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With market confidence in China sapping on account of Xi’s state-driven approach and the West changing its approach to China, India must position itself as an alternative
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China’s “economic miracle” of the last four decades was premised upon the Communist Party of China’s “market-friendly” policies and celebrating entrepreneurship on one hand, and corporates in the West taking a long-term bet on China given its vast market. Now, both these pillars seem to be on shaky ground.
This month, China’s economic data for the third quarter (July-Sept) revealed that its GDP growth at 4.6 percent has been the slowest this year. Chinese planners had set a target of “around 5 percent” growth, however, the figures for Q1 (5.1 percent) and Q2 (4.7 percent) fuel talk that the nation may not achieve its objective. Goldman Sachs and Citigroup placed China's economic growth at 4.7 percent this year. Other indices, too, are worrying. Overall, there is dwindling consumer confidence due to fears over job security and rising unemployment. There is trouble in the real-estate sector with the sale of apartments that are under construction plunging to a nearly two-decade low on account of developers being unable to complete housing projects in time. The pre-sale component in real estate is important for developers since it enables them to recover their invested capital quicker and go ahead with planning new projects on account of the cash inflows. The property market is important since it contributes roughly 25 percent% of the GDP.
The pre-sale component in real estate is important for developers since it enables them to recover their invested capital quicker and go ahead with planning new projects on account of the cash inflows.
Foreign Direct Investment (FDI) into China dropped 28 percent between January and May 2024. In this regard, two surveys published on the perception of China offer insights into how American and European corporates think. The China Business Report 2024 compiled by the American Chamber of Commerce in Shanghai reveals that the confidence of United States (US) companies in China has touched a record low due to frosty bilateral relations and an economic slowdown that has dampened investment appetite. Merely 13 percent of respondents rated China as their first investment destination—the lowest in the survey’s history. The ranking of China as one amongst the top three investment choices also plummeted to 34 percent from 53 percent nearly four years ago. Moreover, respondents who asserted that China was ‘low priority’ increased to 24 percent.
Alternatively, the European Union Chamber of Commerce in China in its annual position paper stated that there was a perception that foreign businesses operating in China faced diminishing returns for investment did not justify the rising risks of operating in China. Investors observed that issues in the Chinese market seemed to be of a “permanent nature” that necessitated a “substantial strategic rethink”. Furthermore, 44 percent of EU Chamber members saw bleak prospects with respect to future profitability. The deteriorating confidence of the EU members was on account of regulatory issues, preferences in government procurement, market access, and overcapacity.
The West’s approach has also been imposing export restrictions on semiconductor technology and curbs on outbound investment into advanced technology sectors in China.
There was also a notion that political factors like the Chinese state’s rhetoric on national security and its political campaign of self-reliance have created hurdles for European companies operating in China. Under the Biden administration, the aim is to ‘de-risk’ with respect to China, which has been elucidated by US National Security Advisor Jake Sullivan as the construction of “resilient supply chains”. The West’s approach has also been imposing export restrictions on semiconductor technology and curbs on outbound investment into advanced technology sectors in China. The political assessment at the highest levels in Beijing is that the West steered by the US had put in place measures to encircle, contain, and suppress China that mounted severe challenges to its development.
To combat the West’s campaign, Chinese President Xi Jinping had called for boosting China’s self-reliance, and, doubled down on measures to indigenously develop core technology grounded in independent research. In the light of deteriorating relations with the West, Xi called for achieving ‘Chinese-style modernisation’ by integration of industrial, monetary capital, innovation, and talent chains. Internally, the economic credo of China is transforming. In 2013, Chinese leaders expressed that the market would be the deciding force in the economy. In 2024, the pendulum has swung in another direction with the economic trajectory shifting to greater emphasis on the state-owned sector. The plenum resolution stated that the Chinese state would comprehensively reform state-owned enterprises (SOEs) to improve their competitiveness. The Chinese state also expects that private companies will invest in research and development that will help in technological breakthroughs, not merely pursuing profits. China also aims to build resilience through robust domestic industrial chains for industrial machine tools, healthcare equipment, integrated circuits, and industrial software. Thus, geopolitical conditions have meant that the Chinese economy is restructuring its incentive structure to the detriment of Western corporates.
Business Inc. is also worried about the debates emanating from the US presidential election and the policy trajectory with respect to China. Nearly 70 percent of the respondents surveyed for the American Chamber of Commerce report voiced concerns with respect to tariffs. During the presidential debates, both aspirants accused each other of being soft on China—Kamala Harris blamed Donald Trump for facilitating the sale of technology that helped China modernise the People’s Liberation Army. In turn, Trump accused the incumbent Democrat administration of turning a blind eye to China building factories in neighbouring Mexico, thereby undermining the labour class involved in manufacturing. Thus, US Inc fears that regardless of who wins the American presidential election, there will be a tougher line on China.
During the presidential debates, both aspirants accused each other of being soft on China—Kamala Harris blamed Donald Trump for facilitating the sale of technology that helped China modernise the People’s Liberation Army.
To conclude, there is now increasing scepticism on whether or not, China will be able to meet its GDP target. Since the start of relations between China and the US in the 1970s, there has been growing economic integration between the two. But recently, there has been growing realisation in the West that it must change its approach in response to a changing China. The bottom line of any business is the current and expected rate of return on investment. With market confidence in China sapping on account of Xi’s state-driven approach, and emerging US elite perception of Beijing, the West Inc and China’s romance is souring. Amidst this embitterment, there is a silver lining for India. Recently, after nearly 25 years of operations in China, tech giant IBM announced the winding up of its research operations in a series of retreats from China. There are reports that the technology major plans to expand its Indian operations. Amid the pullout from China, India must position itself as an alternative for Big Tech.
Kalpit A Mankikar is a Fellow at the Observer Research Foundation
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Kalpit A Mankikar is a Fellow with Strategic Studies programme and is based out of ORFs Delhi centre. His research focusses on China specifically looking ...
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