COVID-19 Accelerates China’s Political Economic Transformation – Analysis

By Christopher A McNally*

The economic shock caused by the coronavirus pandemic is often conceived of as a pivotal moment ushering in major shifts in political economies across the globe. But this ‘game-changer’ argument obfuscates how the crisis is more likely to accelerate and accentuate ongoing dynamics. One prominent example illustrating this is China.

The most profound shift taking place in China’s political economy is a move away from the export-led growth strategy adopted in the 1990s to a new economic model based on domestic consumption, indigenous technology development and urbanisation.

An emphasis on greater economic self-reliance began after 2010, but the impetus created by the pandemic is seeing this shift implemented more resolutely and decisively, accelerating a fundamental transformation in China’s political economy. Chinese President Xi Jinping expounded on this new model at the recently concluded National People’s Congress, arguing that ‘for the future, we must treat domestic demand as the starting point and foothold as we accelerate the building of a complete domestic consumption system, and greatly promote innovation in science, technology and other areas’.

Both due to the initial shutdown of economic activity and the following drop-off in global demand, the pandemic has wrought immense damage on China’s economy. Exports still account for 30 per cent of China’s GDP, making it impossible to shield the country from shocks beyond its borders. Yet, domestic consumption has risen and is now the most important driver of growth.

The transition to domestic consumption as the primary driver of growth has already been underway for almost a decade. The coronavirus pandemic is just rapidly accelerating this trend. The economic shocks created by the pandemic are crippling global commerce to such an extent that external demand for Chinese exports might not recover for two or three years. The trade and technology war with the United States, one of China’s major trading partners, is also creating long-term risks. These factors have accentuated an expectation among Chinese leaders that the global economy will fragment and de-globalise.

The way out of this dilemma for China’s trade-dependent economy is to seek a more self-sufficient development model for the 2020s. Recently announced government policies reflect this trajectory. Perhaps most prominent is a stimulus package with a focus on advancing new technological capabilities. The aim is to invest an estimated US$1.4 trillion over six years to gain technological independence from the United States.

The package supports the rollout of everything from wireless networks to massive data centres that can power artificial intelligence and Internet of Things technologies. It aims to spur innovations in a range of fields, spanning ultra-high voltage lines, biotechnology, high-speed rail, autonomous driving and smart cities.

Private tech giants such as Huawei, Alibaba, Tencent and SenseTime are expected to drive this new infrastructure initiative with few benefits for US companies. Unlike previous efforts — which have focussed on old-style infrastructure such as bridges and highways — this new digital infrastructure plan aims to bolster national champions in their effort to develop cutting-edge technologies and further their global competitiveness.

Another plan put forward at the recently concluded National People’s Congress is more like those of previous years with a strong focus on old-style infrastructure. Beijing’s new ‘Western Development’ blueprint calls for increased investment in central and western provinces, including a long list of new energy and infrastructure projects, such as the Sichuan–Tibet railway, oil and underground gas storage facilities, and new industrial projects.

As with the digital technology plan, the new Go West policy aims to make China more self-reliant in core technologies, food production and consumer demand. It is also a hedge against the mounting problems Xi’s Belt and Road Initiative (BRI) faces. Many international recipients of Chinese loans under the BRI are experiencing severe economic downturns, making defaults on these loans highly likely and putting a crimp on new BRI projects.

The refurbished Western Development Strategy can thus provide leeway to offset risks of geopolitical isolation. Internal development of western provinces, which sit at the eastern end of the BRI, could provide ways to expand transport links with Europe and Southeast Asia in a more predictable domestic environment.

The coronavirus pandemic and the increasing rivalry with the United States are rapidly accelerating transformational shifts in China’s political economy. By seeking greater economic and technological self-sufficiency, these shifts could alter the global political economy in profound ways.

While the coronavirus pandemic makes any economic prognosis hazardous, a few trends can be discerned. Accelerating moves towards relying on indigenous sources of demand and innovation in China portend a future in which de-globalisation and the fraying of economic ties could become even more pronounced.

These shifts could also trigger fundamental adjustments in China’s position in global value chains. If the Chinese government’s new development model succeeds, China could function less as the ‘factory of the world’ and more as the continent-sized consumer market Western marketers have been dreaming about for over 200 years. But the major goal of the new model is to reduce external vulnerabilities. What could become truly the ‘largest market on earth’ might, as during imperial times, keep foreigners at bay.

*About the author: Christopher A McNally is Professor of Political Economy at Chaminade University of Honolulu and Adjunct Senior Fellow at the East-West Center.

Source: This article was published by East Asia Forum

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