Rise of a tainted phoenix

China proved its mettle once again during Covid-19. The world was imploding, but China quickly regrouped, contained it, and continued to surge. The US president blamed China (see “Corona Complexity”, Business Standard, April 15) for having caused the pandemic after profuse praise for its epidemic management. It is ironic that nothing stopped the US from importing Chinese products to confront the virus while China remained characteristically stoic, and got on with its business.

China’s dash to the finishing line in three international political economy concerns will continue in the coming decades, while Europe remains centrifugal and the US transfixed in contradictions. These are international trade in goods, transfer and absorption of high technology, and the role of currency as medium of international exchange. China’s speed is phenomenal in all three aspects.

In trade, as an indicator of the prevailing lack of balance, the US pays more dollars to China than to the rest of the world. Other countries are facing similar current account deficits with China. In the 2010s, China began commenting openly against continuing US quantitative easing. It redirected purchasing US Treasury bills to use its surpluses to intensify construction of economic infrastructure including roads, ports and power plants, along its unfolding “Silk Road” route. Observers have commented that this is a deliberate Chinese policy to bring neighbours, and Europe, closer to Beijing through land rather than by sea which the US protects like a hawk. 

US experience has revealed that financial and manpower costs of controlling large land masses in unfamiliar territory can be prohibitive. China’s advances in its land-based access thus becomes safer and obtrusive. Reflecting that commodity manufacturing and industry trade of China to and from the rest of the world can only rise, and primarily in China’s favour, China is ensuring that its future safety and security are guaranteed through friendly routes that are allergic to US interests.

Illustration by Binay Sinha

Regarding technology, US multinational companies (MNCs) continue to transfer technology to China despite discouragement by the Trump administration. In contrast to India, with its bureaucratic hold blind to economic growth and corruption hurdles reflecting its political system, China dictates that no such impediments be created to obstruct the MNCs. Corruption here leads to quick trials and the hangman’s noose. Whether corruption exists elsewhere in Chinese society is not the question. Rather, China has the wherewithal to set corruption aside where the country’s strategic interests lie. 

As a result, China’s limited number of Special Economic Zones (SEZs) are showpieces2 with better than world class infrastructure and the largest collection of MNCs waiting to transfer advanced technology at the end of their tenure, reflecting their contracts with China. These MNCs are not philanthropists, their driving force being the Chinese workspace uncluttered with numbing labour laws or bureaucratic hurdles. China has proved itself as the prized location well above the next best.

That is not the only technology story. China’s information technology (IT) industry zoomed in with Huawei and ZTE, producers of high-tech telephony equipment. How different these enterprises are in contrast with India’s IT services industry which, despite decades of tax incentives that effectively exempted their incomes from tax3, failed to invest in deep research and development that could make them global players in high technology. Instead, they were the beneficiary of one of the largest give-aways in India’s “tax expenditure”4 history, the other being India’s lamentable SEZ policy.

China’s rise in IT hardware prompted the US to react strongly, though some of it did not hold up, for example, its action against ZTE. The Huawei CFO, however, was arrested on grounds of violation of Iran sanctions. The US threatened a semiconductor export ban in this high-stake international competition. That possibility was aborted reflecting the US’s 1996 Telecommunications Act. Indeed, the UK imported telecom equipment from Huawei for its 5G network when, unsurprisingly, no US supplier was available. Nevertheless, the UK angered the US.

Whether stopping the sale of US semiconductors to China or technology transfer or intellectual property protection is still controllable seems a moot question. Whether all this could be successfully carried out by the US is questionable. The US justice system with it largely independent views, ironically, suffers a handicap against China that takes decisions overnight.

Finally, as its coffers fill rapidly with reserves, China progresses towards a vehicle currency renminbi. If the renminbi is allowed by China to rise to its true underlying level against the US dollar and it floats renminbi bonds that compete successfully with US Treasury bills, given the strength and level of its currency, there should be an increase in the uptake of renminbi bonds. Resultantly, international trade fixed in renminbi should increase, at least in East and Southeast Asia to begin with, followed by friendly countries in South Asia, Africa and Latin America.5 Additionally, China could buttress its foreign aid policy of providing loans to these regions, usually given at high rates but unavailable to them elsewhere.6

In conclusion, the increased international trade through land routes, the unstoppable race to technology equality, and a renminbi vehicle currency are not figments of imagination. The ascending Asian Tiger’s history forebodes this new direction. Unrestrained in perpetrating pogroms on itself during its Cultural Revolution, Long March, Tibet, Tiananmen Square, it continues to do so in Xinjiang, Hong Kong, and elsewhere. It considers Taiwan as its own and casts eyes across the South China Sea. It calls Arunachal Pradesh Lower Tibet and crosses over regularly. It has surrounded India with enticements to Pakistan, Sri Lanka, Nepal, Myanmar and, recently, Bangladesh. It has bought up land rich in natural resources in Africa and has ventured into Latin America. This so-called poor country has expanding and high management presence in multilateral organisations. The consumptive West did, does, and can do, little.

What might happen to the world with a president for life is not mere scaremongering.
1. Charles Gave and Louis-Vincent Gave in Clash of Empires—Currencies and Power in a Multipolar World, Gavekal Books, 2019.

2.  Huawei is located in Shenzhen SEZ

3. Their export incomes were exempted and during one long phase, 90 percent of their incomes were from exports.

4. Society’s sacrifice in terms of government revenue foregone.

5. Bank of China announced on 17 April that work on a digital renminbi has advanced. It would be a functional alternative to the dollar settlement system. 

6. Sri Lanka ceded control of its port to China when it failed to service its loan. And, after Mahathir assumed prime ministership, Malaysia abrogated its arrangement.   

7. Business Standard articles on China dated 16 May 2018, 15 October 2015, 19 November 2012.

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel