Mr Xi Jinping, the Chairman of Everything and Dictator for Life will not only preside over the biggest demographic decline in mankind but will also preside over the biggest loss of human capital in his lifetime.
Many Indian veterans opine that China, being the second largest economy in the world, is a rising power. It will dominate the world as it vies for global supremacy. However, if one looks beyond this simplistic view, there is also a clear sense of a nation under siege. If the communist grandstanding is ignored, the “on ground” reality indicates a decline. In this confusing scenario, one needs to understand China’s current and future trajectory to handle it well. However, it is also important to remember, as they say in mutual fund advertisements—past performance is no guarantee of future results. It applies to China also.
For more than a month, we have been sucked into this huge political soap opera called the 20th Party Congress. We witnessed a dictator self-anointing himself for life and surrounding himself with “chamchas”—as we understand the term in India. The fanfare and media hype did not mask the hollowness of the event. We now know that China, the CCP and one man have been rolled into as the “Xi of Everything”. This ruthless autocrat has grandiose ambitions. However, his ideological bluster was short on substance. If anything, the event highlighted that China faces an uncertain future filled with huge risks for which no mitigation plan is in sight. As The Xi himself put it, there are black swan and grey rhino events on the horizon. What are these? We will get to them by answering a set of questions.
* How does China rise when its GDP is slowing down? It’s the economy, stupid! This phrase mattered most to the Chinese from the days of Deng Xiaoping. It was the antidote to Mao’s great backward leaps. The economy was clocking double digit growth consistently. Private sector unicorns like Alibaba and Tencent led growth, alongside debt-based infrastructure investment. Then, “The Xi” took over in 2012. He yanked hard left and the economy started declining. He sought growth through public debt financing by Chinese-owned banks and large state-owned enterprises. Debt rose and returns on investment declined. Soon, labour force decline set in and productivity growth slowed down sharply. Boosting productivity is important as demographics decline. It is the only way to keep China’s growth engine going. However, Zero Covid policy, increasing unemployment, dwindling private sector and an inefficient public sector do not contribute to increased productivity. The Xi Jinping, rate of growth very much like the Hindu rate of growth, has only been going down since 2012. To amplify it further, about a year back, at the onset of real estate troubles, a Chinese economist had then stated that “the day when China’s economy overtakes the US economy is going further away and not getting nearer”. Recently, an article in the Financial Times stated that “the Chinese economy is unlikely to overtake the US economy till 2060, if ever”. Had China’s growth continued on the earlier trajectory (under Hu Jintao) rather than slowing by nearly 3-5% under Xi Jinping, the Chinese economy today would have been about 25-40% larger. Do these facts portend China’s rise?
* How does China rise in an era of deglobalisation? China joined the WTO and dived deep into globalisation. Its economy took off in a golden era of rapid economic growth and increased international clout. Globalisation meant unrestricted cross-border flows of goods and services, including finance, information, technology, intellect and labour. China, the greatest beneficiary of globalisation, became the global manufacturer of everything. However, the 2008 global financial crisis and Covid-19 slowed down global trade and globalisation. The US-China trade war, pandemic blues, wolf-warriorism and self-isolationism by China disrupted globalisation. Pandemic-related supply chain disruptions, geostrategic economic re-alignments, Xi’s assertiveness and the Ukraine war, reversed globalisation. Most importantly, global inflation dampened demand. China’s debt trap diplomacy and BRI also contributed further to this effect. China’s access to cutting edge technologies is also being severely curtailed by the US and European policymakers. Chinese imports and exports are dipping in this period of deglobalisation. In such a situation, will China continue to rise?
* How does China rise without core technologies? The rise of any nation is predicated on its technological prowess. For all the hype on technology advancement in China there have been only five Nobel Laureates who were Chinese citizens at the time they were awarded their prizes. One of them was a human rights activist. The last one was awarded a Nobel Prize in 2015. China lacks core technologies in seeds to guarantee its food security. Xi Jinping repeatedly exhorts his scientists to make the country self-sufficient in seed technology. It has not happened so far. China also lacks technology to produce aircraft engines for its fighter or transport aircraft. It is in a tight corner for semiconductor technology. Its effort at self-sufficiency in semiconductors is a path strewn with financial scams by political tricksters. Most spectacularly, its disastrous Zero Covid policy is due to ineffective indigenous vaccine technology. China’s technology adoption is largely through intellectual theft and copy catting. It has not been inventive in creating technologies. In the 20th Party Congress, Xi made a call for “developmental security”. He is pressing to promote the integrated development of “strategic emerging industries” and grow “a new group of growth engines” that include information technology, artificial intelligence (AI), new energy sectors, biotech, new materials, advanced equipment and green products. Xi Jinping has nominated many technocrats to the central committee to deliver on “technology”. Xi wants China to promote “new types of industrialization” and to become a powerful country in “manufacturing high-quality goods, space exploration, transport, cyberspace and digitalization”. These aspirations are to be realised through state-led enterprise. Therein lies the huge question mark. The vibrant private big tech sector, which made China into an economic powerhouse has been emasculated.
* How does China rise without people? Till 2019, the estimate was that China’s population would peak at 1.45 billion in 2031. Suddenly and mysteriously , it is now revealed in 2022 that the population has peaked. It has occurred 10 years before it was supposed to arrive. The demographic bomb is not in the future. It is here and now, as a steep decline in China’s population has commenced. Simultaneously, China is aging rapidly. By 2030 it would have lost 10 million working population and added 50 million aged people. By 2040, it would have lost 60 million working population and added 340 million aged people. This decline is irreversible despite the two-child and three-child formula. There are not enough women in a society which has been practising gender selection and female infanticide for over two generations now. Population boosting strategies are destined to fail (and have failed). The decline in China’s working-age population is irreversible. It sets the stage only for lower economic growth, unless productivity increases (which is actually decreasing). Higher costs of the rapidly shrinking labour force are already pushing low-margin, labour-intensive manufacturing out of China. There is something more damaging. In 2021, 10.62 million babies were born. These children will enter college around 2039-2040. In 2022, 10.67 million college students graduated. By 2039-2040, the college graduates will slowly reduce to only 5-6 million annually. Mr Xi Jinping, the Chairman of Everything and Dictator for Life will not only preside over the biggest demographic decline in mankind but will also preside over the biggest loss of human capital in his lifetime. The reality facing China is simple. It will lose in one generation what it took three generations to build. The effect of this irreversible decline should be palpable in about 3-5 years.
* How does China rise without investment, meritocracy or trust? China’s quarterly GDP figures were released after the 20th Party Congress. A reasonable 3.9% growth was indicated. However, Chinese stocks were sold in panic to hit a 13-year low. The Chinese yuan hit a low last seen in 2008. This reaction was due to the major reshuffle of China’s leadership, falling exports, cooling of retail sales, reduced imports, and patchiness of the GDP data. Internationally, Chinese equities are becoming “uninvestable”. Investors lack confidence in the future of the Chinese economy. Economic policy is entirely dependent on the political aspirations of Xi alone. There are no checks and balances to his power. The Politburo Standing Committee is stacked with his loyal men, rather than people of merit. Lack of transparency, weak accounting standards, and poor regulatory oversight add to this problem. Additionally, conflicts that China is enmeshed in are also driving investor sentiment down. These include a spat with the United States for global domination and contending its sanctions on advanced technologies, obsession with military annexation of Taiwan, frictions in the South China Sea, border problems with India, human-rights abuses in Xinjiang and China’s unlimited partnership with Russia. At the end of the day there is a trust deficit about China.
THE FUTURE TRAJECTORY
The 20th Party Congress did outline the shape of China’s future trajectory. It was all about reunification of the Chinese nation by annexing Taiwan and rejuvenation of the Chinese dream in the face of “unparalleled complexity,” “graveness,” “black swan and gray rhino events” and the “difficulty” that China faces at home and abroad. The “Xi Thought” places ideology, national security and state control above economic growth. There is a willingness to pay the price for it. The commitment to Zero Covid was reiterated. Common prosperity, dual circulation, and anti-corruption policies would firmly get China back on the growth track. Xi also spoke of “having the courage to fight and the fortitude to win” and “make our party invincible.”
What is rising in China? Ideology, national security, state control, Zero Covid and its oversized military. Which part of China’s trajectory is dipping? In the short run, it is its sluggish economy, globalisation, lack of technology and the “only point” leadership. In the long run, it is the demography. As the short-term issues are playing out, the long term demographics have started catching China flatfooted. The good old “gunboat diplomacy” is the only way to reverse this process and open up pathways for economic revival. The gun is therefore out. The greatest and most modern military on earth is therefore on the warpath to win local, regional and reunification wars in order to establish a Xi-centric world order. It is time India watched out.
Lt Gen P.R. Shankar PVSM, AVSM, VSM (Retired) is a retired Director General of Artillery. The General Officer is now a Professor in the Aerospace Department of Indian Institute of Technology, Madras. His articles are available at www.gunnersshot.com