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For a metropolis teeming with 13 million people, it was the most spectacular of disappearing acts. Overnight, Beijing, a city whose wide avenues are usually jam-packed with crowded buses, squadrons of bicycles and even the occasional donkey cart, had transformed into a ghost town. Panicked about Beijing's burgeoning severe acute respiratory syndrome (SARS) crisis, residents were fleeing or staying indoors to evade the deadly disease that had by week's end claimed 48 lives and afflicted 988 others in the capital. Restaurants, theaters and shopping malls resembled abandoned movie sets. Elementary and middle schools were closed for two weeks, while some universities confined students to their campuses. Three major hospitals were quarantined, including the Peking University People's Hospital with its 2,000 or so employees. Only the city's dilapidated railway stations bustled with activity as frantic, face-mask-clad citizens pushed and shoved for a ticket out of town. "I'm very worried about getting on a train with so many people," says a student surnamed Wang, who was waiting for the poorly ventilated train back to his native Changzhou in Jiangsu province. "But I'll do anything to get out of Beijing. It's simply become too dangerous."

It is a crisis the international community has known about for more than a month, but only now is it hitting home in China. On April 20 the government ended a weeks-long policy of massively underreporting SARS cases in the capital, sacking the city's Mayor Meng Xuenong and the nation's Health Minister Zhang Wenkang. In just one day, the city's SARS caseload was revised from 37 to 339. By week's end even that figure had almost tripled. But increased transparency has hardly meant an end to Beijing's looming biological nightmare, and the scramble to make up for lost time has only succeeded in spooking residents who had genuinely believed the city's original lowball SARS statistics. As nervous citizens cooked up exit strategies, the social stability that China's leaders were trying to maintain when they underplayed Beijing's SARS numbers has been shaken. The World Health Organization (WHO) slapped a travel advisory on the capital city, portending a slowdown of foreign investment in Beijing and sluggish economic growth.

Panics can happen anywhere, but they take on epidemic proportions in countries lacking a free flow of information. Unable to rely on government reports, Beijing's citizens were forced to depend on the rumor mill, which was turning at 1,000 r.p.m. last week. Grannies in Mao suits whispered that the entire capital was going to be quarantined, while Internet chat rooms buzzed with claims that the disease was a conspiracy courtesy of the Americans and the Taiwanese. Yu Jun, a worker at a private metal company, had heard that shops would soon be closed and was raiding a grocery store for basic food supplies. "I know this is probably a rumor," says the 32-year-old, whose neighbor has come down with SARS. "But right now I'd rather believe rumors than what the government tells me is true." Meanwhile, in villages on the outskirts of Beijing, terrified citizens have set up blockades to bar all outsiders from entering, creating an atmosphere of desperate vigilantism.

Even more worrying, hospitals on the epidemic's front lines are also spooked. Medical facilities in both Beijing and the country's impoverished interior are reeling, as the very doctors supposed to be fighting the disease are themselves falling ill; at the quarantined Peking University People's Hospital, 70 medical staff caught the disease after one virulent victim arrived at the emergency room. When that first patient checked into the hospital on April 7, doctors had not been adequately schooled in infectious-disease protocol, since Beijing was still denying the capital had a SARS problem. Medical staff quickly fashioned a makeshift isolation ward, but their quarantine techniques proved faulty when 20 patients and dozens of doctors were infected. "We just didn't have the right resources to handle the problem properly," says a department head at the hospital. "It was hard to do the right thing before the government started reporting accurate numbers." In an effort to prevent the disease from spreading to other vulnerable hospitals, Beijing has touted a soon-to-be-finished facility dedicated to treating SARS victims. The complex is a converted clinic formerly used to treat sexually transmitted diseases. Wards are being constructed out of sheet metal and resemble the temporary dormitories usually used to house migrant workers.

For the Chinese government, the SARS crisis presents the gravest threat since the student protests at Tiananmen Square 14 years ago. Confidence that the Party always knows best is badly shaken. China's leaders have parlayed their success at transforming the mainland economically into a depoliticization of the masses that enables continued one-party rule. But if the Communist Party cannot handle a public-health crisis — a basic service in most developed countries — then will it really be effective as China hurtles toward even greater transformations ahead?

How the crisis ultimately rattles China depends, in part, on what happens in the country's financial capital, Shanghai. The city is home to Jiang Zemin's power base, and if any heads roll there, the former President and his acolytes lose out. So far this city of 16 million has appeared largely untouched by the mystery virus. Last Saturday, local health officials had only confirmed two cases and 15 suspected patients, one of whom was an American. So worried were central-government officials that this last bastion of good health might be infected that they sent a directive to Shanghai authorities early last week demanding that local bureaucrats maintain the city's reputation as essentially "SARS-free," according to a vice-mayoral aide. Whether that meant Shanghai really was immune to the disease or whether they were just supposed to give outsiders the impression that China's biggest city didn't have a SARS outbreak wasn't clear. "All I have been told is that we must maintain the image of Shanghai as a place without a SARS problem," says a Shanghai health official, before adding: "Sometimes the reality can be different from the image, but if you want to attract foreign investment, image is the most important thing."

But as the week progressed, Shanghai's much-vaunted image was starting to fray. Local doctors, who have been instructed not to talk to foreign media lest they lose their jobs, haven't accused Shanghai of a cover-up as extensive as the one in Beijing. But they have voiced doubts about the veracity of the government's statistics. In a press briefing last Friday, the WHO, which concluded a five-day trip to Shanghai that day, said it generally accepted the government's confirmed caseload, despite having posted a notice on its own website the day before saying that it suspected Shanghai was underreporting the numbers. (An informal press conference set up by a WHO official on Thursday evening was halted by security personnel.) Though the WHO reported it had been given full access to medical facilities, a doctor at the People's No. 6 Hospital said the international experts were shown "a sanitized version of Shanghai's SARS problem." A doctor at the Shanghai Contagious Diseases Hospital told Time there were more than 30 suspected cases at his hospital alone, double the official suspected caseload for the whole city. He and other physicians also complained that Shanghai's requirements for diagnosing SARS had been much more stringent than elsewhere in the world and that if the standards used in, say, Hong Kong were applied in Shanghai, many patients in the suspected caseload would be shifted to confirmed cases. The same questionable accounting had been used in Beijing, before the capital became more forthright about its viral crisis. On Friday, the WHO reported that Shanghai would be adopting a less strict standard for calculating suspected cases and that the city therefore would soon be substantially increasing its suspected caseload.

At the Huashan Hospital in a leafy district of Shanghai, doctors and nurses confirmed there were seven suspected cases at their hospital, although the hospital's official press liaison said it had none. The patients were being treated in a makeshift isolation ward housed in a dilapidated prefab building formerly used for hepatitis patients. Doctors and nurses were not wearing formal isolation suits, and many were wearing four or five simple surgical masks over each other. But last Wednesday, security guards waiting for possible visit from WHO officials were instead ushering interested foreigners to a fancy high-rise nearby. On the 15th floor of this building, medical staff in full barrier suits greeted the guests, while other staff conspicuously sprayed disinfectant around the ward. The road leading to the building had been recently repainted and an elevator lady stood in the lobby, helpfully directing the visitors to the official isolation clinic. No such sprucing-up measures, however, had been taken at the makeshift ward where the patients were actually being treated. In the end, the WHO did not visit the hospital, although it toured many others. Says one security guard there: "Now we can go back to being normal."

Similar games were played out at other hospitals. At the People's No. 6 Hospital, director He Mengqiao formally denied there were any suspected cases there, instead maintaining that the hospital was merely a "monitoring station." Yet just 10 minutes earlier, another doctor who mistakenly assumed a TIME reporter was affiliated with the WHO showed X rays of a 14-year-old patient suspected of having the disease. He said that other students at the same school were also running fevers and were being monitored. Education officials denied knowing of any such cases.

Political analysts say Shanghai's Party discipline has never been so tight as it has been in recent weeks. Early last week, top Shanghai Communist Party officials met with local state-run media to discuss the city's SARS situation. The meeting was classified as neibu (internal), meaning that the information discussed would not be disseminated to the public. Officials told the gathered media that medical experts had told them Shanghai would not escape the SARS epidemic, despite previous public assurances to the contrary. The cadres also said the WHO had told them that the U.N. agency did not believe the government number of only two confirmed cases — before the WHO basically proclaimed otherwise in its Friday press conference. Large-scale events in the city were to be canceled, and Shanghai's much-vaunted auto exhibition was ordered closed two days early after rumors that SARS-positive patients had visited the show. The media were instructed to ramp up a SARS public-education campaign so that city residents would know how to prevent the spread of the virus.

But then the meeting took an alarming turn. Party officials cautioned that "Shanghai's SARS caseload was still a state secret," according to a journalist in attendance. The state media were not to report any SARS statistics higher than the government-sanctioned figures, nor were Shanghai-based journalists allowed to interview any SARS patients or their families. "Readers are going to be very confused," complained the journalist. "On the one hand, we tell them there are almost no cases in Shanghai. On the other, we tell them that they must be very vigilant in avoiding the disease. But if Shanghai has barely any cases, why does the public need to be worried about SARS?" The answer to that question is self-evident. The Party, however, appears to still be putting its own survival above the well-being of ordinary Chinese.

As frightening as China's medical epidemic is, the country's leaders could find the economic and political fallout even more terrifying. For years, the Communist Party has based its legitimacy on a record of rapid economic development. Soaring GDP rates and rapidly improving material well-being have distracted the masses from a still spotty human-rights record and sclerotic political system. Fear of an economic downturn, such as the one hitting Hong Kong, was among the reasons the government covered up the epidemic for so long. Now, the disease looks like it could indeed have a devastating effect on the country's finances — precisely at a time when other Asian nations were counting on China to serve as an engine for regional economic growth. Already, Citigroup has lowered its forecast of China's growth for this year to 6.5%, far below the 8% Beijing considers the minimum requisite level to provide work for the millions who are being let go by money-losing state enterprises each year. A poll by the American Chamber of Commerce in Beijing shows that 20% of its member companies have already sent family members out of China for fear of SARS. "Anything that requires face-to-face meetings is on hold," says Jack Langlois, director of Morgan Stanley Properties for China. But expatriates are the least of China's problems. The brunt of the economic burden will be largely borne by the laboring masses, namely the country's estimated 120 million migrant workers, who have already been flocking to Beijing's train stations in the tens of thousands after being let go from menial jobs at restaurants, markets and factories. "(The impact) will fall disproportionately on those least able to cope," says Tang Min, chief economist at the Asian Development Bank in Beijing.

These economic and social implications of the disease may be pushing China's leadership to a make-or-break point. Containing the outbreak is the first big test for the country's new President, Hu Jintao, a man who appears to have reached the top by keeping his head down and not formulating a single memorable policy. But in an unprecedented display of forthrightness, both Hu and Premier Wen Jiabao have called for increased transparency in dealing with SARS — a radical policy departure, and major political gamble, for a leadership that traditionally feels more comfortable with obfuscation than candor. If Hu's move toward open governance pays off by containing the disease and winning public confidence, analysts say it could help him consolidate his power base by shunting aside forces loyal to his predecessor, Jiang Zemin. "This is his chance to grab the support of the people and stand up on his own," says Bao Tong, a former senior Party official who was purged after the 1989 Tiananmen uprising and lives in Beijing. But should China's GDP rates tumble or the public remain skittish, Jiang, with his continuing control of the military, could reassert his authority. That could signal a return to the bad old days when the Communist Party regarded the massacre around Tiananmen Square and the deaths of some 200,000 people in the 1976 Tangshan earthquake as state secrets. Keeping information about SARS a secret, however, could ultimately undo much of the progress China has made over the past 10 years in securing foreign investment and ensuring growth. It's hard to do business with a government that won't talk openly about a disease that could kill you.

• Hannah Beech / Shanghai
• China struggles to contain SARS—and the fallout