China's economy is encountering severe headwinds from the disruption caused by Beijing's Zero-COVID policy, a flattening of investor and consumer confidence, plummeting exports, and geopolitical complications.

Xinhua reported on May 23 that the State Council has approved an economic package consisting of 33 measures across six areas. Measures include expanding tax credit refunds, loan facilities for micro and small businesses, and new infrastructure projects.

The State Council then convened a national teleconference on stabilising the national economy on May 25. Premier Li Keqiang told 100,000 officials across the country that "the [current] difficulties are in some respects and extent greater than they were in 2020 when the epidemic caused a severe shock."

Li instructed officials to translate the State Council's economic package into actionable implementation plans and measures by the end of May. Inspection teams were sent to 12 provinces on Friday (May 27) to ensure this.  

Economy vs COVID measures

The Chinese leadership is trying to balance COVID control with socio-economic stability. As the economy gets deeper into trouble and the Chinese public gets more restive, stringent COVID measures will be tuned down. We have already seen signs of this, for example, with the lifting of restrictions in Shanghai.

Abandoning Zero-COVID publically will not be politically palatable to the leadership as some will see it as admitting to a policy mistake. To be sure, the choice faced by the leadership is not Zero-COVID or "live with the virus" per se — it's not one or the other — but rather the balance between the strictness of COVID measures with socio-economic considerations. Even when Zero-COVID is abandoned, Beijing's story will be that it's no longer needed because China had defeated COVID (again).

In any case, what we are now seeing is a shift: the economy has returned as the top priority. In Li Keqiang's words at the teleconference: "development is the basis and key to solving all [China's] problems."

Elite politics

Li Keqiang is trying to distance himself from the Zero-COVID policy, which Xi has so far championed. There have been growing rumours over the last few weeks of a Xi-Li split. Whatever is happening in the black box of Chinese elite politics, from the outside what we can see is a palpable increase in the mentioning of Li in state media and his influence on economic policy. Moreover, the observable differences between Xi and Li's policy priorities, including their approaches to COVID and the economy, have been put under the sharp light of public scrutiny.

In many ways, a vote for Li so-to-speak from those within the Party-state system is a vote against Xi. As we get closer to the 20th Party Congress, forces within the Party fearful of the further centralisation of power under Xi himself may support Li and others as a means to voice opposition.

Will Li continue to rise at the expense of Xi in the lead up to the 20th Party Congress? Will Xi and Li strike a deal? If so, what kind of deal? Who will replace Li as the premier? And what will become of Li after the Congress (he is likely to stay on the Politburo)? These are all questions hanging.

A word of caution

By early October 1971, a few sharp-nosed readers of People's Daily had worked out that Lin Biao had fallen. Lin Biao died on September 13 in a plane crash in Mongolia after fleeing a failed power struggle with Mao.

The absence of Lin Biao's name (and increasingly the names of his associates) in the pages of the People's Daily were clues that something was amiss. The People's Daily would only make public Lin Biao's death in August 1973.

The bravest of those observers took extraordinary measures such as denouncing Lin Biao. Some of them were later rewarded when they were proven right. If they had been wrong, they would have been punished for grave counter-revolutionary crimes since Lin was still at that time Chairman Mao's "close comrade-in-arms" and "successor".

The example above illustrates the importance of correctly reading the tea leaves, especially for those inside the Party-state system. Millions of cadres in China are affected by the power struggles at the top of the Party, and their future depends on reading the signs correctly.

By Adam Ni