The pandemic offers a tremendous long-term strategic advantage for policy makers to deal with the Chinese threat of dominance permanently
Before COVID-19 struck the world, “emperor” Xi Jinping decided that 2020 was the year to establish the Chinese century. American think-tanks had predicted in 2019 that the Chinese GDP was more than the US’ and by 2030 it could be up to 70 per cent larger. China’s share of global output would grow to 32 per cent from 20 per cent currently, as opposed to the US’ share declining from 16 per cent to 10 per cent. In terms of global market capitalisation, the Chinese would grow to 25 per cent from five per cent in 2019, while the US would fall from 40 per cent to 18 per cent. China’s share of global exports would rise to 18 per cent from 12 per cent while the US would be static at eight per cent. The above forecasts were supported by massive Chinese investments in education in the fields of mathematics, science, technology and medicine.
Starting with the 1980s, the Chinese had successfully got the world’s manufacturing supply chain to relocate to their nation and became the “factory of the world.” From a pure labour arbitrage offering, they created world-class infrastructure (cities, roads, ports and airports) to support it. The top 2,500 global corporates had a business presence in China. This aggressive export-led growth model allowed the Chinese to radically improve per capita income and in the process create a massive domestic consumption engine. A 40 per cent domestic savings rate supported the huge developments that happened on their eastern seaboard. Till 2012, the Chinese Government was sitting on foreign exchange reserves of close to $5 trillion. China now imported/consumed 45-50 per cent of every commodity in the world.
Chinese leaders till 2012 kept a low profile, hiding their strengths while they relentlessly gained market share from the world. The Chinese acquired the world’s Intellectual Property Rights by any means. The Communist Party of China’s (CPC’s) command and control structure had also silently expanded its Foreign Ministry with requisite resources to create a public relations repository in every major country and to manage the national discourse on any prickly subject in its favour. This three-decade old policy profile started changing with Xi’s ascension in 2012.
Chinese strategists now started believing that the Middle Kingdom deserved to rule the world and post-2008, global financial institutions were weakened, substantially dysfunctional and lacking leadership. They unleashed a project of achieving complete Chinese dominance in the manpower of every multilateral agency and United Nations (UN) body in the world. Chinese students were encouraged to study overseas and many persuaded to join these organisations, and as so many Federal Bureau of Investigation investigations are now showing, made instruments of Government policy.
The collapse of the USSR in the 1990s and the profligacy of the US financial sector in 2008 had left a leadership vacuum in many areas. Xi moved rapidly to occupy the vacancies. China needed to secure its supply chain as it neither produced adequate food for its population, nor was it endowed with manufacturing or energy raw materials. The Chinese leaders wanted to avoid supply side shocks and created strategies to acquire assets surreptitiously. They moved rapidly to fund every country and project that the World Bank or the rest of the world would not find viable. The Chinese wanted to eventually acquire the underlying asset and default was hence a preferred option for them. This juggernaut covered 150 countries and nearly $5 trillion in loans/investments. Xi had successfully over-invested the Chinese US Dollar reserves and left his countrymen very vulnerable. They desperately needed their Dollar engine (Foreign Direct Investment, Foreign Portfolio Investment and Foreign Currency Loans) to keep firing quickly to recoup their position, or fast-track their long-term vision to get global trade out of the Dollar and into the RMB.
Unluckily for the Chinese, two things changed the landscape in 2017. Donald Trump won the US presidential election and was a wild card that they read wrongly. Second, the world economy started topping out and growth began stalling. The Chinese engine was not designed to handle economic contraction. Faultlines in the domestic economy were led by huge non-performing loans in State-owned enterprises. Ghost cities started appearing as demand stalled while real estate started going belly-up. The country was overbuilt and no more infrastructure spending was needed.
Trump started the trade war and insisted that the Chinese reduce trade surpluses. Xi erred massively in not giving Trump a cheap victory and riling up the Americans. US strategists had clearly war-gamed that the days of the USD hegemony were numbered and if their political dominance was to be extended, a war with China was not an option, the only question was timing. By a strange coincidence, the two technology hardware giants, the US and China, were tangibly dependent on Taiwan for their semiconductor underbelly. The US had formed a joint venture (JV) with the Taiwanese that would go operational in Arizona in 2023. Till then any military threat to Taiwan would be an attack on the US’ technology dominance, an intolerable thought for them. Democrat Presidents had soft-pedalled the “One China” policy and the Chinese had got their way. The Americans had celebrated access to a large consumption market but landed up creating a rival.
The Chinese People’s Liberation Army (PLA) in manpower terms is the largest standing armed force on the globe. The PLA and CPC moved fast to upgrade weapon systems, stealing blueprints and buying where they could not. However, the Navy is their Achilles’ heel and they lack in class aircraft carriers and submarines. This limits China’s ability to protect its interests spanning 150 countries. A whopping 75 per cent of Chinese oil still moves in tankers through the Malacca Strait. To reach the Arabian Sea by land, China invested in a bankrupt Pakistan by constructing the China-Pakistan Economic Corridor (CPEC) which links Xinjiang to Gwadar Port. It also engaged east European and European countries to construct the Belt and Road Initiative (BRI) for creating dedicated freight corridors to 50 cities. In the process, it has protected trade supply routes but the oil buy routes lie exposed. The nightmare for China achieving dominance is that Indian land illegally occupied by Pakistan is being used by the CPEC and India re-acquiring Pakistan-occupied Kashmir (PoK) could render its $66 billion investment useless, blocking oil supply. The Chinese realised that economic sanctions against Iran had crippled the proud country with 15 per cent of the world’s oil. It needed investments and so China decided to bust sanctions on Iran imposed by the UN (which Beijing was a party to imposing, too). China and Iran signed a 25-year trade and military alliance in June 2020. China has bet on the US exiting Afghanistan in 2020 and by using the Pakistanis to install a puppet regime in Afghanistan, it could take a pipeline from Iran to Xinjiang. In return, the Chinese have to pump in the equivalent of $400 billion into Iran’s development, which they can crank their RMB economy to deliver. What will happen to Pakistan?
In the interim, Xi got the CPC to appoint him as leader for life and emerged as an emperor. The CPC decided that by its 100th anniversary in 2021, it would stamp itself as numero uno in the world. A few pinpricks remained: Taiwan and Hong Kong as independent democracies were an eyesore. They had to be acquired by coercion at the earliest. The South China Sea (SCS) had a $5 trillion supply chain transiting the route. China laid claims to territories/islands of all its neighbours and started constructing artificial islands as missile bases. Beijing started bullying and humiliating Australia since 70 per cent of its mining exports were bought by it. Singularly, none of the Asian countries could take on China but many could exact a heavy toll if it came to conflict. The Chinese flirted with conflict among all their neighbours using “wearing down” tactics. The success of this gambit hinged on the continuity of their trade with the US, heavily skewed in their favour. Trump not getting an early trade war win upped the ante, imposing a $250 billion annual hit on China. It perhaps felt that US corporations would not listen to their Government and continue business as usual. It floated a trial balloon by abrogating the agreement with Hong Kong which would have lapsed in 2047 and suppressing protests with force. Then it ostensibly manipulated the World Health Organisation (WHO) and the COVID-19 pandemic was unleashed upon the world. This hit world economies and created a very strong anti-China sentiment.
It resulted in fast-tracking the operationalistion of the Quad (US, Japan, Australia and India alliance) to take on the Chinese. UK, France and Israel are openly in support of the Quad while Vietnam, Myanmar, the Philippines, Indonesia, Taiwan and South Korea have put their armed forces on alert. In the Chinese camp are North Korea, Pakistan, Iran and Turkey while anti-India squeaks may emerge from Nepal, Bangladesh and Sri Lanka.
With China designated as “world enemy Number 1”, even Joe Biden has ratcheted up the anti-China rhetoric, lest Trump steal the thunder and a potentially-lost presidential election through a war with China. The Indian and Chinese armies are facing off across the 3,400 km border and uneasy peace prevails for now. The Middle East has stayed quiet but will have to choose sides as a Shia Iran and a Sunni Pakistan and Turkey side with the Chinese. It is an uneasy time for the Saudis and the UAE.
The Koreans, however, have been quick to act and Samsung moved a $18 billion annual capacity out of China to Vietnam. Japan has incentivised its corporations to exit China. The US and UK have banned Huawei telecom and India, too, has banned Chinese telecom equipment and apps. The US is shutting off access to its capital markets to the Chinese. The cancellation of the Hong Kong treaty will kill the USD supply route to China. The Chinese balance of payments is negative for the last few months and they still need to buy food, oil and commodities. Scams like fake gold collateral have shaken China’s $5 trillion shadow banking industry and put a question mark on how much of its national reserve is gold-plated copper. This has damaged China’s plans of having a partial gold-backed alternate currency to replace the dollar.
The world now sits on a powder keg in the midst of the pandemic. President Trump and Emperor Xi now have gone too far for either of them to back down without losing their crowns. For Trump it’s just an election, but the world knows what happens to deposed Chinese dictators. The South Asian countries all want Tibet to regain its independence after being annexed by the Chinese in 1950 so that they can get their freshwater security back.
Meanwhile, the domestic market collapse will force Xi to take a few more hasty decisions. China’s banking regulator has advised its banks to be prepared for sharp rises in bad loans once the Corona moratorium period is over. Three Chinese banks have collapsed in the last three years and 15 per cent of the financial sector is supposedly past a high risk stage. Tax revenues have grown under five per cent and budget deficits exceed 11 per cent. The season of discontent for 1.4 billion Chinese has arrived. China created the BRI to use the surplus capacity in its construction materials and equipment sector and keep Chinese labour occupied. Experts estimate that this project needs another $5 trillion over the next five years. The money given to 150 countries cannot be recalled. China’s $10 trillion foreign debt is realistically supported by $2 trillion of reserves. With the balance of trade going negative, Chinese supporters are nervous. If China’s trading partners do not agree to settlements denominated in the RMB, a run on the currency is highly possible.
Meanwhile, Xi is attacking China’s neighbours to distract the world’s attention from the pandemic. Now India must return the favour. The Coronavirus offers a tremendous long-term strategic advantage for policy makers to deal with the Chinese threat of dominance permanently.
New Delhi must immediately recognise Tibet and Taiwan as sovereign countries and allow them to run official embassies in India and vice versa. Many countries will follow suit and shake up Chinese hegemony globally. Second, India must supply subsidised arms and military technology to Vietnam and the Philippines to create multiple fronts for China and the PLA, just like Beijing is arming Pakistan. Third, India should take a lead in the Indo-Pacific command with the US, Japan and Australia to choke the Chinese trade route. It will hurt China and its ambition to be a global economic leader. Lastly, we must restrict import of non-essential Chinese goods by imposing tariffs and focus our attention on building a formidable self-reliant economy with a target of $10 trillion by 2030 to face a hostile Beijing.
China should be treated as a permanent adversary even when the times are good. India and the world must escalate the information warfare to expose the draconian CPC and its oppressive regime working against the interest of native Chinese. Xi’s dilemma is what to tell the domestic audience. In the age of the internet, you can censor but not hide news. Do the Chinese need to beat the war drums in order to transfer the blame for their miscalculations? The world scenario is evolving every week and 2020 threatens to be a very long year indeed.
(Tewari is Editor-in-Chief, Opinion Express and Singh is Managing Partner, S&S Associates)
