After Covid-19, China will find that trust has significantly eroded

After Covid-19, China will find that trust has significantly eroded
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We live in strange, indeed monumental, times. Just what will happen next in our economies or our societies is an open question, and the people whose business it is to know such things have been left floundering. It does not seem to matter that the global viral epidemic started in China, the Chinese leadership has gripped the situation in a way the United States has not. This reinforces the consensus that China has become a major economic power. And while the United States economy is larger, the prevailing economic momentum suggests it is now a matter of time before the pre-eminent power of the last century gives way to its natural successor. 

China’s economic rise has by any measure been remarkable. While China is likely to see a recession this year, the country last saw negative growth in the 1970s. Since 1980 the Chinese economy grew from 2.6 billion yuan, or 2.3% of the global economy, to 95 billion yuan, accounting for just under 20% of global production. This has been one of the strongest, most rapid and most sustained periods of economic growth recorded in the world history. For the leaders of China this is simply a recognition of the natural world order; a righting of a century or more of wrongs.

How safe is this assumption? There are three things which are notable about China’s rise, each of them enhanced by the Covid-19 crisis, but not in the way that might initially be thought. 

The Chinese government is going to be a lot less trusted. There was a danger that the Covid-19 crisis could become a “Chernobyl moment”, when the general populace loses confidence in their leadership as they realise that they are being lied to on an epic scale. Premier Gorbachev himself traces the initial cracks in the Soviet system to the mishandling of the 1986 crisis. The Chinese leadership seems to have seen that threat off, at least domestically. But there is a huge gulf between trusted and tolerated, and there remains every possibility that this crisis acts as a catalyst for much of the rest of the world to wake up and look beyond immediate short-term cost advantages in deciding who to involve in their supply chains. In February Prime Minister Johnson resisted a back-bench rebellion over the use of Chinese equipment in building the 5G network. Given the corona crisis, this issue has been put onto the back burner. But whenever it is reconsidered, the chances of proceeding with Huawei equipment as planned are next to nil. Such decisions will not be confined to the United Kingdom. 

China is going to be more isolated. China has not taken the typical path of a developing market; they have made the most of their low-cost labour and their comparative advantages stretches well beyond the ability to produce reasonable quality products. They have made the difficult transition from producing to others’ designs, to producing products incorporating serious intellectual capital.

But they face a challenge. The United States has long complained that the Chinese have little regard for intellectual property rights, and President Trump has taken this dispute to a full-on trade war. The Corona crisis might provide a reason for a truce, but it is difficult to see the next President, whomever it might be, backing down on what is widely seen as the theft of the American firm’s competitive advantage. Economists generally believe that the future belongs to those firms and societies which can best innovate. Fostering innovation, while maintaining overt political control, is going to be a challenge and doing so with steadily less global input makes that challenge all the more acute. 

Sharing the proceeds of growth has worked extremely well: until now. Over the past four decades, China’s economy has grown sufficiently rapidly that its populace has been able to enjoy steep rises in living standards and the government has at the same time accumulated an astronomical $3 trillion in reserves. This latter pile of cash, unencumbered by intractable welfare funding commitments, has allowed the political leadership to undertake bold new initiatives such as the belt and road. It remains to be seen how the political leadership will respond to a world where the steady rise in living standards is harder to sustain (even if only as a result of naturally diminishing returns) and the needs to the broader populace has to be balanced against the much-cherished strategic initiatives. Certainly, the Corona crisis has driven home the point that the needs of the domestic economy are paramount. 

The 2008 Global Financial Crisis taught us that the initial triggers to any crisis give scant clue as to the eventual economic and strategic impacts. China’s ascendancy, seemingly so inevitable, faces a number of significant challenges that stretch well beyond the markets of Wuhan. The world has been reminded that China is much more than a competitive economy capable of sophisticated manufacturing; it is an authoritarian state, and ultimately, that matters.

The post After Covid-19, China will find that trust has significantly eroded appeared first on Global Vision UK.

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