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Return of the big spender

Paran Balakrishnan | Updated on August 04, 2020 Published on August 04, 2020

China’s looking to kickstart its economy by turning on the spending tap but it’s making many enemies globally

It’s been a lucky break for India’s iron ore miners. The global economy might be going to hell in a handcart but iron ore exports from India have hit an eight-year peak and prices are shooting up. The reason: the Chinese are looking to restart their economy in the only way they know how. As part of their post-coronavirus policy package, they’re opening the purse-strings and going on a construction spree. What puts Indian iron producers in an especially sweet spot is the flare-up in Sino-Australian tensions which means China’s cutting back on how much ore it buys from them.

And it isn’t just iron prices China’s driving up. Even in the depths of pandemic economic despair, copper, aluminium and even coal prices have been gaining altitude, thanks mostly to Chinese buyers, a trend seen continuing into 2021. “We’re particularly positive on the outlook for industrial metals prices, given the surge in (metals-intensive) infrastructure spending in China,” says a Capital Economics report. In fact, new July data suggests China’s year-on-year industrial output growth will overtake its pre-virus trend.

Can the Chinese pull off its high-wire, growth-without-a-pause act once again? And can they be the world’s locomotive economy as they were in 2008? With $3.3 trillion in forex reserves, they’ve certainly got deep pockets to kickstart their economy. Beijing plans to spend $560 billion, representing 4 per cent of GDP, on a stimulus package that aims to create nine million jobs and keep unemployment at 6 per cent.

Incidentally, it might become tougher figuring how China’s economy is faring as they won’t be issuing GDP numbers in coming months but rather focussing on the “quality of growth.” Spending will target cutting-edge AI and other technologies in which China hopes to become a world leader. Besides that, money will be poured into urban renewal and infrastructure, particularly water conservation and railway projects, and regenerating rural areas.

Our own government can only look on enviously and wish it had such megabucks at its disposal. But even with their financial firepower, the Chinese still face a hard time. In 2008, China stepped up its factory-to-the-world role but there was no pandemic. This time, the world isn’t rushing to the shops and so China must rely on its own internal market. “Their hope is to get through this year. But if they aren’t able to create jobs, they won’t be able to create demand,” says Manoj Kewalramani, China studies research fellow at the Takshashila Institution.

Battle with Trump

Also, this time China will be fighting off US President Donald Trump who’s determined to ensure the US keeps ahead of China, both economically and technologically, as well as to try to exclude them from the US and global markets. Still, the US can’t rest on its laurels.

A recent Citi report found while the US still leads significantly in AI out of 48 economies, helped by its patents, investments and academic research, China was second-ranked. China will be spending billions on next-gen technologies like AI, 5G and biotech to close the gap with the US. Currently, it still needs components for various advanced realms. But Citi forecast China will create an “independent strong ecosystem for the AI industry” and threaten US biotech pre-eminence.

There are other hurdles along the way. The Belt and Road Initiative is probably the most stellar example of China’s talent to think big. But the BRI could unravel at the seams simply because the countries in which it’s investing can’t build and use money as efficiently as the Chinese. The result will almost certainly be that projects will have to be downscaled or there’ll be massive losses.

Also, it used to be received wisdom that the Chinese had a long-term vision superior to any other country. Now, the soundness of their strategic moves is looking questionable, especially in the international arena, since Xi Jinping anointed himself president-for-life. Xi’s been making extraordinarily aggressive moves which some have termed “Wolf Warrior” diplomacy after a popular movie.

We hardly need to enumerate Xi’s mistakes. He’s waded into Hong Kong in a way that couldn’t have been better calculated to destroy the city’s value. Already, Western companies are scouting for cities where they can shift their regional headquarters. (Singapore’s a frontrunner for many). Similarly, there have been constant conflicts in the South China Sea. President Rodrigo Duterte of the Philippines was at one time moving closer to the Chinese but a territorial demand forced him back to the Americans. The Chinese have also sunk two Vietnamese fishing boats in the last year.

Why the Ladakh move

And what was the purpose of its muscular moves in Ladakh? India’s been wary of China since the 1962 war and the latest stand-off ensures we’ll mistrust our neighbour for the next 60 years, at least. From China’s viewpoint, it could be argued India had ideas of regional dominance above its station and needed a lesson. But China’s keen to turn away from US markets and look towards Europe and Asia — in fact, it’s already doing more business with Asean countries even than with Europe. In such a scenario, surely India needs to be a key part of Beijing’s plans. India’s mobile revolution particularly has ensured we’re a huge market for products like TikTok.

Now, Indians are furious China started a pointless and unprovoked conflict. If China made any strategic gains, they were hardly worth the international rumpus it’s caused.

The world may not be paying too much attention to military moves in Ladakh but the international community has been served notice China’s an unreliable power that will strike at a neighbour for no apparent reason. Prime Minister Narendra Modi, who visited the country several times as chief minister, has always been keen to build relations with China.

At a global level, a different argument prevails. The Chinese have effectively kept out Facebook, Google, WhatsApp and other similar services by imposing so many rules on functioning there. Now, many argue Trump may be within his rights to block TikTok in the US.

It may seem unlikely but in this climate of general ill-will, it’s China that really needs to settle its differences with India. Indians often flatter themselves in thinking we’re an important global player. Our economy has to get much bigger for that to happen. But if anyone’s looking at an Asian market, they’d be very wrong to ignore India. Can China afford to do that?

At a different level, can the Chinese pull off their hell-bent-for-leather growth act once again or are they setting themselves up to create a grand-scale bubble economy that will come crashing down in the not-so-distant future?

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Published on August 04, 2020
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