India’s Chinese Takeaway

China’s economy grew at 0.8 per cent sequentially in April-June 2023 over the January-March 2023 quarter. Economists now reckon that the target of five per cent growth for the full year 2023-24 is out of reach. Even with customary fudging, four per cent annual GDP growth is the best China can hope for.  Global financial institutions believe China’s long-term economic growth rate could sag to three per cent a year.

Is China the new Japan, as I wrote in these pages several months ago? Shyam Saran, India’s former foreign secretary, is an astute China observer. In an op-ed for Business Standard on 19 July, 2023 Saran broadly agreed with the idea of China sinking into Japan-like stagflation: “During a recent visit to China, I had the opportunity to get a sense of where the Chinese economy was heading after the zero-Covid restrictions were lifted in November 2022. These pervasive restrictions on mobility had adversely affected both domestic and external economic and commercial activities. Chinese annual GDP growth had fallen to three per cent in 2022, the slowest in several years. The property sector, which has accounted for over 30 per cent of Chinese growth for years, has been hit by the imposition of much stricter regulatory measures. The property bubble has ‘popped’, leading to knock-on effects on other related sectors, particularly banking and finance.

“One senior Chinese academic told me that the Chinese economy was in ‘dire straits’ and that the slowdown was likely to persist for at least three to four years. He added that for the first time in 40 years, Chinese employed in several sectors of the economy were having to accept salary cuts. While there may have been some years when incomes had not risen, this was the first time that a substantial number of people had lower incomes than before and were no longer optimistic about the future.”

China has been hit by the perfect storm. Inflation is low or negative, indicating collapsing domestic demand. Overall public debt is an unsustainable 287 per cent of GDP. The real estate sector, comprising 30 per cent of China’s economic output, is moribund. The unemployment rate among young people between 16 and 25 is over 21 per cent.  One Chinese expert placed the real youth unemployment rate at above 45 per cent, double the official figure. His online article was taken down by Chinese censors within days.

Local Chinese bodies have run up huge debts to over-build infrastructure. Empty buildings and ghost towns dot several regions across China. Local bodies unable to repay loans are adding to China’s debt mountain. As Saran notes: “The woes of local governments pose a threat to the banking sector. Local government financing vehicles constitute 15 per cent of total banking assets. Mortgage loans outstanding at the end of 2022 were 40.6 trillion renminbi (RMB) or $5.7 trillion and constitute 18 per cent of total bank loans.”

Has India benefitted from China’s slowdown? The China-plus-one strategy practised by global firms operating in China initially helped near-neighbours like Vietnam, the Philippines and Indonesia. India’s market size and tech talent, however, make India the obvious choice for multinationals de-risking, but obviously not decoupling, from China. Foreign firms are far too integrated into China’s supply-chain ecosystem to decouple.

China’s new law that carries severe penalties for transmitting corporate data has spooked global China-based companies. Data shared with headquarters by foreign companies operating in China can be interpreted as data leaks, placing global executives in the crosshairs of punitive Chinese law enforcement.

Sensing the tide turning against it, China has changed tactics. The recent visit to Beijing by former US Secretary of State Dr Henry Kissinger was almost treated like a state visit. The 100-year-old Kissinger was given a rare personal meeting with Chinese President Xi Jinping. Kissinger’s secret trip to Beijing in 1971 had allowed China to drag itself out of international isolation.

Washington finally established diplomatic relations with China in 1979. Easy access to US technology helped trigger President Deng Xiaoping’s economic reforms in the 1980s, enabling China’s rise as an economic superpower. It took Washington three decades to wake up to China’s threat.

What is striking about China’s current slowdown is the level of disbelief in Beijing that the 30-year-long economic miracle could be over. As Saran points out: “In conversations with several Chinese interlocutors, there seemed to be some surprise over India having emerged as a preferred destination for flows of international capital and technology, with its economic prospects appearing brighter than China at this point. It was argued that China had been adversely impacted by trade and economic relations being increasingly influenced by geopolitics and security considerations. That China has itself contributed to this changed environment is not acknowledged.”

India has been unable to yet extract the full benefit from a slow drift of global corporations de-risking operations in China. Apple is an early convert. It expects to manufacture 25 per cent of all iPhones in India by 2026, up from about seven per cent today. India’s scale – markets and manpower – is difficult to ignore.

Recognising the danger of slipping irreversibly into another Japan, China’s Politburo met recently to draw up a new strategy. Comprising China’s top leadership, the Politburo said on 24 July 2023 that it would implement macro-economic measures “in a precise and forceful manner.” It conceded that “currently, China’s economy is facing new difficulties and challenges which mainly arise from insufficient domestic demand… as well as a grim and complex external environment.”

Significantly, the Politburo meeting was chaired by President Xi Jinping, emphasising the seriousness with which China’s leaders take the country’s economic downturn. For India, whose demography resembles China’s in the late 1990s, it is time to seize the moment.