Rather than fire-fighting the external challenges, China will face far more serious challenges from its domestic audience.

In a new year address on 31 December, Chinese President Xi Jinping told the Chinese people that they have all along “stood firmly on the right side of history” (坚定站在历史正确的一边); he reiterated the principle of “people’s supremacy” (人民至上) and the “supremacy of life” (生命至上) as regards the prevention and control of the epidemic, which he said has entered a “new phase” (新阶段). Perhaps responding to the defiance of the people towards the incessant lockdowns and the anti-government outburst such as the White Paper Revolution, he said, “It is absolutely normal (很正常) to have varied demands (不同诉求) and differing views (不同看法) by people on the same issue, and consensus must be built on these through communication and consultation.”

The pandemic entering a “new phase” refers to a sudden U-turn by China on its “dynamic zero Covid” approach that in the past three years was based on mass testing, strict lockdowns and building of the “mobile cabin hospitals” (方舱医院) for quarantine. China’s National Health Commission (NHC) stopped publishing its daily briefing on Covid-19 since 24 December 2022, when it reported 4,128 new cases. Nonetheless, the Chinese Centre for Disease Control and Prevention Centre (CDC) has continued to publish similar data on its Chinese language website, albeit the big chasm between the Central and provincial governments’ statistics continues to exist. For example, the day the NHC and CDC reported 4,128 cases, Qingdao in Shandong reported a spurt of between 490,000-530,000 cases every day, and that from 25 and 26 December a growth of 10% could be added on this figure.

As of 3 January 2023, the CDC has given the new numbers of the infected and deaths as 7,689 and 5,258, respectively. It is indeed the case of from “zero Covid to zero deaths” after China redefined the new variant as “new novel coronavirus infection” (新型冠状病毒感染), essentially dropping it from Class A of the coronavirus infections and lifting the related prevention and control measures through a notification issued by the NHC on 26 December 2022. Irrespective of statistics of the CDC and NHC, the ground reality at China’s hospitals, crematoriums and pharmacy counters tells an unpleasant state of affairs, albeit for funeral companies like Fu Shou Yuan International Group, a mainland listed company in Hong Kong, this is the good news, as its “stocks are expected to rise more than 80% in the next 30 days”. The report says that “the gradual relaxation of epidemic prevention restrictions will create conditions for a strong recovery in Fu Shou Yuan’s business development next year”. Why has China taken a U-turn on the pandemic?

One, the “White Paper Revolution” was just a spark, but not the main reason behind China’s U-turn on “dynamic zero Covid” policy. China was already mulling ways to optimize its zero Covid policy—on 11 November 2022, the State Council Joint Prevention and Control Mechanism rolled out 20 measures to optimize Covid-19 response, and on 7 December, the same organisation issued a “new 10 measures” response, further optimising stringent Covid-19 lockdowns and quarantine periods. Undoubtedly, the “one-size-fits-all approach or excessive measures” by the local governments were denounced, so as normal daily life of the people is restored. The main reason behind the U-turn was unsustainability of the zero-Covid policy. In one of my previous articles, I had quoted that “a single nucleic acid test costs China around 215 million yuan a day, amounting to nearly 50 billion yuan a month”! Rather than ameliorating the Covid-19 situation, the testing companies were making fortunes.

Two, if the proceedings of the Central Economic Work Conference (CEWC) held in Beijing between 15 and 16 December are any indication, China has come to believe that all is not well with its economy. The conference focused on economic growth by way of domestic consumption, foreign direct investment, stabilisation of real estate sector, and support to private enterprises, including the big-tech companies that were once penalised by the party-state. The conference argues that the “foundation of economic recovery is not yet stabilized, and China is still facing three-fold pressure on contracting demand, supply shocks and weak expectations.” The expansion of domestic consumption would be an uphill task, as consumer confidence is at its lowest ebb. The confidence has been shattered by the pandemic, but more importantly it is owing to China’s inability to keep on investing about 45% of the GDP domestically for the fear of low or even negative return on investment in the real estate or other infrastructure projects. Depreciation of the RMB is a serious challenge that will impact the overall GDP of China. This year alone the Yuan has depreciated by 12%.

Three, bad finances of the local governments amounting to over $4 trillion is another issue. Since land was a cash cow for the village collectives, realtors and enterprises, with the bursting of the real estate bubble, this steady source of income has been lost. No wonder, local governments competed for building “mobile cabin hospitals” at such a huge scale for getting financial support from the Central government. If the auditing of such “hospitals” is carried out these may run into billions of dollars.

Four, the prolonged China-US trade war is another worry. According to a study conducted by the Peterson Institute for International Economics, “China is now the source of only 18% of total US goods imports, down from 22% at the onset of the trade war.” The decoupling is visible as regards the products that have been subjected to high tariffs, and those in the hi-tech sector such as semiconductors. Nonetheless, these goods have been replaced by the import of other goods, e.g., computer monitors, consoles, toys etc., not really affecting the total trade volume. It has though triggered the shifting of supply chains to Southeast Asia and India by companies from the US, Korea and Japan. No wonder, the South China Morning Post reports that in the first 11 months of 2022 some 4.37 million of China’s small businesses have permanently shut their businesses. The unemployment rate amongst the youth has reached 19.3%.

Finally, there is a silver lining for China if we look at its exports to the developing or the Belt and Road Initiative (BRI) countries. According to the BRI portal, as of now, the “friend circle” of the BRI countries has extended to 150 countries and 32 international organisations. China’s total export and import with the BRI countries reached $1.82 trillion, registering 20% growth over 2021. According to a report published by Christoph Nedopil Wang of Shanghai-based Green Finance and Development Centre (GFDC), since 2013, China’s cumulative BRI engagement amounts to $932 billion, about $561 billion in construction contracts, and $371 billion in non-financial investments. Undoubtedly, these massive projects have contributed to the local development and provided employment opportunities to thousands of people. However, these have also raised various concerns, some genuine and some geared towards demonising China. The fact that China’s BRI footprints in Asia, Europe, Africa and Latin America has forced the United States and its allies to counter the BRI with their own projects like Indo-Pacific Infrastructure Forum (2018), Build Back Better World (2021), EU’s Global Gateway strategy (2022) etc., shows that the West is rattled by China’s influence.

However, rather than fire-fighting the external challenges, China will face far more serious challenges from its domestic audience as have been witnessed during the “White Paper Revolution” and the recent “fireworks” in Henan’s Yiba county and Nanjing where people defied the government ban on firecrackers and even toppled a police car on 2 January 2023, inviting anger and counter measures from the authorities. The Public Security Bureau of Yiba county in a notification issued on 3 January warned that “the authority of the law enforcement agencies cannot be challenged” after it arrested the eight suspects.


B.R. Deepak is Professor and Chair, Center of Chinese and Southeast Asian Studies, Jawaharlal Nehru University, New Delhi.