A revival in China? Recent govt stimulus fails to address deeper issues

The Chinese government has announced a stimulus, a “big bazooka”. The Shanghai composite index first surged 26 per cent and is now 19 per cent up over a month. Does this mean that the Chinese economy is healing, and that the machinery of government stimulus will bring the economy back to health? It is unlikely.

The Chinese government has a philosophy of control which extends into macroeconomics. Policymakers have desired “fine tuning” of the economy. Non-traditional levers of financial policy have been used for this purpose, such as rules in the central planning system that govern credit growth and credit directed (or pulled back) for real estate and infrastructure.

These methods are inferior to a market economy. Construction in China has gone to a point where there are now 1.5 homes for each household there. There is no easy path back from this. Similarly, infrastructure building in China has gone into many projects of dubious value. Some people think that more infrastructure should always be built but the bang for the buck should be paramount. The early projects (eg a Bombay-Delhi road) yield high gains, but the projects that arise later in the story (eg roads that assist Himalayan pilgrimage) make less sense. The gallows humour in emerging market (EM) investing runs: The time to buy an EM is when the capital gets its first good airport, and the time to sell the EM is when the capital city gets its second airport.

When a bad asset gets built, the net present value of revenue is below the cost of construction, and there is a loss. A loss has taken place, and all that is left is arguing over who bears the loss. Absent a well-defined bankruptcy system, the loss is the sword of Damocles. There is a pall of gloom, and the wasted man-hours in politicking, for all persons who fear being dumped with the losses.

In the past, faulty Chinese approaches to macroeconomic fine-tuning worked less badly for two reasons. The early construction of housing and infrastructure made more sense. And, the engine of the economy was purring: There was high growth in manufacturing exports, which created growing prosperity, which papered over the failures of policymakers in other respects.

China’s problem is that this engine is faltering. Many decades ago, China was a small country, a bit like India, with a negligible share in global production. At that time, growing production and exports were accepted by the world economy. Now, with Chinese manufacturing production at about a third of the world’s total, there is less headroom to grow. There was a doubling for China when they went from 16 per cent of the world’s manufacturing to 32 per cent. It is just not possible to get a next doubling of this share, to go to 64 per cent. The growth that rescued the economy when faced with macroeconomic problems in the past is just infeasible.

Into this complexity comes the shift from the second globalisation to the third globalisation. In the second globalisation, the periphery was given free access to the core on all manner of issues including trade, foreign direct investment, technology access, and financing. We are now in the third globalisation, where engagement into the core is now conditional on foreign policy and military alignment. The Russian invasion of Ukraine, over the last decade, has steadily led to Russia being cut off from the core.

There is common sense in being kind to your customer. We in India know that services exports went up from $163 billion (2016-17) to $341 billion (2023-24), which was a huge boost to the economy. The next doubling of these revenues (ie an additional $341 billion of additional export revenues in seven years or ideally faster) could be the most important single force in Indian economic growth if it arises. But we should not be complacent, and we should not take this next doubling for granted. We have an incentive for foreign policy and military alignment that respects the role of the West as the source of technology, entrepreneurship, financing, and markets through which services exports have delivered benefits for India ranging from better lives of workers to higher tax revenues for the state.

It is surprising to see the extent to which China’s famously pragmatic leadership lost sight of such common sense in the third globalisation. They defiantly stuck to a hostile position on foreign policy and military affairs. This has induced a large number of moves worldwide that hinder the ability of China to achieve technological progress and growth of exports.

We in India have lived through our own story with China, where we have seen nationalism and militarism there — as expressed in Doklam and Galwan — playing out into a decline of the Indo-Chinese economic relations. This small story (and India is but a small part of the world market for Chinese exports) is a microcosm that shows us nationalism and militarism in China have induced a large number of self-defeating actions vis-a-vis the advanced economies, which once nurtured China with financing, technology, entrepreneurship, and markets.

From an Indian point of view, the wise path for policymakers lies in being strategic about navigating towards a good place for the country in the third globalisation. There will always be arbitrage opportunities, which can be exploited for short-term gains: Through busting sanctions, through trade diversion, through expropriating foreign investors like Vodafone, through withdrawing the protection of bilateral investment treaties, etc. Such thinking sounds like machismo but harms the Indian cause in the medium term. What would be best is to keep our eyes on the ball: The next $784 billion of (goods and services) export revenues that will come from one doubling compared with 2023-24. This requires India’s deep integration into global value chains that are centred in the advanced economies.

The writer is a researcher at XKDR Forum