China at the crossroads

The third plenum of the 20th Central Committee of the Chinese Communist Party (CCP) is now meeting in Beijing. We will know of its key decisions on economic reform and restructuring only when it concludes on July 18. Its basic orientation is already known from the Chinese official media. The outcome document, namely the “Decision on Further Comprehensive Deepening of Reforms and Advancing Chinese Style Modernization”, has already been discussed in draft form in the CCP’s Politburo and is unlikely to see major changes at the plenum itself. The CCP will lead the reform and modernisation process and this means that the recent trend towards greater centralisation of authority will continue. The focus of economic strategy will remain on what President Xi Jinping has called the “new productive forces”, or the arena of high technology. He has often declared that technology will be the “battlefield of the future”, and China must seek to occupy its commanding heights. Further, that the champions of this strategy will be state-owned enterprises (SOE), with the private sector playing second fiddle. This strategy is also dictated by a perception of growing external threat, including technology denial, reduced market access, and an all-round containment policy against China by the United States (US) and increasingly the West in general. Xi Jinping appears to be ready to pay the price of slowing growth while doubling down on what many analysts, including in China itself, regard as a risky gamble.
 

As the plenum began to meet, it was announced that China’s growth in gross domestic product in the second quarter of the financial year had fallen to 4.7 per cent, below market expectations. One of the headwinds faced by the economy has been stagnant consumption. Retail sales in the quarter were up only 2 per cent year-on-year and hence consumer confidence has not recovered. The property crisis continues to drag the economy down, with real estate prices continuing to decline and banks’ exposure to defaults in the real estate sector expanding as a result. Many local governments whose financial health had been linked to land sales and property development are facing insolvency. The central government is likely to focus its support measures on this segment of the economy.
 

During a recent visit to China, there was an opportunity to interact with both Chinese and foreign interlocutors. The overall impression conveyed was that the Chinese economy was in worse shape than what was apparent. Youth unemployment (16-25 age category) continued to be around 25 per cent. The property crisis had dealt a severe blow to the urban middle class, whose savings had been locked up in real estate and expectations of rising property prices. This had affected spending power but also led to generally pessimistic sentiment across the board. The private sector continued to be apprehensive of more scrutiny and regulatory tightening. Investment sentiment was also on the decline.
 

Some Chinese shared their concern about what they saw as a steady slide towards a more ideologically inclined state which had also become increasingly nationalistic and hostile to foreign, particularly Western, influences. Social media has become a potent weapon in attacking and demonising those considered to have strayed ideologically or those who are regarded as having any affinity with Western countries or Western values. People are encouraged by the CCP to flush out security risks among their communities and to report suspicious elements and behaviour to the authorities. Since the state has control over what is allowed to trend in social media and what is not, there is fear that China may once again become a relatively closed society with the state encouraging anti-foreigner sentiment. I did not experience any of this personally. The young students I met at the Tsinghua University were invariably friendly, unusually bright and curious, and eager to engage in spirited argument.

In a separate discussion on India-China relations with Chinese South Asia experts, there were no signs of any shift in China’s position. They continue to argue that the border situation was now “stable” and that the two countries should restore normal relations and exchanges. There were complaints about the “discriminatory” actions taken by the Indian government against Chinese companies that invested in India. A more negative view saw India trying to profit from the anti-Chinese policies being pursued by the US and the West, positioning itself as politically a more congenial alternative. The conclusion being drawn was that India, therefore, had a vested interest in maintaining a hostile posture towards China. All these assertions were strongly refuted. The impasse in relations is likely to continue.
 

Here are some other impressions. If there is a perception on the Indian side that our reaching out to Russia may slow, if not reverse, its increasingly close relations with China, that is likely to be illusory. The “no-limits” partnership between them has only grown stronger. There may be other important reasons for India to maintain its friendly relations with Russia, including legacy issues, but any expectation of being able to influence its overwhelming reliance on China should not be one of those reasons.

There is an obsessive Chinese preoccupation with the US seen as an existential threat. There appears to be a consensus that the US is determined to forestall China’s rise to becoming the most powerful country in the world, starting with Asia. However, with the US involved in two wars, one in Europe and the other in West Asia, and with a fragmented and distracted polity at home on the eve of presidential elections, China believes it has more room for manoeuvre in Asia. It is using this period to consolidate its position in Asia.
 

In some conversations, there was surprise expressed over India being able to maintain a relatively steady and high rate of economic growth and its success in increasing its global profile and standing. While acknowledging this, the bottom line was still the same — India was not in the same league as China and should keep its own ambitions in check. It was deemed presumptuous on the part of India to seek leadership of the Global South.
 

Geopolitical equations as seen by China do not, as yet, seem to justify a more accommodating posture towards India.

The writer is former foreign secretary