The year 2020 is designated in the Chinese Zodia as the ‘Year of the Rat,’ which is said to come laden with bad omens, calamities and mishaps. And true to style, the year started with the coronavirus pandemic that has already destroyed the China's growth story. The lockdowns brought industries to a grinding halt during January-February and the country's economy contracted 6.8% in the first quarter.

China faces more than one challenge. Externally, it will have to manage its tensions with the U.S. where President Trump is blaming Beijing for the rising death toll from COVID-19. As of June 2, the U.S. has recorded more than 105,000 deaths from the virus, which is higher than the U.S. fatalities during Vietnam War. Domestically, the country will have to chart out a recovery plan in the aftermath of the COVID-19 outbreak, and manage the rising aspirations of its youth who have tasted prosperity after decades of planned growth.

China’s rulers are acutely aware of the what the pushback from the U.S. can bring. Washington plans to cancel visas of thousands of Chinese graduate students with alleged ties to the People’s Liberation Army. If these students are expelled from American soil, it may affect several research projects. Already Flagship telecom company Huawei’s supply lines to semiconductor makers are being throttled as Trump restricts its access to U.S. technnology. Trump has also barred a federal retirement fund from investing in Chinese equities.

The United States Senate has cleared legislation that will mandate Chinese companies listed on U.S. stock exchanges to provide information about their finances and ownership to auditors. If signed into law, it could force many Chinese firms to delist from the New York Stock Exchange and the Nasdaq. Additionaly, China’s banks may face the heat of sanctions over with the new national security law that Beijing is pushing for Hong Kong.

The Chinese economy remains dependent on the global financial system, which is dominated by America. China’s leaders face probably the biggest challenge they have ever faced as the U.S. chokes trade, technology access, human capital development and finance — in short, all the essential ingredients that have helped the country record galloping growth over the last four decades.

China's huge economy has been hammered by the coronavirus outbreak China's huge economy has been hammered by the coronavirus outbreak Photo: AFP / NOEL CELIS

On the domestic front, there is some reason for cheer. Wuhan — where the coronavirus is believed to have originated — reported no new cases for the first time as on May 31. Between May 15 and May 26, as many as 9 million of Wuhan’s residents were tested. In other parts of China (excluding Hong Kong), only 16 new cases were reported on May 31. China has slowly eased many of the restrictions on businesses and travel. But deeper problems remain. Business owners say they are bracing for tough times ahead as household incomes have plummeted. In the coming months, China’s leaders have to deal with the same problems that other national leaders also face, but made more complex by the sheer size of the the economy and its growth model: how to revive the economy, while at the same time guard against the coronavirus coming back.

In a one-party system, there is an unwritten compact between the government and its people: where the subjects relinquish their freedoms in return for material prosperity and steady economic growth underwritten by the state's growth model. Until now, Chinese leaders have had a good record on that front, with more than 850 million people pulled out of poverty since the 1978 reforms.

However, the per capita income of Chinese citizens is just a quarter of their counterparts' in high-income nations, and more than 350 million Chinese earn less than $5.5 a day. In other words, despite the gargantuan economy, 350 million-odd Chinese live below the upper-middle-income poverty line. While income inequality has improved since 2010 (after China displaced Japan to become the world’s second-largest economy), it still remains relatively high. Immediately after becoming president in 2012, Xi Jinping had set a 2020 deadline to eradicate absolute poverty. According to the State Council Leading Group Office of Poverty Alleviation and Development, approximately 82 million people were lifted out of poverty between 2012 and 2018.

How to handle the economy seems to be top of the minds of China’s rulers. During the ‘Two Sessions’ (meeting of China’s legislative and deliberative bodies) last week, Premier Li Keqiang announced the largest-ever rescue package for businesses (4 trillion yuan, or $559 billion) and a nearly 3.6 trillion yuan ($506 billion) stimulus package. The ‘Two Sessions’ is an eagerly awaited event as it indicates the path ahead for China’s economy and the GDP growth target. This year, for the first time since 2002, the government has not announced any growth target for the economy. Instead, on May 31, state-controlled media published a 2019 speech by President Xi, which just said the country had doubled the size of its economy between 2010 and 2020.

Premier Li admitted that employment is the “biggest issue,” and the challenge of eradicating deprivation may get increasingly “heavier since people may slip back into poverty” due to the fallout from the COVID-19 pandemic. In April, the International Monetary Fund estimated that China's growth rate would be a mere 1.2% this year.

Chinese leaders' thinking is reflected in what Premier Li said: “China has a workforce of 900 million — there are 900 million mouths waiting to be fed if there are no jobs, but 900 million pairs of hands to generate wealth if there are jobs.” That approach, which has worked so well all these years, may not deliver in the post-COVID-19 world. China’s economic model depends heavily on consumption in the West. But purchase orders from Western companies are drying up as coronavirus craters national economies and wipes out jobs by the millions. And that is affecting jobs at China’s factories. The economies of Beijing's top trading partners —  U.S., South Korea and Germany — have all been devastated by the pandemic.

In addition to that, a record 9 million young people are set to graduate from China's colleges this month. On the uber-competitive campuses of China, teachers prod their pupils to do their best as good scores can land a dream job. A dark joke at the universities is that the Chinese characters for graduation ( 毕业 ) look very similar to the characters for unemployment ( 失 业 ). Bright and promising students usually get placements during the campus recruitments that take place around the spring holidays (Jan-Feb). But when the government shuttered universities to limit the spread of the contagion this year, it also abruptly halted the hiring process. These youth now face the devastating reality that they will enter the job market at a time when recruiters are freezing hiring or even downsizing. Economists estimate that China's urban unemployment rate may touch 10% in 2020.

The Communist Party, which prizes social stability and is intuitively aware of the expectations of the nation’s burgeoning educated class, has embarked on damage control. But discontent is already brewing, as shown by the trading community hitting the streets recently in Wuhan, demanding reduction in rentals. The government is also trying to offset the loss of jobs by creating more vacancies in the civil service, with a tour of duty to the rural hinterlands added.

The government is leaning on its state-owned entities to tide over the crisis. The Chinese government’s control over businesses is unrivalled: it manages 51,000 state-owned enterprises (SOEs) collectively worth $29 trillion that have around 20 million people on their payrolls. It is now nudging these SOEs to ramp up hiring. Sops are also being dangled before private firms to recruit more graduates.

Historically, a lack of demand and a recession have been usually followed by a full-blown war, like it happened in 1939 in Europe. With similar economic conditions back again, the world's fate will largely depend on how successfully China will respond to the U.S, and its own internal challenges in the coming months.

(Kalpit Mankikar is a journalist who has completed his China studies from the London School of Economics and Political Science.)