Beijing’s Covid Recovery Isn’t So Enviable

China touts GDP growth but faces a hard call: rest on a fragile economy or try for a difficult transition?

By Joseph C. Sternberg.

"Few myths are proving so durable in our pandemic age as the notion that China has somehow cracked the coronavirus code. It hasn’t.

The argument proceeds in two steps. The first is to assert that Beijing’s authoritarian approach to mass lockdowns, followed by intrusive testing and tracing, defeated the virus in a way almost no democratic government has managed. This might be true, but it is also meaningless. It does little good to argue in favor of Chinese methods to control a pandemic when a democratic society would by definition find that authoritarianism a cost not worth paying.

More interesting is the second prong of the Beijing-beats-the-world myth: the economy.

We’re supposed to believe that China’s success in suppressing the virus has facilitated a phenomenal economic recovery—and, by extension, that our economies would be growing again too if only we had batted down Covid-19 as efficiently. The claim was bolstered this week by more good news from Beijing’s statistics gnomes, who reported gross domestic product increased by 4.9% in the third quarter compared with the same quarter last year. China is set to be the only major economy that manages to grow this year.

This might even be true. Chinese economic data are notoriously, oh, what’s the word I’m looking for . . . fake. Headline GDP numbers tell you less about the real state of the economy and more about the Communist Party’s political preoccupations and goals. Still, there is substantial evidence that the Chinese economy is growing to some extent. Important and harder-to-fudge measures such as industrial production and retail sales have improved in recent months.

But ginning up economic growth has never been Beijing’s problem. Generating genuine, productive economic activity has been the difficulty. And on this front the pandemic is becoming a major disaster. The coronavirus immeasurably complicates Beijing’s efforts to engineer a long-overdue transformation of the Chinese economy away from reliance on exports and inefficient state-owned enterprises (SOEs) and toward domestic consumption by a middle class employed by productive companies.

To succeed, this transformation would require an enormous redistribution of resources—including some level of household income—away from the SOEs and their politically well-connected managers and employees and toward expanding the private sector.

This metamorphosis also would require a massive reallocation of resources within households. The middle class, accustomed to stockpiling its wealth in housing, would need to be cajoled into shifting its savings out of unproductive properties and into financial investments that support corporate productivity.

That process implies other households might see their housing wealth decline unexpectedly as evolving demand dings values. And Beijing would have to deliver wholesale regulatory and corporate-governance reforms to boost savers’ confidence in a financial system that currently operates like a cross between a casino, a Wild West saloon and the cantina from “Star Wars.”

What government in its right mind would want to attempt such a wrenching change in the middle of a global downturn? Not only has the pandemic created new domestic stresses such as rising unemployment and mounting indebtedness. Tenuous recoveries elsewhere raise questions about China’s ability to fall back on its export markets as a growth support while it attempts difficult domestic reforms.

Little wonder, then, that Xi Jinping appears ambivalent about pressing ahead with reform. He has made fitful noises about rebalancing, most recently over the summer with a vague “two circulations” program that envisions developing a vibrant domestic economy while also preserving the state-led export machine. But more recently he shied away. Last month he encouraged private firms to align themselves more closely with the interests of the party-state. This is inimical to a rebalancing program but is more consistent with Mr. Xi’s authoritarian impulses. Chinese entrepreneurs will get the message.

Which means China’s coronavirus experience has been the same as everyone else’s. The overarching economic story of the coronavirus is that it has interrupted important transformations that had been under way. In the U.S., the pandemic stunted an investment-and-jobs boom that was starting to reorient the economy toward faster productivity growth. In Europe the virus has disrupted the transition of both the European Union and the U.K. to a post-Brexit economic order.

The difference is that Western economies have the option of recovering from the virus by getting back on track—by extending the Trump-era deregulation agenda, or by redoubling efforts to finalize a free-trade agreement between the EU and Britain. (Whether they will exercise these options is another matter.)

China doesn’t have this choice. It can dig in its heels on a model that was showing signs of stress before, or it can attempt difficult political and economic changes at the worst possible global moment. Maybe Beijing is secretly jealous of us."