Countering China

After the Second World War, the world was divided into countries that could largely be categorised as liberal democracies or authoritarian communist nations. But interestingly, contemporary China doesn’t fit in either of these categories. It is an authoritarian market economy. Even as it adopted free-market policies and allowed private companies to grow, there were still a large number of state-owned enterprises. The Chinese Communist Party has invested a huge amount of money in these enterprises, which led to the debt-to-GDP ratio of the country to soar high (most of it, though, was domestic debt). Corruption was also rampant across various public institutions and among public servants. All this led to the above-said conclusions about the China model being weak, and it would crack down and pave the way for a democracy in the country. Xi Jinping has, however, changed this; even as he has turned to rule the country Mao-style.

The principal ingredients of Xinomics are a muscular state and technology. After he took control, Xi took steps to create a more business-friendly environment; giving them space to grow. For instance, his reform measures today mean that it only takes 9 days to set up a new company. Unlike in the past, where public officials ruled in case of civil disputes, courts are now given the responsibility to rule in all such matters (in non-political matters, to be precise). Since Xi assumed power, administrative lawsuits have doubled. The same can be observed in cases related to intellectual property rights and insolvency. Local officials, among whom the disobedience of court rulings was prevalent, were forced by the government to comply. Xi has, therefore, brought order to the markets. He has also made it easier for companies to raise funds through the use of equity shares. All these measures certainly enhance the ease of doing business in China.

Along with this, he has tried to make state enterprises increase productivity. For instance, the success of these enterprises was redefined to be measured by their net profitability. On the other hand, party committees are beginning to play a crucial role in the functioning of private enterprises. Party committees are parallel bodies to the Board of Directors that consist of members from the China Communist Party (CCP). It is said that the investment decisions are being taken by these committees. What is important to note is that as long as companies abide by the party guidelines, they receive massive support from the state. But if they don’t, the state makes things painful for them. There is a strange dichotomy that exists at the heart of this plan. Xi Jinping wants public enterprises to comply and adhere to the market principles and private enterprises to adhere to the party principles. Essentially Xi wants to blur the distinction between private and public firms, which is why he is advocating for a mixed model of public and private enterprises; at least in industries that are identified as the key (eg: information technology, semiconductors) for the country’s success in the future.

Then there is technology. One of the key imports into China includes electric machinery and equipment (semiconductors, vehicle parts, etc). To reduce this dependency on the world, Xi Jinping gave a clarion call for ‘Made in China 2025’. This was a new industrial policy that had a strong focus on industries that require technologies to be imported. Under this, a huge sum of money is being spent on research and development to indigenously develop key technologies. State enterprises are being used for this purpose. While this is one part of the technology, the other is soft technology. Chinese information technology firms are increasingly expanding their presence across the world. These firms restrict the information their users’ access, catering to the needs of the party, and sometimes share data with the party. WeChat is a case in point. Though it is mostly used by Chinese people, it is estimated that there are about 100-200 million international users of the app. The app is used to plant fake news and exercise censorship. It has also become a platform where Chinese spies communicate. Apart from WeChat, there are companies like Huawei, Baidu, Xiaomi, whose bosses have close ties with the party and will certainly oblige to all the “requests” from the party. Chinese tech is today ubiquitous and serves as an instrument to promote and protect the interests of the party across the world.

There is an opinion that is increasingly being voiced from many circles that the world (or at least major economies like the US, Japan, India) could hit China where it hurts the most – trade. They also point out that China has, quite successfully, used trade as leverage to get its way. Cutting meat imports from Australia after the country demanded a probe into China for the COVID-19 pandemic; threatening Canada after a key Huawei official was arrested are cases in point. However, this strategy might not prove effective against China because the country has been diversifying (the composition of GDP, by end-users). China is wise to expect retaliation from other major powers, owing to its cheap and dishonest actions. There has been a gradual reduction in the share of exports in its GDP. This has been the trend since 2010. As of 2017, the share of exports as a percent of GDP was only 20% (while that of investment was approximately 43%). Also, China could very well use its economic might and soft power to do exactly what the United States has been doing for a long time now – condition its aid on a mandatory adaptation of the ‘China Model’, where it forces the countries to adopt its state-capitalism model. It very well serves China if there is no opposition (both political and public) in the countries it tries to bring under its sphere of influence. This is evident from the fact that more than 50 countries agreed to join the Asian Infrastructure Investment Bank, in which China holds a 30% stake. This is only reinforced by research that indicates, “a majority in the developing world and in many middle-sized, non-Western powers prefer the authoritarian model”.

One thing is clear: the assumption of the US foreign policy, under Obama and Bush presidencies, that the integration of China into the international system would change its domestic politics towards democracy and liberalism was wrong. However robust China may be, one must not forget that democracies are always better than authoritarian regimes. Democracies hold their leaders accountable to their people. There has been emerging, from leading think-tanks around the world, the idea of the alliance of Democracy-10 (G7 countries plus India, South Korea, and Australia) to counter China. Though there have been no official talks, US President Donald Trump’s invitation to Indian Prime Minister Modi to join G7 (it still requires the consensus of all the members of G7) is a step in a positive direction. One country may not be able to take on China. But an alliance of a group of powerful democracies certainly can.


Kartik Balaji Kundeti

A low-key individual with keen interest in Economics and Policy making. Currently pursuing Economics from SRCC, University of Delhi.

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