Moving beyond Beijing

Economic revival may not sustain

The People’s Republic of China is the major wild card for the world’s economic and geopolitical future in both the short and medium terms. This has only been reinforced by two recent developments, one in the security realm and one economic. The first was the somewhat tense meeting between the foreign ministers of the United States and China, which was followed by the US making the startling claim that China was preparing to send military aid to Russia to support its invasion of Ukraine. China’s response predictably refuted the claim. This came also at a time when US President Joe Biden made an unannounced trip to the Ukrainian capital of Kyiv. While the Western alliance has been arming Ukraine after the Russian invasion last year, the Russian Federation has been dependent upon countries like Iran and North Korea. The availability of Chinese lethal weaponry would significantly change the dynamics, and make the war look much more like Cold War-era proxy conflicts. This would be inherently destabilising for a world that is attempting to repair damaged supply chains.

Unpredictability in Beijing’s decision-making has also been visible in its policy reversals over the past six months on pandemic control and re-opening. This has affected expectations about the national, regional and global economy. The country appears to have passed through a reopening wave of Covid-19, and has moved swiftly to restore pre-pandemic levels of activity. This is reflected in the changing outlook for the Chinese and the global economy. The latest update of the International Monetary Fund, for instance, increased its 2023 growth projection for China by 0.8 percentage points. As the IMF itself has highlighted, the biggest change from the last such forecasts published in October 2022 has been the effect of China’s re-opening, “which has paved the way for a faster than expected rebound in activity”. This has had an effect on the rest of Asia, according to the IMF, with one percentage point increase in growth in China raising output in the rest of Asia by 0.3 per cent.
 

But positive spillovers in the short term can also turn negative. Domestic obstacles to the recovery in China continue to be of concern to policymakers and investors. The overall rebalancing of the economy away from investment-driven growth to consumption-driven growth has been set back by measures introduced to preserve it during the pandemic and to speed the recovery after re-opening. Thus the medium-term prospects for the Chinese economy are not as optimistic, and the consequent spillover effects for the regional and global economy are less rosy. The IMF has recommended that countries that are affected by the Chinese economy in Asia continue down the path of market-friendly reform if they are to overcome this medium-term drag. For India, these reforms are of course a long-standing requirement. What the IMF does not say, but is nevertheless true, is that attempts to decentralise supply chains such that they are less dependent upon unpredictable policy decisions in China must also be a priority. That Beijing may now be seen as a disrupter of global security or of the world economy that is capable of sharp policy u-turns may only speed up this process.