An Address by V.Srinivas IAS
Respected Shri H.K.Dua ji, Former Foreign Secretaries, Distinguished Members,
I am extremely grateful for the opportunity to present my research work on China’s Economy before this distinguished audience. I undertook a study of the “The Rise of China in the International Monetary System” on the advice of Dr. Duvvuri Subbarao former Governor Reserve Bank of India for my book “India’s Relations with the International Monetary Fund 1991-2016, 25 years in perspective”. Dr. Duvvuri Subbarao said that China had grown in stature to such an extent that it was in a position to influence decision making processes in major International Economic Institutions, and India’s policy makers must study the developments in the Chinese economy very closely. Ambassador Nalin Surie, Director General Indian Council of World Affairs invited me to present my research at the ICWA, subsequently Ambassador Ganapthy gave me an opportunity to speak on the subject at the Chennai Center for China Studies and in January 2019 the India International Center invited me to speak on the subject.
2018 marks the 40th anniversary of China’s reform and opening up policy. Four decades of reform have transformed China from one of the poorest countries in the world to now the second largest economy that accounts for 1/3rd of global growth. Over 800 million people have been lifted out of poverty and the country has achieved middle income status. A few provinces of China have achieved advanced economy income levels. Today China’s expanding footprint worldwide is visible from Asia Pacific to Africa and beyond through the Belt and Road Initiative infrastructure projects. As China increasingly approaches the center of the world stage, President Xi Jinping in a speech to mark 40 years of market reforms in December 2018, said that “China’s development does not pose a threat to any country, no matter how far China develops, it will never seek hegemony.” Further President Xi Jinping said that China is committed to the multilateral trading system and further opening of its economy, saying that no one is in a position to dictate to the Chinese people, what should or should not be done. The speech reiterated the distinctiveness and ideological correctness of China’s economic path.
President Xi Jinping’s thoughts have been enshrined into the Communist Party charter and were elaborated in his three and half hour speech at the 19th Communist Party National Congress held in October 2017, seated next to him were his predecessors – Presidents Jiang Zemin and Hu Jintao. The October Communist Party National Congress declared China’s entry into the “new era” and laid out a strategic vision for a “great modern socialist country” by mid 21st century. China’s developmental challenge has evolved from ‘meeting the people’s basic needs’ to their ‘ever growing needs for a better life’, as it sought to transform the economy from ‘high speed to high quality’ growth. The 3 critical battles that needed to be fought were addressing financial risks (with a goal of stabilizing the debt to GDP ratio in 3 years), eliminating absolute poverty and tackling pollution.
One of the President’s key allies, Wang Qishan, a member of seven-man Politburo Standing Committee said that the indiscriminate separation of the Party and Government affairs had led to the weakening of the party’s leading role. Wang said ‘upholding the Communist Party’s leading role is the paramount political principle for contemporary China.” The 19th Communist Party National Congress called for strengthening the Party’s role in every aspect of public life. The Chinese authorities have implemented major institutional restructuring to implement the reform agenda. Communist Party Central Committees in key areas of structural reforms have been formed. The Committees have been given a role in policy making and oversight. The newly established Financial Stability and Development Committee will be responsible for inter-agency coordination, merging the banking and insurance regulators and restructuring the financial regulatory framework. New Government agencies have been setup for international aid and market regulation.
China is an important contributor to global growth and trade and an increasingly inter connected participant in the global financial markets. China is also a major international creditor, including through the Belt and Road Initiative (BRI). The BRI has great potential for China and participating countries by filling large and long standing infrastructure gaps in partner countries, boosting their growth prospects, strengthening global supply chains and increasing employment. There are concerns about the lack of transparency over contracts, lack of openness in procurement and debt sustainability of partner countries.
Amidst competing visions for global leadership, the United States has been a strong critique of China’s policies. At the November 2017, Pacific Summit at Port Moresby, Papua New Guinea, the Vice President of the United States said that “The United States, a democracy is a better partner than authoritarian China. Know that the United States offers a better option. We don’t drown our partners in a sea of debt, we don’t coerce, compromise your independence. We don’t offer a constricting belt or a one-way road. When you partner with us, we partner with you and we all prosper.” On the additional tariffs of US $ 250 billion imposed by the United States on Chinese goods, Vice President Pence said that “the United States will not change course unless China changes its ways.” China has been reiterating in multiple fora, that its international infrastructure drive is a win-win progress, and is not designed to serve any hidden political agenda, not targeted against anyone and it does not exclude anyone.
The State of China’s Economy
2018 marked the appointment of Yi Gang as Governor of the People’s Bank of China. His illustrious predecessor Zhou Xiaochaun, widely known as “China’s most able technocrat” retired after 17 years at the helm of the Peoples Bank of China. The appointment of Yi Gang indicates a commitment to continue with Zhao Xiaochaun’s legacy of liberal minded reforms. That said, a politician, Guo Shuqing has been appointed as the Party Secretary of the People’s Bank of China. This is the first time the political and technical elements of the role have been split between two officers.
In his speech to commemorate the 40th anniversary of China’s economic reform and the 70th anniversary of the People’s Bank of China, Governor Yi Gang said that financial adjustment and macro prudential management framework in China have improved. The PBC has resolved risks of high-risk financial holding groups, rectified financial order and conducted the special program on addressing internet financial risks, while further deepening financial sector reform. The 3 policy banks, namely, China Development Bank (CDB), the Export-Import Bank of China (CEXIM) and the Agricultural Development Bank of China (ADBC) have been positioned as development oriented financial institutions with strengthened capital base and remarkably improved governance structures. Further China has promoted reforms of the market based interest rates and exchange rates, with the RMB exchange rate becoming increasingly market based.
The RMB has been internationalized on a market oriented basis and ranked fifth worldwide as a global currency of payment at the end of August 2018, accounting for 2.12 percent of the global market. RMB reserves held by countries stood at USD 194 billion as of June 2018 and over 60 foreign central banks and monetary authorities have included RMB in their official foreign exchange reserves. China’s focused on opening up the financial sector and has made headway in establishing a rules based financial sector, with the enactment of the Banking and Insurance laws.
2018 economic developments in China can be described as stronger growth and slower rebalancing. The momentum of the Chinese economy has remained strong. The year on year GDP growth has been in the range of 6.7-6.9 percent for the last 11 quarters. Inflation has remained at 2 percent and unemployment rate has fallen. Corporate profits are being witnessed, domestic and external conditions have remained favorable with reduced capital outflows and exchange rate pressure. China is carrying US $ 3.1 trillion foreign exchange reserves which are 260 percent of import cover.
The strategy is to shift from high speed to high quality growth. The five pronged approach for this is to rein in credit growth, accelerate rebalancing efforts, increase the role of market forces, fostering openness and modernizing policy frameworks towards financial regulation. There has been a visible shift to the new economy with growth rebalancing towards service sectors such as IT, Health and Pharma that are less credit intensive. Health care and education have been opened to private investment and land reforms have been undertaken to grant property rights to rural residents. There has been a continued reduction in steel and coal capacities. Housing inventories have come down significantly with the social housing programs.
China has responded to trade tensions with the United States by lowering of entry barriers for financial services and autos, and import tariffs on a wide range of consumer goods and autos, and shortening the negative list on foreign investments. The direct impact of the tariffs announced to date has been limited but could be amplified with further rounds of retaliation through financial and investment channels. Amongst the major opening up measures are plans to open financial services to foreign investment including raising foreign ownership cap to 51 percent and removing the cap in 3 years. Manufacturing sector has been comprehensively opened to foreign competitors and import tariffs have been cut from 17.3 percent to 7.7 percent on a selection of consumer goods such as food, health products, medicines, clothes and shoes.
Wielding Economic Clout
President Xi Jinping has indicated that China has entered a new era under his leadership and seeks to secure a decisive victory in building a moderately prosperous society in all respects and strive for the great success of socialism with Chinese characteristics for a new era, an era that sees China moving to center stage. The policy push has been “opening up will bring progress, while those close down will inevitably lag behind”. There are some policy contradictions too. At the same time China has launched the “Made in China 2025” program with Chinese firms expected to control domestic markets as much as 80 percent by 2025.
China seeks to shape international norms and institutions as it forcefully asserts its presence on the global stage, “constructing international play grounds”. China’s influence in international institutions is at an all-time high. It has strategically positioned itself to set-up new international institutions where it wields considerable influence. China has a voting share of 6.09 percent in the International Monetary Fund and 5.5 percent in the Asian Development Bank. It is the 3rd largest member in both institutions. Further China is a member of the African Development Bank, the Caribbean Development Bank, the Inter-American Development Bank and the European Bank for Reconstruction and Development.
The Foreign Affairs says “China is an illiberal State seeking leadership in a liberal world order”.
The Belt and Road Initiative – “China encircles the World”
The single biggest investment is the Belt and Road initiative which is a massive project involving the funding and construction of a system of roads, railways, oil and natural gas pipelines, fiber-optic and communication systems, ports, and airports. The Belt and Road Initiative will create new forms of connectedness across much of Central Asia and Europe and lead to greater interdependence and enhanced growth for States in these areas. China has defined the BRI as a “win-win” through the creation of an economic system that’s mutually beneficial for all participants. As of August 2018, 70 countries have signed contracts with China for projects related to the BRI. China has enshrined the BRI in its Constitution – a signal that the Communist Party views it more than a regular foreign policy.
In implementing the BRI projects, China has taken up more than 900 projects, 80 percent of which are contracted to Chinese firms. Chinese State owned enterprises now run 76 ports in terminals in 34 countries including Pakistan, Sri Lanka and Greece. Chinese State Owned Enterprises have made several high risk investments in strategic ports, railway track construction, road construction projects for the next wave global economic leadership. China’s BRI initiative has created deep interdependence. The Marshall Plan which created a system of deep and complex interdependence between the United States and Europe is the closest analog to the BRI in promoting structural power.
China is pursuing a number of Free Trade Agreements as part of a long term multilateral approach to be included in the institutional infrastructure of the BRI. The Sino-Swiss FTA might be considered a benchmark, a gold standard in the context of the BRI. The Swiss Government’s position has been “include many trading partners in the FTA, the benefits of FTA increase”. The BRI gives China the narrative to collapse bilateral FTAs into multilateral arrangements to maximize welfare benefits. It is likely that in coming years the Swiss trade with Kazakhstan will increase because of BRI.
The Sino-Polish Comprehensive Strategic Partnership of 2016 and the Polish decision to join the AIIB have significant geopolitical consequences. Further the SREB countries (Czech Republic, Bulgaria, Slovakia and Poland) signed a comprehensive strategic partnership agreement with China during President Xi Jinping’s visit to Warsaw in June 2016. China’s cooperation with the Central and East European Countries (CEEC) within the framework of G16+1 is being spoken of by Chinese scholars as restoration of European Civilization.
The China-Central Asia-West Asia corridor connects the China-Kazakhstan railway to Uzbekistan, Turkmenistan, and Iran. The involvement of the 5 Central Asian Republics in the BRI is very profitable by ensuring economic and political benefits, with trade increasing to US $ 34 billion in 2015 and China financing large energy sector projects in Turkmenistan and Kazakhstan. The Central Asian Pivot of the Modern Silk Road is Kazakhstan. President Nazabayev has highlighted the complementarity between the BRI and Kazakhstan’s economic policy“The Bright Road”, with both aiming to create transport infrastructures integrated with big international railway and roads.
The Economist has said that ‘if not a debt trap, Chinese investment in infrastructure is often a diplomatic one’. The Economist cites the Malaysian BRI project of East Coast Rail link which costs US $ 20 billion financed entirely by Chinese loans and constructed by Chinese workers which has resulted in Malaysian debt shooting up. The Centre for Global Development has listed 23 countries involved in BRI at significant debt distress. These include Pakistan which is facing a balance of payments crisis, Myanmar, Sri Lanka and Maldives. The US President Donald Trump has depicted China as out to bankrupt weak governments, to erode sovereignty and dictate terms: “debt trap diplomacy.”
2018 Beijing Summit of the Forum on China Africa Cooperation
China has announced a total of US $ 60 billion financing to Africa, in the form of Government assistance, financing and financing by financial institutions and companies. This includes US $ 15 billion, of grants, interest free loans, and concessional loans, US $ 20 billion, of credit loans, the setting up of US $ 10 billion special fund for development financing and US $ 5 billion special fund for financing imports from Africa. Further Chinese companies have been encouraged to finance US $ 10 billion, of investments into Africa. After the 2015 Johannesburg Summit, China had committed US $ 60 billion, of financing for Africa which had been delivered. China has identified 8 major initiatives for collaboration – industrial promotion, infrastructure connectivity, trade facilitation, green development, capacity building, health care, people to people exchanges and peace and security. Further China has called for aligning the Belt and Road initiative projects in Africa with the African Union’s Agenda 2063. The aim is to build a stronger China-Africa community with a shared future.
Asian Infrastructure Investment Bank
President Xi Jinping has stated that China is prepared to assume greater global leadership. The world of development financing in Asia was hitherto dominated by the World Bank and Asian Development Bank. The establishment of the Asian Infrastructure Investment Bank under the Presidency of Jin Liquin in 2014 at Beijing represents a major diplomatic success for China. Its membership has rapidly risen from 21 member countries to 85 member countries in 2019. With the exception of Japan and United States, major democracies have joined the AIIB. The AIIB is a hybrid borrowing from a liberal international order where the dominant country is not a liberal democracy. Chinese scholars have said that AIIB will have a strong presence in the international development scene and China will work hard to make the bank work. That said, the financing through AIIB with US $ 6 billion paid-in capital from China is small as compared to China’s pledges to Latin America for US $ 250 billion and Africa for US $ 60 billion infrastructure development.
The AIIB has concluded its 2018 Annual Meetings at Mumbai with the theme “Mobilizing Finance for Infrastructure Innovation and Collaboration.” The AIIB is financing a USD 329 million loan for improvement of rural roads of 1060 villages in Gujarat. Further the AIIB is financing a USD 150 million investment in a fund to make private equity investments in India’s infrastructure sector with Morgan Stanley as Fund Manager and another USD 100 million in India’s new National Infrastructure and Investment Fund. The AIIB has financed its first project outside Asia – a USD 210 million project in Egypt for a solar power park. The AIIB has also worked on a wide range of regional infrastructure arrangements – the Belt and Road initiative, the Greater Mekong Sub-Region program, the Central Asia Regional Economic Cooperation program and the Africa–Asia Growth corridor.
China also established the BRICS New Development Bank in July 2015 and established a contingent reserve arrangement to address short-term balance of payments crisis.
Hangzhou Summit September 2016
A major global leadership initiative has been China successfully hosting the 2016 Hangzhou Summit of the G20 leaders. In the run-up to Hangzhou summit 2016, IMF Quota and Governance reform was effected which made China the 3rd largest member in the IMF reflecting its relative position in the world economy. The Paris Club the principal international forum for restructuring official bilateral debt was expanded to include Korea, Brazil and China. The Hangzhou summit reaffirmed the G20’s founding spirit to bring together the major economies on an equal footing to catalyze action. The G20 had expanded into several new areas in its developmental agenda. The Hangzhou Communique laid emphasis on robust international trade and investment as also inclusive and interconnected development. The Hangzhou Comprehensive Accountability Report on G20 Development Commitments reflected the progress made over the period 2014-16. The G20 Labor Ministers, G20 Agriculture Ministers meetings were also included in the Developmental Agenda.
The growth strategy was to strive to reduce excessive imbalances and promote greater inclusiveness. A new path for growth was charted, with the G20 2016 Innovation Action Plan which sought to pursue pro-innovation policies, investments in science, technology and innovation (STI), support skills training for STI, and mobility of human resources. The G20 New Industrial Revolution Action Plan seeks to strengthen SME’s and address workforce skill challenges. Further the G20 Digital Economy Development Cooperation Initiative was formulated to unleash the potential of digital economy. An Enhanced Structural Reforms Agenda was adopted consistent with country specific choices.
Controlling the Internet
China has called for “a multilateral approach to governing cyberspace, with the United Nations taking a leading role in building international consensus on rules.” A UN based multilateral approach has the benefit of prioritizing the interests of Governments over Technology Companies and it would allow China to mobilize votes of developing countries, many of which would like to control the internet and free flow of information. At the World Internet Conference in Wuzhen in 2017, the Apple CEO Tim Cook said that “Apple shared China’s vision for developing a digital economy of openness and shared benefits.” Many have construed the statement as Apple’s willingness to play by Beijing’s rules.
China has endeavored to control the world’s digital infrastructure, promoting its vision of a closed internet. China has said “countries should be allowed to choose their own path of cyber development, model of cyber regulation and internet public policies.” Over the past 5 years, controls have been tightened on websites and social media. In March 2017, the Chinese Government told Tencent the second largest of China’s digital giants to shut down websites they hosted that included discussions on history, international relations, and military. Virtual Private Networks (VPN’s) used by Chinese business, entrepreneurs and academics have been directed to be blocked. Even American companies have complied with these new rules, Apple removed hundreds of programs from its software that enabled deeper penetration behind the great firewall. China has announced regulations to reduce online anonymity and made organizers of online forums personally accountable for contributions of their members.
As part of the BRI, Chinese companies are building a “Digital Silk Road” of fiber optic cables, mobile networks, satellite relay stations, data centers and smart cities. These activities are being led by Chinese companies and not by Government. Alibaba has acquired a Pakistan e-Commerce company Daraz and launched a digital free trade zone with the support of Malaysian and Thai Governments which will ease customs checks, and promote MSME exports from Malaysia and Thailand to China. Alibaba has been providing surveillance mapping, cloud storage, and data analysis services in Ethiopia, Nigeria, Laos, Sri Lanka, Sudan and Turkey.
2019 marks the 100th anniversary of the May Fourth Movement which was long coopted by the Chinese Communist Party. The origins of the Chinese modern State lay in the anti-imperialist outcry against Imperial China’s supine response to the Treaty of Versailles handing over German held China including the Port city of Qingdao to Japan, resulting in intellectual ferment and the birth of the Communist Party in 1921. It also marks 30th anniversary of the Tianenmen protests. As China seeks to play a global economic leadership role to compensate for the United States retreat, the United States speaks of “debt trap diplomacy” as Governments across Latin America, Africa and Asia struggle to repay loans extended by China. The US-China bipolar world order should be ready for a period of recurring tensions and fierce competition.
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Senior Bureaucrats and Author
V.Srinivas, IAS , Additional Secretary to Government of India , Department of Administrative Reforms and Public Grievances, Ministry of Personnel, Public Grievances and Pensions.
V.Srinivas is the Chairman of the Board of Revenue for Rajasthan, Ajmer and Chairman of the Rajasthan Tax Board.He has a Master’s degree in Chemical Engineering from College of Technology Osmania University. He is a member of the Indian Administrative Service from 1989 batch, and has 30 years of distinguished service.
He is an Indian Council of World Affairs Fellow for 2017. “India’s relations with the International Monetary Fund 1991-2016: 25 years in perspective” is his first book. He has served as Chairman Rajasthan Tax Board, Deputy Director (Administration) AIIMS, Director General National Archives of India, Joint Secretary to Government of India in the Ministry of Textiles, Joint Secretary to Government of India in Ministry of Culture, Secretary to Government Finance and Planning Department, Rajasthan, Advisor to India’s Executive Director on the International Monetary Fund (2003-2006) and Private Secretary to Finance Minister of India and Private Secretary to External Affairs Minister (2001-2003), District Collector at Jodhpur and Pali.
Mr. Srinivas has authored 108 articles on public finance and delivered 18 orations. His second book “A March to New Age India” is scheduled for completion in November 2018. He is a recipient of a number of awards and merit certificates for distinguished public service and has travelled widely across India and the World.
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