Even before the Covid 19 catastrophe, Emperor Xi Jinping decided that 2020 is the year to establish the Chinese century. American think- tank predicts in 2019 the Chinese GDP was already larger than the USA’s GDP and by 2030 it could be up to 70% larger. As a share of Global output China would grow to 32% from 20% currently, as op- posed to the USA declining from 16% to 10%. In terms of Global Market capitalisation the Chinese would grow to 25% from 5% in 2019, whilst the USA would decline from 40% to 18%. China’s share of global exports would rise to 18% from 12% whilst the USA would be static at 8%. The above forecasts were supported by massive Chinese investments in Education in the fields of Mathematics, Science, Technology, Medicine and rapidly improving the quality of education. Starting with the 1980’S the Chinese had successfully got the world’s manufacturing supply chain to relocate to China, and was truly the “factory of the world”. From a pure labour arbitrage offering, they created world class infrastructure (Cities, Roads, Ports, Airports) to support it. The top 2500 corporates outside China all 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 also create a massive domestic consumption engine. A 40% 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. Over time Chinese labour had become a very skilled workforce, moved up the value chain and was no longer cheap. China now imported/consumed 45-50% of virtually every commodity in the world even though more than half of it was re-exported.
Chinese leaders till 2012 had made the country keep a low profile, hiding their strengths, whilst they relentlessly gained market share from the world. Asian growth engines Japan and South Korea had also felt compelled to move/make tangible manufacturing investments in China. The Chinese had mastered the skill of acquiring the world’s IPR ‘s by any means. Their Chinese Communist Party(CCP) command and control structure had also silently expanded their Foreign Ministry with requisite resources to create a Public Relations repository in every- major country, to manage the national discourse on any prickly subject in their favour. This three decade profile started changing with Xi Jinping’s ascension to Chairmanship in 2012.THE Chinese strategists now started believing that the Middle Kingdom deserved to rule the world. They changed the nomenclature of the 21st century being an Asian century to a Chinese century. They mapped that 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 body in the world. Chinese students were encouraged to study overseas and many persuaded to join these organizations, and as so many FBI investigations are now showing made instruments of government policy.
The collapse of the USSR in the 1990’S and the profligacy of the US financial sector in 2008 had left a leadership vacuum in many areas. Xi Jinping moved rapidly to occupy the vacancies. China needed to secure its supply chain as it neither produced adequate food for its population, nor was endowed with manufacturing or energy raw materials. Chinese leadership 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 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. The new Chairman had successfully overinvested the Chinese USD reserves, and left his country 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 alternately 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. President Trump had won the US election and was a wildcard that the Chinese read wrongly. Secondly the world economy started topping out, and growth started stalling. The Chinese engine was not designed to handle economic contraction. Fault lines in the domestic economy led by huge non performing loans in domestic state owned Enterprises. Ghost cities started appearing, as domestic demand stalled, whilst domestic 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 the Trade surpluses. President Xi erred massively in not giving Trump a cheap victory, and getting the Americans riled. American strategists had clearly war-games 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 giant’s USA and China were tangibly dependent on Taiwan for their Semiconductor underbelly. Taiwan has a dominant share in the Semiconductor foundries globally, and both the USA and China are dependent on them. The Americans had anticipated this and a JV with the Taiwanese would go operational in Arizona in 2023. Till then any military threat to Taiwan would be an attack on their technology dominance, an intolerable thought for them. Democrat Presidents had soft-pedaled on the one China policy, and the Chinese had succeeded in getting away with their wish-lists. 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 CCP moved fast to upgrade weapon systems, stealing blueprints and buying where they could not, theoretically they are a lethal strike force. However the navy is their Achilles heel, and they lack best in class aircraft carriers and submarines. This limits their ability to protect their interests spanning 150 countries. 75% of Chinese oil still moves in tankers through the narrow Malacca Straits. To reach the Arabian sea by land they invested in a bankrupt Pakistan by constructing the CPEC which links Xinjiang to Gwadar Port and is a dedicated economic corridor. They also engaged east European and European countries to construct the Belt and Road Initiative (BRI) for creating dedicated freight corridors to 50 European cities. In the process they have de-risked their trade supply routes, but their oil buy routes lie exposed. The nightmare for China achieving dominance is that Indian land illegally occupied by Pakistan is being used by CPEC and India reacquiring PoK by use of military power could render their $66 Billion investment in Pakistan useless, blocking oil supply. The Chinese realized that economic sanctions against Iran had crippled the proud country with 15% of the world’s oil, needed investments, and so decided to bust sanctions on Iran imposed by the United Nations (they were party to imposing them). China and Iran signed a 25 year Trade and Military alliance in June 2020. China has bet on the USA exiting Afghanistan in 2020, and by using the Pakistani’s to install a puppet regime in Afghanistan, they could take a pipeline from Iran to Xinjiang. In turn the Chinese have to pump in the equivalent of $400 Billion into Iran’s development, which they can crank their RMB economy to deliver. Where does that leave the Pakistani’s?
In the interim President Xi got the CCP to appoint him as the leader for life and emerged as an emperor. The CCP decided that by its 100th anniversary in 2021, they would stamp themselves as “numero uno” in the world. A few pinpricks remained: Taiwan and Hong Kong as independent democracies was an eyesore, and raised aspirations of good life in mainland Chinese youth. They had to be acquired by coercion or force at the earliest. The South China Sea had $5 Trillion of supply chain that transited the route. China laid claims to territories/islands of all its neighbours and started constructing artificial islands as missile bases. They started bullying and humiliating Australia since 70% of Australian mining exports is bought by China. 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 with all their neighbours using “wearing down” tactics.
The success of this gambit hinged on the continuity of their trade with the USA, heavily skewed in their favour. President Trump not getting an early trade war win, upped the ante, imposing a $250 Billion annual hit on China. Chinese perhaps felt that US corporations would not listen to their government and continue business as usual. They floated a trial balloon by abrogating the agreement with Hong Kong which would have lapsed in 2047, and suppressing protests with brute force. Then they ostensibly colluded/ manipulated the WHO and unleashed the Covid 19 pandemic on the world infecting every- country on the planet. This collapsed world economies and has created a very strong anti-China sentiment. It has resulted in fast tracking the creation of the Quad, an alliance of the USA, Japan, Australia and India to take on the Chinese. UK, France and Israel are openly in support of the Quad, whilst vietnam, Myanmar, Philippines, Indonesia, Taiwan and South Korea have alerted their armed forces for battle readiness. In the Chinese camp are North Korea, Pakistan, Iran and Turkey with 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 President Trump steal the thunder and a potentially lost election by a war with China before November this year. The Indian and Chinese armies are facing off across 3400 Km. border, and a tense peace prevails currently. The Middle East has so far stayed quiet, but by default 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 Saudi’s and the UAE. It is ironic that the OIC and its 54 member countries including the ”Turkish caliphate” maintain a studied silence on China incarcerating nearly 3 million Uyghur Muslims in Xinjiang.
The Koreans however had seen this coming two years earlier and Samsung had moved an $18 Billion annual capacity out of China to Vietnam. Japan has incentivized its corporations to exit China totally. USA and UK has banned Hauwei telecom with immediate effect to secure data for national security. India has banned Chinese Telecom equipment and Apps with immediate effect. There is a very strong anti-Chinese imports movement starting in India, and may set an example for the world to follow. China’s partners in BRI and in Africa are resenting the usurious conditions in their loan agreements. The Americans are shutting off access to their Capital markets to the Chinese, and 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 days of surpluses are now a memory. They still need to buy food and oil and commodities.
Even nature seems to have conspired to ruin Emperor Xi’s timing. China is being ravaged by the worst ever floods in the last 100 years with 29 of its provinces impacted, and the survival of the showpiece three Gorges Dam under threat from heavy rain which could affect nearly 400 Million people as down- stream cities including Shanghai could be impacted. Scams like fake Gold collateral has shaken China’s $5 Trillion Shadow banking industry as the Kin- gold default is by a powerful former CCP member. It also puts a question mark on the credibility of China’s domestic gold production which is part of its National Reserves, as to how much of it is gold plated copper. Will anyone in the world now ever trust a Chinese certification of gold? This scandal has seriously 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 Covid crisis. Funnily it is China’s 150 debtor countries (especially Pakistan) that must be praying for a fall and dismemberment of their Lender, for them to escape losing their sovereignty which they have so negligently mortgaged. 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 all get their freshwater security back.
Meanwhile the domestic market collapse will force Emperor Xi to take few more hasty decisions. China’s banking regulator has advised domestic banks to be prepared for sharp rises in bad loans once the Covid moratorium period is over. It has guided banks to conserve capital by not paying dividends and bonuses. Three Chinese banks have collapsed in the last three years, and 15% of the financial sector is supposedly past a high risk stage. Tax revenues have grown under 5%, and budget deficits exceed 11%. 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 to keep Chinese labour occupied. Experts estimate that this project needs another $5Trillion over the next five years to complete it. The money given to 150 countries cannot be recalled. The Hong Kong door may be closed by the Americans if push comes to shove. The FDI and FPI flows post Covid may flow outwards. China’s $10 Trillion foreign debt is realistically supported by $2 Trillion of reserves. With Balance of Trade going negative, even diehard Chinese supporters are a highly nervous lot. If China’s trading partners do not agree to settlements denominated in the RMB, a run on the currency is highly possible.
It is a serious reason to worry for 1.3 billion Indians. Already, we were facing economic downtrend since last three years, the GDP growth rate is gradually slipping towards 5% mark and Covid 19 has destroyed the large section of economy permanently. Xi Jinping has taken Chinese virus as an opportunity to attack its neighbors to distract world’s attention from the pandemic. Now it is India’s turn to return the gesture to China. This crisis offers tremendous long term strategic advantage for policy makers to deal with Chinese threat permanently. India must immediately recognize Tibet and Taiwan as sovereign countries and allow them to run official embassies in India and vice versa, this will open floodgate for several countries to follow the footsteps of India in shaking up Chinese hegemony globally. Secondly, India must supplying subsidized arms and military technology to Vietnam and Philippines to create multiple fronts for China and its PLA in response to what China is doing by arming Pakistan to be used for India in a proxy war. Thirdly, India should take a lead in Indo pacific command with USA, Japan, and Australia to choke Chinese trade route; it will hurt PRC and its ambition to be a global economic leader. Fourth, India must use weapon and army on regular basis when it is spending billions of dollars on armed forces and weapon procurement. The country like Pakistan, Nepal and others must be fearful of the consequences, if they plan to go against the interest of India. Lastly, restrict Chinese import of non essential goods by imposing tariff and focus our attention in building formidable self reliant economy with a target of $10 trillion by 2030 to face hostile China, this threat is permanent and China should be treated as permanent adversary even when the times are good. India and the world must escalate the information warfare to ex- pose the draconian CCP and its oppressive regime working against the interest of native Chinese. The dilemma for the Xi led CCP is what do they tell their domestic audience. In the age of the internet, you can censor but not hide. News spreads like wildfire with every citizen carrying smart-phones. Do the Chinese need to beat the war-drums to transfer the blame for their miscalculations. The world scenario is evolving every week, and 2020 threatened to be a very long year indeed.
(Prashant Tewari Editor in Chief Opinion Express & Sanjit Paul Singh Managing Partner S&S associates)