China has been less harmed by the tariff war than was expected, and it has been remarkably resistant to the Covid-19 pandemic. It is the only economy in the IMF’s World Economic Outlook update that is likely to have a positive growth rate of 1 per cent in 2020. This has probably reinforced Xi’s belief that a strong one-party state is better able to handle the challenges. He has also pushed state-owned market enterprises to follow market rules.
Writing in the Communist Party’s theoretical journal Qiushi last Saturday, Chinese President Xi Jinping rejected suggestions that China’s Marxist political economy was outdated. He insisted that it gave primacy to markets in the allocation of resources, but at the same time, enhanced the role of the government. Notwithstanding the important role of the private sector, he declared, “The leading role of the state-owned economy cannot be shaken.”
Last week, the influential weekly, The Economist, examined the subject from its liberal point of view arguing that that Xi Jinping’s China is reinventing state capitalism and that it would be a mistake to underestimate its endeavour.
As the US-China quarrel escalates, many analysts say China with its mix of authoritarianism, technology and dynamism, is too big to stop. There does seem to be a general tendency to underestimate the sheer scale of the Chinese economy, or how it has used IP theft, R&D investments, and STEM education to create important equities in technology industries. Squeezing Iran or North Korea through sanctions is one thing, but taking on China is quite another.
The Economist argues that China has been less harmed by the tariff war than was expected, and it has been remarkably resistant to the Covid-19 pandemic. It is the only economy in the IMF’s World Economic Outlook update of June 2020 that is likely to have a positive growth rate of 1 per cent in 2020. Everyone else is in negative territory. The US will be down -8 per cent, Euro area -10.2, and India -4.5.
This has probably reinforced Xi’s belief that a strong one-party state is better able to handle the challenges of our times. Xi may have stopped liberalisation of the economy and enhanced party control over private firms, but he has also pushed state-owned enterprises to follow market rules, thus strengthening the new hybrid state capitalism.
All this come at a time when China is locked in a struggle with the US on a range of issues — from trade, technology and human rights to the origins of the Covid-19 virus. US leaders like Mike Pompeo are leading the charge, blaming the ruling Communist Party of China for a host of ills. Both countries are involved in a cycle of retaliatory actions, pugnacious official statements and sanctions that appear to be intensifying.
Providing the two countries do not get into a hot war, the real battle will really play itself out in the arena of technology, and the answer to the question as to whether innovation can flourish in an authoritarian China with its techno-centric planned system, or the diffused decision-making and open system of democracies.
Around the world, especially in countries like India, there is concern over Chinese behaviour. Many think it could be a result of some Covid opportunism or to distract attention from the fallout of the pandemic at home. Richard Haass, president of the Council on Foreign Relations, says this could well be simply that China has transitioned into a new era and reflects its strengths and ambitions.
Trump Administration hawks, wary of a Biden victory in November, now want financial decoupling, meaning denying Chinese banks and companies access to the US dollars for financial settlements. Some even call for seizing the part of the US debt that is held by China. While both the options would inflict severe harm on the US and the world economy as well, the Chinese are planning for the worst. They are renewing efforts to internationalise the yuan and their central bank has reported a 36.7 per cent growth of cross-border settlement in the currency over the past year. Several proposals are doing the rounds, ranging from pricing some exports in renminbi, to creating a digital yuan for cross-border transactions.
India and the world have to decide just what do they want of China. Do they want regime change, the blocking of the economic and geopolitical rise of China, or merely a halt to its unfair trade and business practices and IP theft?
The former would involve an all-out Cold War, while the latter would suggest a coalition of countries to systematically confront China. Having so far taken on China on its own, it is doubtful whether the US could now get a coalition for a new containment policy on China, especially its more extreme versions. China is not about to keel over, but could actually emerge more resilient by being forced to adjust its economy to US pressure.
Further, countries like Vietnam, Australia and South Korea, and even Japan are heavily dependent on the Chinese economy. Recently, Australian Foreign Minister Marise Payne told the visiting Mike Pompeo that Australia had its own China policy “and we have no intention of injuring it”, spelling out the fact that the Australians made their “own decisions, own judgements in the Australian national interest.”
That still leaves India for whom Chinese economic ties are not too significant, but important geopolitical differences are. Joining US hawks in the pursuit of extreme options would be self-destructive. On the other hand, coordinating a pushback with like-minded middle powers in the region, the EU and, maybe, a better led US, would be useful. Presidential candidate Joe Biden’s support to counter border threats with China is a good beginning since this is the first time a top US leader has come out in categorical support of India in relation to Ladakh. We may not get to humiliate China, as many Indians want to, but we could create the space that would enable us to win in the longer run.
This commentary originally appeared in The Tribune.
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Manoj Joshi is a Distinguished Fellow at the ORF. He has been a journalist specialising on national and international politics and is a commentator and ...
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