Erupting troubles in China

China is in a pincer like grip, from domestic woes on one hand and foreign hostilities on other. It is stuck in a middle income trap. — KK Srivastava

China has grown, both politically and economically, amidst the league of nations at an unparalleled scale during the last four decades. Many factors and judicious decisions by the state contributed to this fast paced and prolonged advance. However, now the growth spurt is a bit faltering. Question is, why? And, whether China will regain its momentum? If yes, how?

For well over 30 years, Chinese model produced high economic growth, urbanisation and poverty reduction. But this has led to massive environmental degradation, corruption, rising inequalities, an enormous debt burden, growing youth unemployment, and lately muted protests. Consumption of domestic users was deliberately suppressed in the interests of generating export surplus on one hand and capital formation on the other. This led to the economy being (in the words of then premier Wen Jiabao’s words) unstable, unbalanced, uncoordinated, and unsustainable. This was in 2007. China decided to take note.

For example, it focussed on science and technology. Here either a country can achieve break throughs in the basic sciences and foundational technologies or, another way, it can adapt existing technologies to better applications. China adopted the second route, sometimes (allegedly) even stealing the technology from other nations. Result: of the 25 most valuable technology companies China owns nine. In emerging areas like green energy and electric vehicles, the downside has been, however, that while China has deployed resources, money and human, to advance in the domain of science, it never created institutional infrastructure to promote scientific creativity. For example, the education system has cultivated rote learning, and not original thinking, among the students. Likewise the research bodies lacked much autonomy, so much so that Chinese scientists never formed the part of global scientific community and exchange ideas at the fraternity level. This could be, one guesses, due to the communist regime’s distrust of the ‘other world’ in general, and capitalist economies in specific.

On the other hand due to its ‘closed’ system, China’s financial sector (equity and bond markets) are underdeveloped. There are very few independent market players, including financial intermediaries. Here too foreign institutions are highly distrusted. But this has led to two setbacks. One, China has not been able to channel funds for its own development through a vibrant and well regulated stock market. And, two, even though China carriers a considerable weight in world trade, its currency is not ‘hard’ enough; it does not play a commensurate role on world trade and commerce stage. This weakness of the financial system again stems from the communist party’s distrust of open market system which presumably can lead to the possible turbulence on one hand and loss of party’s grip on the system, on the other.

While one can cite other examples of demographic policies, the party’s distrust of private sector, etc. the basic idea is clear. It is time the party takes an assessment of opportunities arising from and risks involved in, the exercise of political power. Paradoxically the system wants to dominate the world economy and polity and yet won’t integrate with the global set up beyond a point. 

China is definitely a very influential and with considerable weight, player on the world arena. Hence its problems are not its alone. So while it should not and cannot take a 180 degree about turn and work along the liberal western economic development model, it need to pause and design a new playbook. Notable, now the original ‘global village’ concept is being abandoned; many countries (India included) are redesigning their industrial policies (Atmanirbharta, In India) and preferring economic controls over the free play of markets – all of this to ensure welfare of their subjects and grow economically at the targeted pace. However, a return to socialism/communism is neither feasible nor desirable, more so in face of three very important developments – geopolitical upheavals (the likes of Russia – Ukraine war, Israel-Hamas conflict), climate change (global warming), and disruptive technologies (artificial intelligence). 

China thus needs to convince the world that it poses no threat to other nations by being hegemonic – economically, politically, or otherwise. China ofcourse does not conceal its ambition of aiming for a global leadership image. But an ageing China faces economic slowdown, since a rapid supply of labour force at very low real wages will no more be available. Therefore future growth rate would not be in the vicinity of 8-10%, as was the case earlier. It is likely to be stuck in the ‘middle income’ trap. To add to the woes there exist both local government debt and corporate debt which leave adverse implications for both financial stability and economic growth.

But this syndrome is not confined merely to the Chinese economy losing pace at home. At the international level, America and many other countries are turning openly hostile. One very visible example of this is ‘China plus one’ policy adopted by the Western World. The other one is ‘non cooperation’ in technology transfer. For example, during 2018 eighty percent of Walmart’s shipment came from China; this figure has reduced to only 60% for the period January-August 2023. Incidentally a major gainer has been India. The shift by Walmart and other Western companies away from China is on account of escalating political tensions on one hand and rising import costs (from China) on the other. To be sure, however, America (as also India) remains a significant importer from China both in terms of final goods and as part of supply chain arrangements. ‘Friend shoring’ is no alternative to a cheap source of import.

Then the US led coalitions and China are at war in the domain of technology. US wants to considerably restrict China’s access to semiconductors and high tech intellectual property. If successfully executed this will hinder China’s technical advancement. Again, to be sure, China is trying to gain access to supply of critical minerals deployed in chip making.

In short, China is facing problems both domestically (demographics, debt issue, social unrest, unsettled symbiotic relationship between public and private sector, growth vs equality issue) and on world stage (tech restrictions, China plus one policy, cold war with Western World). This, however, does not mean that the rest of the world, including India, can disengage from China. It is a low cost exporter, and its economy is mouth drooling for Western exporters. So we need to tread cautiously.   

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