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China’s Xi Jinping tightens his grip

May 22, 2020, 11:05 AM UTC

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In most years, the annual gathering of China’s two largest parliamentary bodies is elaborately scripted political theater.

The conclave is known as the lianghui, or Two Sessions, because it convenes delegates from the Chinese People’s Consultative Conference and the National People’s Congress. Neither assembly has much real power. To outside observers, it can appear that the main point of the proceedings is to furnish an audience to applaud party leaders as they extoll past achievements and outline grand goals to come.

But this year’s event, which commenced in Beijing on Thursday, offers genuine drama.

First came a surprise announcement Thursday that members of NPC’s powerful standing committee are drafting a new national security law for Hong Kong. That revelation suggests Chinese President Xi Jinping has lost patience with increasingly violent anti-government protests in the former British colony, and isn’t concerned about global condemnation for overriding the city’s system of self-governance.

Then on Friday, Chinese premier Li Keqiang declared that Beijing would dispense with a formal economic growth target for 2020, citing “great uncertainty” caused by the coronavirus pandemic. That decision departs from nearly a quarter-century of Chinese tradition and tacitly acknowledges the party may not achieve a high-profile poverty alleviation target meant to burnish Xi’s image ahead of next year’s centenary of the founding of the Chinese Communist Party.

Both moves are a measure of Xi’s determination to tighten his hold on power in the wake of the pandemic. The virus, which originated in the Chinese city of Wuhan, brought China’s economy to a temporary standstill, and continues to wreak havoc in the rest of the world.

As Xi takes center stage in the Great Hall of the People this week, he confronts enormous domestic and global challenges. China’s economy, which expanded 6% in 2019, shrank 6.8% in the first quarter of this year. Full-year growth will slump to 1.8%, according to a Bloomberg survey of economists.

Xi faces global criticism for his early handling of the outbreak. China is sparring with Australia over that nation’s call for an international probe of origins of the virus and squabbling with Europe over the quality of medical products sent by China to cope with the outbreak. Its relationship with the United States is in freefall.

This isn’t the narrative Xi intended, and yet it may still play to his advantage. He can blame the virus for the sluggish economy. And whatever the failings of his initial response to the outbreak, he can tout his decisive steps to contain it in late January, ordering an almost total lockdown of an area encompassing more than 100 million people. The subsequent failure of governments in Western Europe and especially the United States to do likewise have bolstered Xi’s stature by comparison, and enabled China to restart its economy more quickly and with more confidence than the West.

In this week’s Eastworld Spotlight conversation, Matthews Asia investment strategist Andy Rothman, argues China is headed for a V-shaped recovery in the year’s second half, and unemployment rates are rapidly falling.

Xi, now midway through his second term as president, may emerge from the crisis stronger than ever, and poised to extend his reign for an unprecedented third term in 2023.

More Eastworld news below!

Clay Chandler
clay.chandler@fortune.com

This edition of Eastworld was curated and produced by Grady McGregor. Reach him at grady.mcgregor@fortune.com.

Eastworld news

A 'Great Firewall' in Greater China?

Beijing's promise on Thursday to enact a new national security law in Hong Kong, its latest exertion of power on the Special Administration Region, sent Internet users in the city into a race for privacy. Nord VPN, a company that allows users to mask their Internet activity and location, reported that demand for its services in Hong Kong rose by a factor of 120 after the news. Hong Kong's Internet remains free from the Great Firewall restrictions imposed in mainland China. Hong Kong citizens, however, may feel that their digital buffer from the mainland is under threat. Bloomberg

Running out of luck

Nasdaq may make life harder for Chinese-listed companies. Reuters reported on Tuesday that the exchange is preparing new rules that will tighten requirements for Chinese IPOs hoping to list on the U.S. exchange. The crackdown follows a crisis at Luckin Coffee, a Chinese coffeehouse chain that became Starbucks’s largest competitor in China. The company was found to be fraudulently reporting its financial numbers in early April, and Nasdaq froze Luckin's stock for over a month. The company's shares began trading again this week, with its stock in free fall. Fortune’s Eamon Barrett dug into the crisis at Luckin and what it could mean for the future of Chinese companies hoping to list in the U.S. Fortune

The world’s largest democracy meets digital health surveillance

India’s government launched a COVID-19 contact tracing app, Aaroygya Setu, meaning ‘bridge to health,’ six weeks ago. It lets users know their risk of contracting COVID-19 based on their proximity to people infected with the virus and has been downloaded over 100 million times. The app is not mandatory for all citizens, but it is required by some localities and private employers. There are now growing concerns among users about sharing personal information and location data on the app. At least one user hacked the system (he was able to mark himself as always safe from the virus), plus there's India's checkered history of protecting digital privacy to consider. BBC

‘Bloom and bust’

In the northern Chinese province of Inner Mongolia, government officials thought they could boost local revenue with a major push into sunflower production. The effort, however, cost local government coffers millions, and ended in the conviction of two county officials who led the failed initiative. In a feature published this week, the independent Chinese outlet Caixin gives us an in-depth look into where the doomed flower effort went wrong and the pressure local governments face in trying to find innovative ways to meet national production and poverty alleviation targets. Caixin

Breaking bad

As governments in Southeast Asia focused on containing COVID-19, narcotics makers ran rampant. On Monday, government authorities in Myanmar announced Asia's largest ever drug bust, seizing nearly 200 million methamphetamine tablets and thousands of liters of derivative of the dangerous narcotic fentanyl. A UN official in Southeast Asia said of the bust, “While the world has shifted its attention to the COVID-19 pandemic, all indications are that production and trafficking of synthetic drugs and chemicals continue at record levels in the region.” Southeast Asia Globe

Coronavirus by country

Japan’s coronavirus response is a puzzle. In February and March, Japan seemed to dismiss the threat of the virus, keeping the country largely open even as neighbors like China went into lockdown and others like Taiwan and South Korea took aggressive measures to combat the spread.

At the time, Japan had yet to report a major outbreak, though the Diamond Princess cruise ship became a vector for the disease just off the country's shores. In late March, Japan announced the postponement of the 2020 Summer Olympics in Tokyo. Japan averaged dozens of cases a day during March, but cases spiked into the hundreds following the announcement, and the country regularly reported over 500 new cases per day in April. The sudden surge raised concerns that the country had been covering up the scale of its outbreak in hopes that the 2020 Olympics would go on as planned.

Now, after the steady rise in new infections in April, Japan’s COVID-19 curve seems to be leveling off at  17,000 confirmed cases. Japan enacted a state of emergency starting in early April, yet measures like closing non-essential businesses were more recommendations than enforceable policy. Still, data shows that the majority of Japanese citizens adhered to social distancing guidelines, even if crowds still formed at some establishments like gambling parlors. This week, Japan Prime Minister Shinzo Abe lifted a state of emergency in much of the country, and announced that he hopes the five remaining provinces that remain under emergency state will reopen soon. As Foreign Policy states, "it is difficult to know if [Japan] has just been lucky or if it’s a matter of good policy."

Markets and movers

TikTok – Kevin Mayer, Disney’s streaming chief, is moving to TikTok. On Monday, Mayer announced that he will become the Chief Operating Officer of Bytedance. He will also be named the Chief Executive Officer of TikTok, which Bytedance owns, as of June 1. Fortune

Alibaba – On Wednesday, the Chinese tech giant Alibaba announced a $1.4 billion investment into its existing smart speaker system Tmall Genie. The company hopes to expand Tmall Genie's existing capabilities and incorporate it better into company’s vast e-commerce system. SCMP

Softbank – The Japanese conglomerate has been struggling and is looking for cash. On Thursday, the company announced that it was selling off 5% of its shares in its domestic telecom company, Softbank Corp, which are valued at $3.1 billion. The company is aiming to raise an additional $41 billion by selling off its stakes in companies like T-Mobile and Alibaba. Deal Street Asia

Muddy Waters – This week, the activist research firm Muddy Waters took a short position in GSX Techedu, a Chinese online education startup, and published a report claiming that over 70% of the company’s users were bots meant to boost the company’s performance. GSX responded, claiming Muddy Waters lacked “a basic understanding” of its business. Muddy Waters' report, however, led to a sell-off; GSX stock has dropped 15% since the claims. Investors are likely taking the activist investing firm's report more seriously than in the past since it published an incriminating report about Luckin Coffee (see above) in January, months before its allegations proved true. SCMP

Final figure

In a first (and likely last) time for Eastworld, our final figure this week is the absence of one. On Friday, China announced that it will not be setting a GDP target for 2020 at the government’s annual Two Sessions meeting. It's a remarkable break in precedent for a country that has elevated economic growth targets to gospel during its ascent to become a global power. China was projected to grow at a rate of roughly 6% this year, before the pandemic caused a 6.8% contraction in the first quarter. “We have not set the specific [gross domestic product] target mainly due to the global pandemic and big uncertainties in the economy and trade,” a government paper said. Fortune