Originally Published 2014-04-16 06:30:03 Published on Apr 16, 2014
The Chinese economy's has been facing serious structural problems for some time now. Premier Li knows it, and he is making sure that the legislators attending the parliament session also get the message and pass it on.
The new fix list for China
"In popular perception, China is an unstoppable juggernaut setting new world records and growing to gargantuan proportions. The Chinese establishment does precious little to counter that image. After all, it's this particular projection that allows the Chinese establishment to achieve both strategic and tactical objectives. It not only fulfills internal national security imperatives, but also creates a larger geopolitical reach for China across the Asia-Pacific region. At first glance the 10-day annual Parliament session in Beijing can easily be construed as just another exercise at buttressing and polishing that image, and why not? The most highlighted points at the session pertained to Premier Li Keqiang's confident pronouncements on growing the Chinese economy at 7.5% and the almost universal global consternation about the increased defence spending: officially now pegged at US $132 billion, a substantial annual hike of over 12%, but unofficially supposed to be touching almost US $150 billion. It's easy to get carried away with the glossy sheen, but it's precisely these two points that needs deeper scrutiny. Layered within Premier Li's lengthy speech to 3000 legislators, almost as a hidden sub-text, were three unusually clear indications about the shape of things to come. To seasoned observers Premier Li's blunt admission of the need for 'painful structural adjustments' was a radical departure from the nuanced Chinese approach of delivering tough messages couched in an indirect anecdotal or rhetorical form. Similarly, Premier Li's acknowledgement of the rapidly deteriorating environment as 'nature's red light warning', again an unusually strong language, is an explicit admission of the lack of sustainability of the current model of development. Again, his almost cursory nod to the government's work getting off to a 'good start', but lacing it with a cutting rebuke about 'many problems that people are unhappy about', was a sharp rap on the knuckles for officials. It's a clear expression of concern from a top level Chinese leader of the increasing restiveness within the Chinese society. These three statements, taken together, paint a picture that's not rosy. In this context Premier's Li's assertion that inflation will be kept in control at 3.5% almost seems like a red herring.

The Chinese economy's has been facing serious structural problems for some time now. Premier Li knows it, and he is making sure that the legislators attending the parliament session also get the message and pass it on. There are three major problems that Premier Li and the Chinese establishment will have grapple with, and subdue. Ever since the Four Modernisations process officially started in 1979, the Chinese government has acted as the catalyst, facilitator and incubator for industrial development and numerous mission mode national priority projects. The combined cost of subsidies, soft loans, infrastructure development and benefits ranging from free electricity, tax cuts and long-term land leases to State owned Enterprises (SoEs) over the last three decades has led to a situation where the Chinese financial sector is saddled with a Non Productive Asset (NPA) base of over 25%, as opposed to about 8% in India and just 1% in Australia and Singapore. It's pertinent to note that NPA as a proportion of China's GDP was as high as 40% in 2000: more than the GDP of Sweden during that period. It was reduced to low double digits by 2010, but the financial crisis combined with a strong Renminbi and a liberal credit environment in China has pushed the banking sector to the brink. The crisis is so severe that several experts predict that the collapse of just one bank will bring the entire Chinese economy down. The second problem, more of a challenge actually, is the implementation of the ambitious blueprint for the overhaul of economy and society unveiled by President Xi Jinping in November last year. Experts considered the plan a break from the 'ten lost years' of Hu Jintao, who repeatedly shied away from taking critical decisions. China's economic engine has been powered predominantly by its manufacturing sector, which has been caught in a business cycle of low-cost, low-end and high volume for the last three decades, despite some concerted policy initiatives to move to high technology manufacturing. The Chinese strategic community knows and understands the need to move up the global value chain, but is hard pressed to operationalise it at the ground level. China today is the world's largest manufacturing country, yet its value addition, which is the amount of value added/total sales x 100%, is about 33 percent. Not surprisingly, the value addition in the relatively high technology electronics manufacturing sector is only around the 23 percent mark. The third problem for President Xi and Premier Li is a necessary paradigm shift in the entire model of development.

Premier Li alluded to it by emphasising on 'people-centred urbanisation'. China today has 15 fully developed ghost cities. It's a symptom of a larger state-led economic growth model, where massive investment in large scale infrastructure projects is required to keep the GDP growth rate high. China has to dismount from this rampaging tiger, without getting devoured itself. The paradigm shift is sought to be brought about by an overhaul of the economic engine, where newer, ecologically sustainable and environmentally technologies and industries start to power the economy. This much sought after paradigm shift also explains why China is investing a huge amount of resources in building up institutions of fundamental research, biotechnology and information technology. It's a gamble that China cannot afford to lose. It is also a bet that can reduce pollution and address the concerns of a restive Chinese society.

China's ambitions to play a larger, an almost hegemonic, role in Asia are quite apparent, and well documented. The increase in defence spending has to be seen in the context of China's geopolitical and strategic considerations. From a Chinese inside out perspective, the world does seem to be conspiring, passively at least if not actively, to contain and encircle a growing China from occupying its well deserved place as a leading nation. There are several strategic papers from the United States of America, both from formal institutions of the US government and private think-tanks, which perceive and position China as an emerging superpower: one that's increasingly challenging the established world order. If one adds to this mix traditional rivalry with India, Vietnam and Japan, and the increasing disquiet in Southeast Asia, Australia and New Zealand over Chinese naval power, the enhanced defence spending fulfills the deep-rooted Chinese desire for security and respect. In fact, the Australian decision to acquire F-35 stealth aircraft over upgraded F-15 and F/A-18 Super Hornet was prompted by the rapid Chinese advances in stealth technologies and the strengthening of their air force.

Yet for all its sabre-rattling, the Chinese strategic establishment understands that substantial parts of the Chinese armed forces still need to be modernised. Often the Western press gets taken in by visible symbols of modernisation, like the J-15 and J-20 stealth aircraft project, or the commendable indigenisation of military hardware that range from helmet mounted display systems to aircraft carriers. No doubt, it's an indication of the inherent strength of the manufacturing capabilities and base of the country. But the larger challenge, which Premier Li hinted during his speech, was the modernisation of strategies, tactics and operational doctrines for asymmetrical warfare, global cooperative efforts against terror and non-conventional threats. Neutralising this challenge requires an increased ability to cooperate on a global level, learn from other militaries and coordinate operational doctrines. In short it needs a greater transparency about China's military mechanisms. It's a conundrum: greater transparency deconstructs the carefully built up perception of a juggernaut, which is currently a critical component of Chinese strategic positioning. But keep business as usual and maintain opacity, the world would passively or actively 'contain' China.

While these are the two major challenges, the Chinese government also has to undertake political reforms to prevent an implosion. The attack in Kunming in southwest China where eight attackers armed with knives killed 29 people was an electric jolt to the Chinese society that everything is not well with the nation. The increasing restiveness of the Chinese middle class, including the intellectuals, is also another cause for worry. The new Chinese dispensation of President Xi and Premier Li has their task cut out. More than ever, China is today at a crossroads and how sensitively it navigates the emerging global order will determine as to whether the Dragon is seen as a fire breathing bully or a benign and powerful friend.

(The writer is a Visiting Fellow at Observer Research Foundation and a Fellow of the National Internet Exchange of India)

Courtesy : Diplomatist

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