The Asian Wall Street Journal: China's Turning Point

05/08/2003

Crowds are forming across China. Some people block roads; others surround and invade government buildings and destroy property of the state. Provincial and local authorities defy Beijing's edicts. Is the central government losing control of the People's Republic?

Commentators have praised China's new president and premier for finally taking decisive steps late last month to combat Severe Acute Respiratory Syndrome or SARS. What is not said is that they acted only after Chinese doctors and nurses openly contradicted their government and made the continuation of the cover-up, which had lasted almost half a year, untenable. Leaders in the Chinese capital were, for the first time in a decade, left with no real choice but to tell the truth, since health care professionals were already telling all they knew to the foreign media and the World Health Organization.

Ordinary people then took matters into their own hands. In the week following the announcement of the government's new campaign against the disease, about a million people fled Beijing to get away from the contagion. Administrative edicts to prevent departures did not work and stringent controls were not effective either.

The Health Ministry knew that the mass migration out of the capital would lead to a health-care catastrophe but could not move itself to act. "The government held meetings for hours with no decision and meanwhile, everybody left town," said Bi Shengli, a virologist who worked for the now disgraced Zhang Wenkang, the former health minister.

As a result of government paralysis, people, some carrying the disease and others driven by panic, fanned out across China and the rest of the world. Many of those who didn't leave shuttered themselves in their homes and thousands of others were quarantined by authorities.

The Chinese people at first appeared dazed, but as the panic subsided fear turned to anger. Anger, in turn, has led to a new assertiveness. Today a few openly call for the leaders to resign and others -- in Zhejiang, Henan, Tianjin and Beijing -- take to the streets, sometimes engaging in violent protest. Villagers establish their own roadblocks, hoping to prevent outsiders from bringing SARS into their homes. Across China, some ordinary folk have now decided that they are indeed the masters of their own destiny and don't need the Communist Party to tell them what to do.

A month ago -- before the mass quarantines, blanket closures of businesses and official resignations -- China's population was pliant and the regime on a roll. In the space of a few years, the Communist Party had managed a remarkable string of achievements: the country joined the World Trade Organization, won the 2008 Olympics for Beijing and the 2010 World Expo for Shanghai, delivered high rates of economic growth and racked up stunning trade surpluses and foreign reserves. Gross domestic product for the first quarter of this year increased by 9.9%, which is the highest quarterly growth rate since 1998. Virtually every analyst was predicting that 2003 would be another banner year for Beijing. The People's Republic, it appeared to almost everyone, had finally arrived.

A few weeks later the country is in distress and its leaders are losing their ability to direct events. The "first global epidemic of the 21st Century" is ravaging not only the Chinese people but the nation's growth as well. J. P. Morgan Chase predicts that the economy will shrink 2% in the current quarter, while other analysts talk of the economy coming to a standstill.

At this early stage it's not clear if the effect will be that severe. But it is evident that the current period will be the worst since at least the downturn that followed the Tiananmen Square massacre of 1989. For one thing, the emerging service sector, perhaps the fastest growing component of gross domestic product, has been knocked flat by the mandatory closing of places of entertainment and other public venues, the restrictions on travel and, most importantly, people's unwillingness to leave their homes.

Next to suffer will be exports, which provided almost three-quarters of last year's growth. China's sales to the world will be relatively unaffected during the current quarter, but plant closures, a slowdown in investment and cancelled trade fairs will have an adverse effect in the second half of this year and perhaps the first quarter of 2004. Observers are correct when they say that the export sector doesn't yet show any effects from the epidemic. But what they don't say is that, although the Chinese economy may take a long time to cool off, it will also take an even longer time to get started again. Like SARS, recessions have long incubation periods.

Yet there's an even more important problem for Beijing's technocrats. Central government leaders have managed to produce impressive growth in the past, but they have done so with tactics that are ultimately unsustainable. The government's inability to cope with SARS highlights how economic planners skimped on education, health care and other essential social services.

Now, in the face of discontent, the central government will have to spend much more to provide basic services. In addition to setting aside $725 million to fight the epidemic itself, the nation's new Health Minister Wu Yi recently announced the allocation of $423 million for the establishment of a health network for the nation. That amount is just a down payment to rebuild the system that has eroded after decades of neglect. The Chinese people, post- SARS, will demand more health care, more education, more of everything.

Beijing's swollen budget deficit grew at 27% a year during the past half decade and will increase even faster as officials are now forced to pump money into previously-neglected basic services. Then the world will begin to appreciate the precarious nature of China's finances. The cost of the current fiscal stimulus program, now in its sixth year, has already pushed the deficit-to-GDP ratio well into the danger zone, far beyond the 3% level claimed by the nation's statisticians.

When growth stalls because of SARS, Chinese leaders will lose the ability to paper over the problems inherent in "market socialism." Government spending will not make the Chinese people return to the shops or force foreigners to visit the ground zero of this disease. At that point, the cost of postponing structural, as opposed to cosmetic, reforms will become apparent: China will still have a half-reformed economy, plagued by problems left over from the Maoist era and even a few created during the reform period. And there may be no way to stimulate growth short of implementing wrenching changes such as withdrawing support for uneconomic state enterprises and recapitalising insolvent state banks.

For the past decade, many in the business, diplomatic and China-watching communities have managed to ignore the unsustainability of the regime's policies, as if in a trance due to years of accelerating economic activity. However the current epidemic has forced a reexamination of our critical assumptions about the future course of the People's Republic. SARS exposes the weakness of both the Chinese economy and the regime itself. And the disease tells us something else: the nation has a population that can no longer be ignored.

As economic growth rates come down this year and possibly next, a government that bases much of its legitimacy on delivering prosperity will be in trouble. Then the challenges of ruling an increasingly complex nation will test Beijing. As the SARS epidemic reveals, leaders are still stuck in the old way of thinking. "China's Communist party once ruled a very simple society," says Zheng Yongnian of the National University of Singapore. "Now, with globalisation and the market economy the whole society is mobile and the old methods don't work anymore." As the world is now learning, SARS is marking the end of China's cycle of good fortune. We are now witnessing a turning point in the history of the modern Chinese state.