All’s not well in the Middle Kingdom: China finds itself internally divided and globally isolated
Economically, strategically and even politically, China finds itself in a fix today. If it doesn’t mend its way, it would soon find its superpower dream going kaput.
Napoleon Bonaparte is supposed to have said 200 years ago, “Let China sleep, for when she wakes, she will shake the world.” In 2021, the world is awake, and China is trembling. It is in deep trouble, with a multiple whammies.
In May 2020, for instance, the National People's Congress of the People's Republic of China did not fix — for the first time ever — a target for growth. The country’s debt is estimated at three times its GDP. Following the 2008 global financial crisis, Beijing unleashed $2 trillion in new lending into the financial system.
Chinese households borrowed merrily, to invest in property that accounts for 40 percent of the average Chinese family’s wealth. In less than a decade, China acquired the highest debt ratios of any developing country in history.
China’s economic growth was driven by unrestrained government investment which has created overcapacity in metals, cement and other industries, empty apartment complexes or rarely used infrastructure such as metro networks, oil pipelines and ports.
Economists had warned of the debt concealed in the books of local governments and state-run companies. Goldman Sachs says in its September 2021 assessment that China’s hidden local government debt now exceeds half of the GDP.
High levels of debt are the main reason why China’s largest property developer, Evergrande, which borrowed to build, is sinking with over $305 billion in debt. Its CEO flaunted his “guanxi” (connections) and was decorated as an “excellent builder for the socialist cause with Chinese characteristics”.
The roots of China’s property crisis go back to the tax reforms of 1994, which swelled Beijing’s coffers but left local governments reliant on land financing for revenue. Evergrande, like several other property developers, became a cash cow for regional governments.
In a recent essay in the official Communist Party journal Qiushi, China called for high-quality “genuine growth” (as opposed to “fictional growth”), based on consumption (driven by increases in household income rather than rising household debt), exports, and business investment.
Growing social unrest
World Bank 2021 estimates put China among the most unequal major global economies, with the top one percent owning 70 percent of national wealth (as against 50 percent for the world).
Deng Xiaoping’s mantra “to get rich is glorious” produced patronage capitalism, with officials providing the political umbrella and entrepreneurs doing the work. No wonder, the deprived, especially the young, are rebelling today.
A frightened Xi Jinping talks of “common prosperity”, pledging to create “conditions that are more inclusive and fair” and to “adjust excessive incomes”. China, which once proudly boasted of its burgeoning billionaire class, is cutting them to size by destroying tech giants like Ali Baba, Tencent and ride-hailing app Didi.
Ostentation is banned, and Chinese kids have been ordered not to emulate television, film, and Internet celebrities. The system that worshipped success and money has reversed course as China’s Leninist leadership tries to keep its grip on a society that has transformed itself socially almost as fast as it has grown economically.
The post-perestroika collapse of the Soviet Union taught China’s leaders the dangers of political reform. Xi Jinping has since been spooked by the chaos unleashed by the Arab Spring.
Demography is not destiny but is always a factor in a country/region’s long-term growth rates.
Recent economic history of Europe and Japan shows that when the median age rises, economic and political stresses intensify. After all, any country’s potential GDP growth is a function of population and productivity growth.
China is greying rapidly, thanks to its imprudent One Child Policy (1979-2015). The proportion of China’s population above 65 years would more than double from 15 percent in 2020 to 33 percent in 2050 (corresponding figures for India are 5.6 percent and 14.2 percent, and the US 14.6 percent and 23.2 percent).
China will need to spend massively on health, social welfare, and pensions; its savings rate will decline. China will get old before reaching the levels of rich countries like the United States, Singapore, Japan, and others.
China was delighted that its mesmerising “Bilk and Rob” (sorry, Belt and Road) initiative found many takers among the dozens of resource-rich countries desperate for money. It found profitable outlets overseas for Chinese domestic overcapacity and employment for its millions. China loaned at ‘extortionary’ rates of interest (three times the OECD rate), and happily gave off-book loans.
The West made a lot of mistakes, including uncontrolled lending that helped create Africa’s sovereign debt crisis of the 1980s-90s. Along comes the Dragon with an open cheque book and says you can take as much as you want for your project (including for your family) with no due diligence, no income checks, no conditionalities. And if you can’t pay back, no problem, the Dragon will take your house, your clothes, your land (loans for land scam)!
Ask Sri Lanka! Ask Tajikistan!
The October 2021 report by Aid Data suggests that dozens of countries owe $400 billion to China off-the-books, and 42 countries owe more than 10 percent of their GDP to the Dragon.
Not too long ago, an Indian company working in one of the African nations where I am privileged to serve sought a substantial project loan from an Indian bank with repayment guaranteed by the beneficiary government.
“Has the country borrowed money from China?” the bank asked.
After much humming and hawing came the answer: “Yes they have, but owing to the confidentiality clause we cannot tell you how much or the terms.”
China lent recklessly and is now in a “credit trap” since a big chunk of its loans was to countries in debt distress. That money is not coming back.
Oil-rich Venezuela, once China’s darling in Latin America, is now a massive liability unable to repay its huge loans. Win-win’s expiry date is over. It is now a lose-lose scenario.
Slowing industrial activity
Goldman Sachs estimates that possibly half of China’s industrial activity has been affected by the ongoing energy crisis. Factories have shuttered while millions of homes face the darkness.
International demand for Chinese manufactures has also been impacted by the coronavirus-induced global near-recession.
In August 2021, China called for an end to wasting food (Clean Plates Campaign) following up on the 2013 'Operation Empty Plate'. Xi's plea suggests China is in a food crisis.
According to a survey, Chinese consumers waste roughly 17-18 million tons of food each year, enough to feed 50 million individuals annually. Restaurants report customers who waste food. And diners are told to order one dish fewer than the number of people under the new system, even though lavish hospitality is a Chinese custom!
China faces a daunting task to feed 20 percent of the world’s population with only seven percent of global arable land. It has tried to lease agricultural land in Africa, but with strong memories of colonial expropriation, no country is ready for this.
Prices of staple foods have soared in one year; China’s imports of barley, corn, sorghum and wheat have doubled in 12 months.
In 2005, then-Premier Wen Jiabao had said that water scarcity threatened the survival of the Chinese nation. China’s per capita water availability is one-quarter of the global average, and climate change is making it worse, compounded by inefficient water management and widespread water pollution (China is the world’s largest chemical fertiliser user per hectare).
According to government figures, over half of China’s rivers have disappeared since 2000! Officials blame statistical mistakes and climate change, never themselves! The four-month drought in 2018 was unprecedented in the country’s history.
A recent study by Greenpeace suggests that by 2030 China’s water consumption would surpass water supply when the glaciers reach their “peak water”.
The damage being done by climate change is evident with massive floods ravaging the country.
Tattered global reputation
Nine out of 10 people in the world believe that the worst health crisis in 100 years originated in China. When asked to come clean, China responded like a cornered canine, substituting vituperation for cooperation, hurling insults and threats, demonstrating a siege mentality.
When Australia sought an independent investigation into the origin of the virus, an apoplectic China called it the “poor white trash of Asia” and “chewing gum” stuck to the boot of China, and tried to throttle the Australian economy. Such language may give the Chinese emotional satisfaction, but it doesn’t win them support.
Earlier this year, US News and World Report spoke to 20,000 people in 36 countries about the trustworthiness of nations. China ranked very low.
By agreeing to withdraw from some contested areas in August 2021, and frequently changing its force commanders on the India-Tibet border, China is unwittingly conceding its weakness. Its underpaid, unwilling conscripts are unable to fight at high altitudes, so it boasts that it has built seven-star accommodation for them and provides world-class hot meals. Yet these PLA soldiers find it difficult to adjust.
A retiring Chinese general reportedly lamented that he regretted not fighting a war. This reveals the greatest weakness of China’s military. The PLA must deal with an obsolete command system, rampant corruption, and training of debatable realism. Xi keeps bemoaning this, urging his troops to learn how to fight a war (since they cannot win it without fighting, sorry Sun Tzu!) and be ready to go into battle at a short notice
When Prime Minister Li Keqiang said last year that the Communist Party’s goal was to strengthen the political loyalty of the PLA, he acknowledged a core fragility. In October 2020, Xi asked PLA troops to be absolutely loyal, absolutely pure, and absolutely reliable (Adolf Hitler had said the same to his fellows).
Communist China’s template is external aggression to divert domestic attention.
Mao’s disastrous Great Leap Forward killed more than 50 million Chinese, so he attacked India in 1962. The Cultural Revolution destroyed China’s social fabric, so he fought the USSR in 1969. The Gang of Four led by Mao’s widow threatened Deng Xiaoping, so he attacked Vietnam in 1979.
As China faltered internally and externally, Xi attacked India in 2020 and became aggressive in the South China Sea. China finds itself completely isolated today and if it doesn’t mend its way, it would soon find its superpower dream going kaput.
Ambassador Deepak Vohra is Special Advisor to the Prime Minister, Lesotho, South Sudan, and Guinea-Bissau; and a Special Advisor to Ladakh Autonomous Hill Development Councils, Leh and Kargil. The views expressed are personal.
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