A year on, China is shaking up the world

An economics consultancy recently predicted China would displace the US as the world’s largest economy in 2028, five years sooner than it had predicted just a year ago.  (Photo: Getty)
An economics consultancy recently predicted China would displace the US as the world’s largest economy in 2028, five years sooner than it had predicted just a year ago. (Photo: Getty)


  • The Middle Kingdom has come out stronger than ever after the pandemic. What are the implications for India?
  • The risk for China as well as the world is that over-confidence in Beijing and persisting worries within that country about the West seeking to curb its rise might tip over into conflict

BENGALURU : When news of a highly-infectious virus spreading like a medieval plague across the city of Wuhan surfaced in January 2020, there was reason to believe that the Chinese economic juggernaut would be stopped in its tracks. Almost a year on, however, consider the headlines about China’s economy, nearly all of which point to the world’s heavy dependence on China.

Such high volumes of Chinese exports were shipped to the West ahead of Christmas that the world suffered a shortage of shipping containers because China sends out three times as much in sea cargo as it imports. A Reuters story in December noted that “the cost of chartering a 40-foot container from China to the US East Coast scaled a record $4,928 this week, up 85% since June 1".

Exports from China increased by 21% in November and the country is the only large economy in the world on track to register positive growth in 2020 of about 2% and likely 8% in 2021.

Meanwhile, despite astonishing claims by the Narendra Modi government that India could supplant or meaningfully supplement China’s role as the world’s factory, there is little evidence of this. India’s exports in November declined by 9%. I had earlier argued on these pages that China’s dense and integrated supply chains and huge share of global exports made such a shift next to impossible.

In fact, China’s global trade surplus for the first 11 months of 2020 was $460 billion, up by a fifth. The surplus is more than India’s total annual merchandise exports. If proof were needed that China has conclusively won the trade war with the US, posting a record trade surplus of $75 billion in November in bilateral trade between the two giants settled that.

“Round one has gone to China and it is a knockout," said Arvind Subramanian, former chief economic adviser and author of Eclipse: Living In The Shadow Of China’s Economic Dominance, published about a decade ago.

Coupled with China’s ever more muscular geopolitical stance in Asia and beyond, this clear economic lead taken by China in 2020 must be viewed seriously. Wishful “Chindia" economic convergence narratives spouted by Indian businessmen and ministers alike at Davos-styled events must be abandoned in favour of methodical deregulation and the building up of our industrial and military capabilities.

Instead of being timid and resisting trade groupings such as the Regional Comprehensive Economic Partnership, India must seek to join them—notably in the event of a remodelled Trans Pacific trade grouping that the Biden administration is likely to push for with wider participation—so that India’s manufacturers are embedded in global supply chains.

Subramanian predicts that 2020 will only have boosted Beijing’s confidence. Referring to China’s massive stimulus that propped up global demand after the collapse of Lehman Brothers led to the global financial crisis more than a decade ago and now China’s resilience in the face of covid-19, he said: “In the broader context of the rivalry with the US, (Beijing would argue) ‘They messed up on the GFC and now again on covid we have come out of it quickly and have rescued the world’".

Muscle flexing

This picture of a gigantic yet somehow nimble Gulliver with an increasing stranglehold on global trade is a disturbing one because 2020 was also the year when Beijing appeared routinely aggressive in its dealings with the world, from constant incursions into Taiwan’s airspace to brazen de facto annexations along the Line of Actual Control with India.

In Hong Kong, its increasingly direct control over one of the world’s premier financial capitals violated the terms of the transfer of sovereignty agreement signed with the UK decades ago that promised an autonomous local government and an independent UK-style judiciary. Global investment banks and the world at large can only stand by and watch. In early December, Hong Kong’s most powerful media tycoon was denied bail on the charge of illegal use of business premises.

Attempts to stand up to Beijing have been met with disproportionate reprisals. Australia’s criticism of China’s behaviour in Hong Kong and its demand for an international enquiry into China’s initial handling of the outbreak of the virus as well as Canberra’s decision to disallow Huawei from being considered for 5G procurement is a case in point.

In November, lengthy customs inspections weaponized as non-tariff barriers led to $3million worth of Australian rock lobsters dying as shipments waited to be offloaded at Shanghai’s port. In contravention of the recently inked RCEP, China massively hiked duties on Australian imports ranging from wine to iron.

Ironically, China has used the challenges of the year and the ongoing trade war initiated by the Trump administration to emerge even stronger. In the past several months, President Xi Jinping has repeatedly spoken of China’s “dual circulation" policy that aims to cut its dependence on overseas markets and technology.

What sounded as if it was yet another impenetrable example of Communist double-speak has turned out to be a pragmatic response to the Trump administration’s attempts to deny China access to high technology imports.

Beijing has energetically confronted the realities of the trade war and bolted on its Made in China 2025 targets announced five years ago. In essence, Beijing wants to accelerate that timetable and put it on a (Cold) war footing. As the New York Times explained in late November, “China wants to become less dependent on the world for its own needs, while making the world as dependent as possible on China."

Other observers warn that “dual circulation" could be a preparation for more hostilities. Speaking of the belligerence of China on many fronts, ranging from the fake photo of an Australian soldier slitting the throat of a child in Afghanistan tweeted by a Chinese foreign ministry official in December to its border battle with India, James Kynge, author of China Shakes the World, said, “If you ask me what dual circulation is, it’s to insulate China. (The attitude is) ‘We must not suffer if we attack Taiwan.’"

He warns that the risks of armed conflict in the next few years over Taiwan, which Beijing regards as part of China, are rising dramatically. “If I were an investor, I would take the political risk very seriously," said Kynge.

When Taiwan’s President Tsai Ing-wen won a thumping 57% of the vote to win re-election in January 2020, her first press conference was bold and direct. She declared that China should take back its oft-repeated threat to reclaim Taiwan by force. “Taiwan is showing the world how much we cherish our free democratic way of life," said President Tsai.

Instead, Beijing has used 2020 to mount incursions into an air buffer zone between the two countries, with spy planes and freight planes intruding into Taiwan’s air space with Taipei’s defence ministry website documenting the violations almost daily.

“It’s grey zone warfare, It is what the Russians do in the Baltic," said Kathrin Hille, Greater China correspondent for the Financial Times in Taipei and a former correspondent for the paper in Moscow and Beijing. “When I was in Moscow, I would have said China is not as aggressive as Russia is. Clearly, that does not apply anymore." Hille believes Beijing’s aim is to undermine morale in Taiwan, not to provoke outright war, which would draw the US into the conflict.

The risks

Beijing viewed 2020, which paradoxically undermined its reputation in the world while underlining its indispensability to global prosperity, very differently from how western capitals saw it. Survey after survey show an increase in distrust of China overseas; questions about the government’s role in initially suppressing news of the spread of the virus were raised worldwide.

Beijing denied this and was applauded by the World Health Organization for sharing the genetic sequence of the virus very quickly in January 2020. But, the war of words on both sides may have led to a hardening in positions taken by Beijing since then. The risk for China and the world is that over-confidence in Beijing as well as worries that the West is seeking to curb its rise might tip over into conflict. China looks invulnerable in its hegemony over many export markets such as mobile phones, but its massive build-up of debt and the over-dependence of its domestic economy on the property sector leave it exposed to external shocks.

The Institute of International Finance released estimates in November showing that while global debt levels had climbed dramatically because of government responses to the pandemic, China’s debt-to-GDP ratio is set to reach 365%, a worryingly high level for what remains a middle-income economy.

Within that picture, there are other fault-lines. It’s largest property developer, China Evergrande, has almost $125 billion in debt, twice as much as the next largest global property developer. Local governments across China remain as dependent on land sales to bolster their over-ambitious infrastructure spending as in the past decade.

In response, China’s able financial czars, Guo Shuqing and Liu He, are methodically seeking to impose discipline on state-owned enterprises, the private sector and local governments. This was likely a factor in reining in Jack Ma’s Ant Financial recently by preventing it going ahead with a giant initial public offering. This balancing act of now curbing an addiction to easy credit can cause accidents: in November, the default of a government coal company on a $152-million bond repayment rattled markets.

China’s enduring problem remains that its economy has not been rebalanced towards consumer demand adequately, which leaves it overly dependent on property markets and infrastructure building. Household consumption remains at about 38% of GDP, well below levels in the US or India.

As Prime Minister Li Keqiang observed in May, China may have an annual per capita income in excess of $4,000 but 600 million people live on about $140 per month. Even so, China’s domestic market has been a huge draw for multinationals and that remains true today.

Jonathan Woetzel, a senior partner in McKinsey’s Shanghai office, has argued that the view of China as predominantly a factory for the West is out of date. “The Chinese economy is likely to be sustained by the Chinese consumer. I would not expect that much change in 2021 either as long as covid-19 remains under control," said Wotezel. “Most of the volatility will come from the domestic financial economy to the extent there are unseen risks."

Despite the risks from its domestic financial industry, China has momentum behind it while the US recovers from the calamitous drift of the Trump administration and seeks to contain bitter battles between Republicans and Democrats that will hobble the new Biden administration. “Chinese leaders believe that America and the West have been weakened by the rise of populism," said Peter Martin, author of the forthcoming book, China’s Civilian Army: The Making Of Wolf Warrior Diplomacy. “They see an opportunity to assert their interests more forcefully."

Tellingly, at the end of a pivotal year that began with predictions that the world would seek to reduce its economic dependence on China and even isolate it, the European Union rushed through a wide-ranging investment pact with China, in large part to get it done before a Biden administration could push for an alliance of Western democracies to be firmer with China.

Meanwhile, an economics consultancy predicted that China would displace the US as the world’s largest economy in dollar terms in 2028, five years sooner than it had predicted just a year ago. But one does not need to look so far ahead to see a seemingly omnipotent China arrayed against a motley assortment of alternately dysfunctional majoritarian or weak liberal democracies, mostly incapable of cohesive cross-border policies.

In trade and arguably even geopolitics, 2020 heralded a new unipolar world around the colossus that is China.

Rahul Jacob was the Financial Times’s south China correspondent (2010-13).

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