Inside the Great Hall of the People during last year’s National People’s Congress in Beijing. Photo: AFP

Inside the rarified atmosphere of the Great Hall of the People, the aroma of disinfectant will mingle with a whiff of economic distress.

A toxic mix before Premier Li Keqiang gives his annual state-of-the-union-style speech at the National People’s Congress in Beijing later this week.

Outside, the air will be virulent as the fallout from the Covid-19 crisis threatens to poison diplomatic relations between China and the world’s leading democracies.

“The United States and China were already on the brink of a new Cold War, or a quasi Cold War, before the pandemic. This has only been exacerbated in the wake of the outbreak,” An Gang, of the Center for International Strategy and Security at Tsinghua University in Beijing, said.

“The pandemic has highlighted the institutional strengths of China and the institutional disadvantages of the US. As its political self-confidence recedes, the US is [becoming] increasingly sensitive. In this way, the institutional rivalry has clearly been an important factor in their bilateral relations,” he wrote in a commentary, entitled Four Major Crises Are Brewing, for China-US Focus.

Diplomatic “relations” between the planet’s two largest economic powers were already frosty before the coronavirus outbreak. Now, they are in a state of deep freeze.

Since the epidemic first officially surfaced in the Chinese city of Wuhan at the start of the year, more than 4.8 million people have been infected across the globe with the death toll edging past 316,000.

Parts of Europe have suffered the brunt of the outbreak with the United Kingdom reporting more than 243,695 infections and 34,636 fatalities. Italy has close to 226,000 infections and nearly 32,000 deaths followed by Spain and France.

Overseas, the reaction has become more vocal with Australia calling for an independent investigation into the origins of the virus. France and the United Kingdom have also demanded answers about the source of the outbreak, while Canadian politicians have joined the chorus for reparations from China.

“Deliberations in Europe about long-term issues ranging from supply chain diversification to telecoms security will take place in an atmosphere of intensified distrust of the Chinese government, as well as greater clarity about the nature of the actor China is becoming under [President] Xi Jinping’s leadership,” Andrew Small, of the European Council on Foreign Relations, wrote in a policy brief for the pan-European think tank.

“The manner in which Beijing has handled one of the most acute tests faced in recent times by European governments – and by the European project itself [or European Union] – guarantees that there will be a political reckoning,” he said. 

Still, the US has been the loudest voice and the most critical of China’s foreign policy approach. In turn, this has fueled a row with Beijing insisting that President Donald Trump has tried to deflect criticism for the climbing US death toll of more than 90,000 with anti-Chinese sentiment.

Zhang Tengjun, of the state-sponsored China Institute of International Studies, has compared the diplomatic mood to the McCarthy witch-hunts in America during the early 1950s.

“China-US relations are at their worst point [in more than] 40 years because of this … [and] the Trump administration is largely to blame,” he wrote in a commentary for the government-owned Global Times.

“Be it the lies that the coronavirus originated from a Wuhan lab, or groundless claims that China should be held accountable for the losses the epidemic will have caused to the US, the Trump administration is trying to revive McCarthyism for the sake of their own political interests and re-election,” Zhang, who is in the Department of American Studies, said.

Against this backdrop, Premier Li will unveil China’s economic blueprint for 2020, with just seven months of the year left.

Key policy decisions will involve getting to grips with rising urban unemployment. Official data showed it was 6% last month compared to 5.9% in March but down from the record high of 6.2% in February.

Moreover, the figures fail to include migrant workers, another notoriously sensitive subject to the upper echelons of the ruling Communist Party. Up to 10% of people officially employed in China could actually be out of work, according to Societe Generale economists Wei Yao and Michelle Lam.

“The Covid-19 shock to the job market is unprecedented in its scale, length and nature,” they wrote in a research report.

Maintaining social stability will be paramount, so shoring up employment will rank alongside saving struggling small- and medium-sized companies.

Creating 60% of China’s GDP growth, the private sector accounts for around 80% of urban jobs and includes legions of SMEs.

In Beijing’s “Six Priorities” rolled out by the influential Politburo last month, the top three were to “ensure employment, people’s livelihoods” and the “survival of companies.” They will receive star billing in Li’s government work report at the annual talkfest known as the “Two Sessions.”

“Public records suggest that at least half a million firms were dissolved in the first quarter and more are likely to close shop,” Mark Williams, the chief Asia economist at Capital Economics, said in an April media brief.

To combat this, President Xi’s government is upgrading the Made in China 2025 policy with next-generation technology. In typical clunky CCP jargon, it is known as a “new-type national system.”

While exact details of the policy have still to be formally announced, it fits into massive state investment into technological infrastructure.

Last month, Xi outlined the high-tech shift during a trip to the northwest province of Shaanxi. He stressed the need to “push forward with investment in 5G, the Internet of Things, artificial intelligence,” or AI, “the industrial internet” such as robotics, “and other new-type infrastructure.”

Yet more immediate risks to the economy need to be tackled.

“This year it’s going to be a challenging task given an unprecedented economic crisis brought on by Covid-19. The economy has suffered its worst-ever contraction [in the first quarter] by 6.8% [compared to] a year ago,” Prakash Sakpal, an economist for the Asia region with ING, the multinational bank, said.

“Although the worst of the country’s outbreak is over (hopefully), a significant global demand slump will continue to undermine the recovery in the rest of the year. Adding to the woes is a growing spat with the US, carrying with it the risk of a re-escalation in the trade war between two countries,” he added in a note.

Amid this climate of uncertainty, the cold, hard numbers in Li’s report will fail to hide what has been a winter of discontent. And what will probably be a summer of turmoil.

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