China - The Pushback and the Difficult Times

 In recent times relations between countries have become somewhat transactional, especially after the pandemic. National interest is seen to be dominating the foreign policy of countries which were hitherto complacent about their interests. The Russia Ukraine war has further exacerbated the economic difficulties.

In the last three decades China was the growth engine of the world. It dominated manufacturing and therefore had a huge impact on the supply chains of the world. However, since the start of the pandemic Chinese leadership led by the Xi Jinping has been reversing many of the economic policies which made China the second largest economy after the USA.

This may surprise many. But to understand this we have to understand the Psyche of the CCP (Communist Party of China). The ruling elite values political power more than the riches earned by the people. Democracy is anathema to the top leadership of the CCP. People should always be subjugated and kept under the thumb of the ruling elite. What the CCP fears most is independent thought, and the fact that people may ask uncomfortable questions when they start thinking.

This monetary influence enjoyed by the private companies and their owners in China is what prompted the CCP to crack down on the big companies. The private businessmen were getting too big for their shoes as some of them criticized the Communist Party policies. The party never tolerated criticism, however constructive. The Chinese government began to cut the private industry down to size. The likes of Jack Ma are not heard of anymore. This policy of the CCP is responsible for the decline in the Chinese economic power. But it is not the only reason.

Chinese economy has begun to face headwinds. The three decades of growth from the 1990s to about 2012-13, when Xi Jinping took over were spectacular to say the least. But this growth also had the seeds of decline.

Chinese growth was powered by exports and was debt driven. Domestic consumption was not encouraged during this time. Also, Chinese real estate saw spectacular growth in the last two decades, but it accumulated a lot of debt. The sector was highly leveraged. As the growth in the sector began to slow after the onset of the pandemic, companies began to default on their loans. Total Chinese debt is said to be around 300% of its GDP.

The zero-covid policy is hurting the Chinese economy by creating labor shortages, causing delays in transportation of goods and services and throwing the whole manufacturing sector out of kilter. These losses have forced many companies out of China.

The Chinese Belt and Road Project also seems to be faltering. After starting with a fanfare and an impressive global outreach, countries who thought Chinese loans were a Godsend are now hesitating to participate. Many countries have been saddled by debt incurred on projects which the countries did not need. Roads, airports and other infrastructure was built in countries which were poor and now cannot pay back the heavy Chinese loans. Small and poor countries all over the world have been victims of Chinese debt traps. As a result, this initiative is losing steam. There is also a decoupling happening between the Chinese and several other economies, as well as denial of some crucial technology.

China’s obsession with unification with Taiwan has also come a cropper. The United States deliberately called China’s bluff regarding Nancy Pelosi’s visit. All the bluster and anger shown by China by engaging in military exercises in the Taiwan Straits impressed no one. Its aggressive actions along the Indian border and in the South China Sea has created a serious trust deficit in the Indo-Pacific. China wanted India to tacitly accept its hegemony in Asia. India did not oblige.

Last but not the least Chinese demographics are not favorable for a growing economy. Infact China today is well past its most favorable demographic period. Mao instituted the one child policy which was continued for about thirty years. It was meant to reduce Chinese population, and it indeed has. In the next two decades China will have the fastest aging population in the world.

A combination of structural economic factors and political and geopolitical headwinds, internally as well as externally has made the rise of China doubtful. There is now definitely a question mark on its ability to become a superpower.