Opinion| China’s slowing down, and that’s bad news for the world
India will be deeply impacted by the turmoil in the Chinese economy, but this is not on our radar yetUpdated: Mar 20, 2019 20:24 IST
At the National People’s Conference (NPC) meeting in Beijing, which concluded on March 15, Premier Li Keqiang drew attention to the “grave and complicated environment” confronting China. He introduced a lower target for GDP growth in 2019, within a band of 6-6.5%, which would be the lowest in several years. The slowdown is believed to be much more serious with the economy probably growing at the rate of 4-5%.
What are the likely causes of this slowdown and what may be its political implications?
Having grown for nearly three decades at double-digit rates, the Chinese economy is maturing and will, like other developed economies, trend towards a slower rate of growth. The earlier opportunities for rapid growth, thanks to a large and relatively cheap labour force, productivity gains from improved infrastructure and adoption of advanced technology and, importantly, easy access to an expanding global market, all these factors are losing steam.
China has been a successful adopter and assimilator of technologies developed elsewhere but has not yet joined the ranks of technology generators. Its Made in China 2025, which is a “blueprint for making China’s key industries of the future, global champions” has alarmed the current technology leaders, the US, Europe and Japan, who are beginning to work together to restrict Chinese access to their most advanced technologies. Since China is still heavily dependent on sophisticated, imported components for many of its high-tech industries, it is facing significant setbacks to its 2025 plan. The blueprint has not found a single reference in the NPC report though the determination of the country to push ahead in its quest for high-tech dominance will continue.
Though unstated, there is no doubt that the natural slowdown in the economy is being exacerbated by the continuing US-China trade war. President Donald Trump has extended the deadline on the imposition of 25% tariffs on nearly $500 billion of Chinese exports to the US in recognition that progress was being made in ongoing trade negotiations. He has invited Chinese President, Xi Jinping, to Mar-a-lago in Florida later this month to conclude a possible deal. However, even if a deal is made, on the basis of increased Chinese purchases of US goods and the easing of investment conditions for foreign companies in China, there is unlikely to be any compromise on the technology issue.
Through its National Defence Authorization Act of August 2018, the US has targeted five Chinese companies — Huawei (telecom), Hikvision (facial recognition), Hytera Communications (radio receivers and radio systems) Zhejiang Dahua and Hytera Dahua (surveillance camera makers) — whose products cannot be used by US government agencies, and entities using their systems cannot bid for US tenders.
China’s export success has been built on its participation in global supply chains, taking advantage of its world-class infrastructure and still relatively cheap and well trained labour force. It has progressively moved up the supply chain to more value-added processes, absorbing more advanced technologies from its developed country partners. However, these supply chains are led by Western and Japanese entities, which are reacting to the prospect of higher tariffs and regulatory disruptions by moving the Chinese component of the chains to other countries. China has tried to create supply chains led by Chinese entities, in particular through its ambitious Belt and Road Initiative, but this is at a very early stage. This explains why China is so keen to avoid a trade war with the US. Chinese criticism of the US has been muted. A leaked Party document contained the following directive to Party members: “Do not oppose the US. Do not lead Sino-US relations into a Cold War. Open up the market. Do not yield on core interests.”
Another driver of slower growth is the persisting debt overhang in the economy, which has become a major vulnerability. The overall debt to GDP ratio in 2018 was 253% up from 231% the previous year. More worrying is the level of debt of local governments, which is at $ 2.74 trillion. But off balance sheet borrowings are nearly $6 trillion. Deleveraging of this massive debt overhang has been half-hearted at best and the current NPC has tried to once again shore up growth with another stimulus package though more modest in scale. This is a recipe for a financial crisis though it may be delayed because China is a State controlled economy.
The ongoing trade war could well be a trigger for such a crisis.
What may be the political consequences of these economic trends? For a political dispensation, which has built its legitimacy on its ability to deliver significant economic growth, popular dissent may grow quickly and threaten the regime. President Xi Jinping has gathered power into his own hands and his anti-corruption campaign has spawned many detractors who have been biding their time. An economic crisis may well crystallise the opposition and lead to a fierce power struggle and leadership change. A Chinese economic crisis will reverberate through the global economy and likely cause a worldwide recession. A China in political turmoil may prolong the ongoing era of geopolitical disruption and wrenching change. What will be the shape of the China which will emerge from this crisis? India will be deeply impacted but this scenario is not even on the nation’s radar.
Shyam Saran is a former foreign secretary and a Senior Fellow, Centre for Policy Research, New Delhi
The views expressed are personal