Coronavirus poised to undermine China’s healthcare miracle

Eurasia Group's Aditya Bhattacharji examines the unfolding coronavirus outbreak, the prospects for China's political and economic stability, and how healthcare firms should think about the path forward.

China appears to be ground zero for a public health experiment with no recent analogues. The situation—in terms of social and economic dislocation—deteriorates daily and represents the most significant challenge the country's leadership has faced during President Xi Jinping's tenure.

Xi's grip will strain but not break

These are high stakes for President Xi. It is widely accepted that China fumbled the early stages of its response, echoing similar missteps during the SARS outbreak in 2003. While the initial blame focused on the provincial government's mishandling of the crisis, implications that the central government played a role in delaying publication of the disease have led to significant popular complaints directed at Xi and Beijing.

Additionally, Xi now firmly owns the crisis response as his consolidation of power is premised on the ability to address emergencies. Premier Li Keqiang may be directing efforts in managing the crisis, but there will be little insulation for Xi if efforts go awry, particularly if he is seen as unwilling to visit affected areas.

However, only a massive failure would exert significant pressure on Xi's hold on power, given his command of both military and propaganda organs. But he could well see his political capital eroded by serious missteps, either in controlling the spread of the outbreak or allowing a major deterioration of conditions in quarantined cities.

There are also risks for China's international standing, especially if Beijing pushes back on efforts by other governments to evacuate citizens. A global health crisis, especially if there are new doubts about transparency, will dent China's image at a time when—unlike with SARS—Beijing is making a bid to be viewed as a global leader.

Implications for businesses

The trajectory of this outbreak remains elusive, but there are a few inalienable implications regardless of its intensity and duration. Material economic damage is imminent even if this outbreak is stamped out by March—in part due to stringent and unprecedented restrictions to movement that have shuttered Chinese manufacturing and transit. Beijing's ability to stimulate the economy is limited; monetary policy can act as a short-term stabilizer for the markets but would have limited impact on demand, and fiscal policy is constrained by overstretched local government finances (particularly in badly affected areas).

A cooling economy presents a real risk to China's ambitious healthcare reforms. Cash-strapped local governments will find it difficult to fund expansive modernization projects, and Beijing's ability to subsidize these initiatives will also be limited, given that funding has already been disbursed to address critical infrastructure shortfalls. Moreover, the likely effect of this crisis on employment could drive up the number of beneficiaries for China's state-sponsored insurance schemes, increasing the fiscal burden. In this context, even more pronounced pressures on product pricing and local investment requirements are likely.

Calls for local investment will be particularly challenging, given that the centrality of China to global medical supply chains is now coming into stark focus and other governments are likely to demand similar initiatives to reduce their reliance on China-made products. Last, the coronavirus crisis is likely to siphon not only funds but also policymakers' attention toward infectious diseases and away from other health issues areas such as chronic disease.

This article was originally published on Pharmaboardroom.com. To learn more, read New deadly virus outbreak tests Chinese, international governance and How the coronavirus epidemic could upend the global economy. Watch What you need to know about the coronavirus, Coronavirus outbreak is President Xi's "greatest political challenge" so far, China Check-in: Coronavirus, and China looks to control coronavirus before economy spirals.