Post COVID China: Hard Exterior and Brittle Interior

By Lt Gen PR Shankar (R)

To understand this, one must start with the economy. China and the CCP are GDP fixated. China has always set hard growth rates and striven to achieve them. The fundamental precept of the Chinese political economy has been getting high GDP growth rates and achieving them.

Post Zero-Covid, China is emerging as a new conundrum. While there are clear signs of a Chinese recovery, it is not a back to the future scenario. The Ukraine war, the hangover of Zero Covid and the global uncertainties which confront China are casting their shadow on its future. At present there is a major international crisis of fuel, food and fertilizer shortages. This is heightened by rising interest rates, high inflation and subdued growth. Countries are failing in this environment. Manufacturing and exporting economies like China are struggling due to isolation, sanctions or de-globalisation.In this backdrop,Xi Jinping and his loyalists seem to have made up their minds to set a new course for China. The course is visible in the aftermath of the recently held Two Sessions. It is also clear that Xi Jinping’s goal of establishing a Sino Centric world order remains aloft along with his personal ambition of emerging as the greatest Chinese statesman who shapes world affairs. However Xi Jinping is also cognisant of the task ahead when he said “the external environment of China’s development has changed rapidly and uncertainties and unpredictable factors have increased significantly. In particular, the Western countries led by the U.S have implemented a comprehensive containment, siege and suppression of our country bringing unprecedented and severe challenges to our development”. To this, one must factor in internal issues. In the recent past there have been a series of protests on the streets.These are rarely seen in China. It indicates a certain internal instability. Overall, In the foreseeable future, the China we are likely to see is one with a hard exterior and a brittle interior.

To understand this, one must start with the economy. China and the CCP are GDP fixated. China has always set hard growth rates and striven to achieve them. The fundamental precept of the Chinese political economy has been getting high GDP growth rates and achieving them. This phenomenon has been the primary means to maintain the social contract with its people, who are expected to give up some freedoms in return for prosperity which stems from high growth. It is also the benchmark which all their provinces strive to achieve in a competitive environment. However the GDP growth target of ‘around’ 5% set in the recent Two Sessions is hardly inspiring. Here lies the conundrum. China is aiming for a Sino-centric world order as its growth remains anaemic. This issue needs reconciliation and analysis to get to a realistic idea of issues that confronts us.

Two factors which will dominate China’s long term landscape are its demography and effect of climate change. It is amply clear that China’s demography is on the decline and irreversibly so. It has to contend with a dwindling population, a decreasing work force and an ageing society, for which it is quite unprepared. Surprisingly, the new Chinese government is silent on its declining demography. It appears they have no answers for it. China’s vulnerability to climate change, its lack of energy resources, and endemic food insecurity also puts it at risk. This is constantly reinforced by Xi Jinping who regularly talks of ‘extreme importance’ of food security. These two factors are loose ends and put an overall limit on China’s growth story and its comprehensive national power. These cannot be wished away. These should not be lost sight of. 

It was increasingly clear even during the pre-covid era that the Chinese economy, which grew on the twin pillars of export and infrastructure growth backed by a well-oiled manufacturing base, must change tracks towards boosting consumption. In the current times of geopolitical headwinds, rising inflation and increasing decoupling/friend-shoring/relocation, the necessity to boost its national confidence and economy through consumption is even more important. However the cultural propensity for Chinese households and their society to save rather than spend consumptive is a real barrier. This barrier is reinforced by job losses, lowering of wages and unemployment which prohibits consumptive spending. The new establishment is trying to revive the once thriving private sector to increase jobs and income which will trigger consumption. However, it was Xi Jinping who decisively broke the private sector in favour of state ownership of businesses. Revival of private enterprises to make them once again into engines of job creation and income growth will require two things. It will need the creation of trust that private companies can re-grow in a free and equitable atmosphere. Further empowerment of private enterprise is a reversal of Xi Jinping’s core idea of state control. There are no indications of how this will be overcome.

The real estate and infrastructure sector still constitutes about 25-30% of the Chinese economy.  Real estate and property continues to remain sick despite several government measures to revive it. Efforts to stimulate property purchases have not borne fruit. Property prices and real estate continue to fall despite a slowing down of pace. A rebound is unlikely as per internal assessments. People do not have the liquidity to indulge in property. The  traditional infrastructure sector  such as transport, electric power supplies and water projects, as also the glitzy infrastructure like bullet trains, world-class highways and airports have very little scope to expand. In fact, China has excess capacities which remain underutilised. This sector will not be able to support Chinese manufacturing, job creation or exports at the necessary scale. In such conditions, China’s economy will not revive. On the contrary it will stagnate.

There are a few other issues. China is also in search of new energy sources. It is betting on space based energy and renewables in a big way. However, that is in the future and is still aspirational for the scale which is required. Till then it has to continue with its coal based economy. The virus and the pandemic exposed the vulnerability and weakness of the Chinese health care system. As the society ages, a weak health care set up will drain the larger economic system. It is to be seen if there is a move towards this direction. As stated earlier, China is a food deficient country. Its leadership is fully cognisant of this. They constantly reiterate the efforts needed to address weak links in agriculture, especially seeds. Xi Jinping has personally repeatedly expressed urgency to attain self-sufficiency in food and seed production technology. This has been heightened as a result of the Ukraine crisis and worsening US-China relationship. Domestic seed innovation is a priority agricultural task. However it has not yielded results so far despite huge subsidies and investment in research.

Xi Jinping and his band of loyalists understand the Chinese situation better than all of us and maybe more. They have more at stake. However they are left with very few options. The Chinese interior is likely to remain brittle, nebulous and unhappy. It will not be out of place to see dissent overflowing into the streets as witnessed recently. When seen in this light, things become clear. That is the reason why they have taken recourse to Science and Technology, Diplomacy and Military in a big way. That is the clear message from the outcomes of the Two Sessions.

Xi Jinping and China are betting big on science and technology to make good on all the ills of their economy. They feel that “stability” and “quality of growth” can be achieved through leveraging technology in the face of external headwinds. China has restructured its Ministry of Science and Technology  as part of a major government-restructuring plan to “strengthen strategic planning” and “accelerate the implementation of scientific achievements”.  They aim to achieve breakthroughs by consolidation of resources and focus them with the goal of achieving “self-reliance”. Xi Jinping wants to reduce dependency on foreign technology.  He is relying on big data, artificial intelligence, aviation and satellite industries to achieve the Chinese dream. He is also looking at improving China’s connectivity with neighbouring countries as also with BRI countries in this process.  A National Data Board is being set up to propel the digital economy and boost investment in big data, 5G and the Internet of Things. It also aims to strengthen the overall computing resources capacity. This is a high risk game whose outcomes are unpredictable. It is also an environment where ethics will be cast to the winds in typical CCP fashion. Hence China will expand its data collection and theft activities from all possible international sources. Weaponization of data, science and technology, is on the cards. From all indications, Xi Jinping is also all set to stoke nationalism through science and technology. Increasingly, the image that will be projected internally and externally will be of China as a technology superpower.

Xi Jinping’s diplomatic moves are the next part of his plan to revive China and also establish a Sino-centric global order.  China has made its first move by mediating a truce between Iran and Saudi Arabia. With Pakistan as its client state and the Central Asian Republics being beholden to it, this move consolidates China’s international influence as well as its energy security besides opening new avenues of trade in this part of the world. His next move towards Russia makes Xi Jinping an international peace maker, if he can pull it off. Further it allows China to form an alternative power block in conjunction with Russia.  It also upends the international US position and secures China all the markets it needs for economic revival. Further an alliance with Russia gives it access to technology, resources and energy that it sorely needs. In all this, one should not forget that China has already made a diplomatic foray into the Indian Ocean by calling all IOR countries less than India to a conference earlier. When viewed holistically, China is very clearly forming an alternative but selective trade block through its diplomatic moves. It will be enmeshed with the BRI to revive its economy. It is also endeavouring to establish the Yuan as the global alternate form of currency. When that happens, China’s financial issues and woes would have been resolved to a large extent.

One of the highlights of the Two Sessions was the increased focus on security in line with the theme of the 20^th Party Congress. The enhanced allocations to external security were on expected lines. However the significant jump in allocation to internal security is noteworthy. Xi Jinping is obviously in no mood to allow dissent to grow. The indications from the budget allocations to internal security indicate that state control of everything in China will be enhanced. The military and security apparatus is being boosted and their capacities are being upped. The security apparatus is the guarantee to ensure that internal dissent does not grow. It will ensure that a brittle China does not fracture. It is also apparent that China will continue with its military modernisation plans to meet its laid down bench marks and capacities. It is going big on militarisation of space, enhancing its nuclear capability and introducing new weapons based on cutting edge technology in a very significant manner besides building a huge ocean faring navy. The purpose of its military is simple. Where its effort to leverage science and technology or diplomacy fail, it will use the military stick to enforce trade practices in its favour and revive its failing fortunes.

When viewed as a whole, it is pretty apparent that China is going to use technology, diplomacy and its military to revive its economy and also use them to offset its long term demographic and climate related problems. The military will be significantly used to keep its regional environment in line. It will also be used as a threat against peer / near peer competitors which are beyond its economic, technological and diplomatic influence but have the capacity to derail its rise. In this connection, it will be fair to say that its main competitor is the USA that it wants to dislodge. Simultaneously, it faces a stiff challenge from India. Hence both these countries must be prepared to deal with China militarily in the foreseeable future. Also it is pretty evident that China will go to all lengths to evade a direct confrontation with the USA and will prefer to adopt a proxy/hybrid/gray zone approach. However against India it will not hesitate to get into a direct military confrontation. This is buttressed by the fact that major multinationals exiting China are heading towards India. China and Chinese now see India as eating their lunch. Hence it is only a matter of time that China will turn towards India with its military stick. Are we prepared?