Stocks

A China showing it’s not fragile

J Mulraj | Updated on June 19, 2020 Published on June 19, 2020

Unlike china, the fragile crockery, China, the country, is flexing its military and economic muscle against several countries, to show that it doesn’t crack so easily. This is a reaction to the accusation that it was responsible for the spread of coronavirus. China has flexed its might against several countries in South China Sea ― against Taiwan, to prevent its acceptance as an observer in international organisations such as WHO; against Hong Kong, for protesting; against Australia, for seeking an independent inquiry into the origin of Covid-19, and recently against India, with a series of skirmishes at the border.

The only country with the military and financial might, albeit weakening, to stand up to China is the US. Should a conflict ensue, it would need the support of coalition partners, and Trump has not won the Dale Carnegie award of how to win friends and influence people.

The truth is that the world is very interdependent and disengaging from China will prove a problem. In fact, it is, already.

Take the US v/s China trade war, in which one of the pain points Trump sought to inflict was on telecom giant Huawei, claiming that using its networks exposed companies/ governments/ individuals to the risk of being spied upon. One news says that Trump is dialling it back. Huawei has the highest number of patents relating to 5G standards than any other player, and is crucial to discussions on how to set up standards, prior to launch.

Where US does have a pain point in the telecom sector is in its control over chips, required for electronic devices. China has a chip-making plant, but lags in technologies needed for the latest generation of chips.

China, on its part, is inflicting pain on the US in other ways. It is attempting to de-dollarise the world, and is promoting its currency, renminbi, as an alternative for international transactions. Consider this: Russia had agreed to invoice the sale of its crude oil in renminbi. Recently Rio Tinto, an Anglo-Australian mining and metals conglomerate (#2 in the world), agreed to invoice its exports to China in renminbi.

When a traded commodity is priced in US $, it creates a demand for the currency. It is this demand that has allowed the US to basically spend more than it earns, printing more $ to do so, which are bought by other countries.

China is also pushing for a digital currency [2] (strangely, India is, at the same time, moving to ban digital currencies, a display of the sort of myopia that stunts our economic growth). [3] A digital currency issued by a central bank in China would, it is believed, weaken the financial structure of those who do not follow.

After Trump delisted Chinese companies from American stock exchanges, denying access to their institutional fund pool, they have listed in Shanghai. Since American investors are not sure of payment and settlement systems (hence safety of investment), China has roped in American Express, promising it a chunk of its digital payment system and opening its $45 trillion market . Another attempt to weaken the $.

So a de-dollarised world would weaken the US and strengthen China’s hands.

This game of pressures and counter pressures goes on. To show its displeasure against Australia for asking for an inquiry into the origins of Covid-19, China stopped its import of Australian beef and lobsters, but not of Australian iron ore, though ― 60 per cent of China’s iro ore requirement is met by Australia.

The objectives behind China’s moves to indulge in border skirmishes with Indian troops is not known. Perhaps it is to pressure India, who will be the next head of WHO, not to investigate deeply into the origins of Covid. Or perhaps to dissuade it from taking up the plea of Taiwan, the country most successful in dealing with Covid, to be able to participate in WHO debates.

The point is that in the ’60s, both India and China had similar per capita incomes. But China started to open up its economy a decade before India, and that loss of momentum is what is hurting India’s ability to take a firmer stand. A stronger economy means more money available for defence, which China has used for building up its military capabilities.

Will India now learn to take bold economic decisions necessary and long overdue?

Charlie Munger, Warren Buffet’s partner, stated rightly that he would not invest in India because the country does not have stability in policy and bribery is rampant. Korean steel major POSCO had a process to use dirty iron ore and dirty coal to make steel, and waited nine years for Orissa to clear the project.

Our judicial system is abhorrently slow and does not protect investors. Ask any of those stung by fraud in the case of NSEL, Sarada, PMC Bank, Yes Bank and others. The system protects scamsters.

Will Modi have the courage to change this state of affairs?

Only when he does, can he dream of a $5-trillion economy, and for India to take its rightful place in the comity of nations.

The writer is India Head — Finance, Asia/Haymarket. The views are personal.

Published on June 19, 2020
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