consumer demand in the first quarter of the year was shocking. Sales figures for iPhones or cars, for example, were disastrous – so bad, in fact, that later improvements probably won’t make up for them. Global companies reliant on China will have to brace for sizeable revenue slumps in 2020. 

Another cause for concern are the potential long-term effects of economic paralysis that will be clearly felt into the second quarter. There is a real danger that "clogged arteries" caused by supply-chain failures will lead to seizures in entire industrial sectors like the electronics industry, for example. Small and medium-sized enterprises are particularly vulnerable.  

What long-term effect will the coronavirus crisis have on China?  

Nobody should expect a rapid, “v-shaped” recovery in which first-quarter losses are quickly made up. A return to normal is unlikely – whatever happens, post-crisis China will be different. 

In spite of the morale-boosting slogans and optimism emanating from the leadership, China will this year remain in crisis mode and likely delay reform plans. It’s already certain the country will not be able to achieve its ambitious growth targets without sizeable state intervention and stimulus packages – and real risks of further disruption remain. In any case, China’s reputation for reliability is in tatters and momentum for supply-chain diversification inside and outside the country is growing. Big companies like Apple are already starting to draw the consequences. 

Everyone involved wishes China's leaders every success in fighting the crisis. Despite justified criticism from inside and outside China about the initial cover-up of the outbreak, any efforts by Beijing to ensure international cooperation and transparency are much appreciated. However, the biggest question remains what "lessons" Beijing will learn from the crisis. Some of these will be welcome – we can expect investments in health-system reform and disease control. But there are concerns that China's leadership will react to likely pressure and economic disruption by shelving its already limited reform agenda for some time. And that it will make crisis-fighting measures like extensive information control and digital surveillance part of its everyday policy.

This interview or excerpts may be quoted with proper attribution.


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