Signposts from China

In its post-Covid recovery phase, China springs a few surprises but sticks to the familiar on foreign policy with India

The Chinese People’s Political Consultative Conference (CPPCC) and National People’s Congress (NPC) are currently in session at Beijing. The Chinese Premier Li Keqiang has already presented his work report for the year. Some ministers have held press conferences at which important new information and policy lines have been revealed. While the text of the 14th Five-Year Plan has not been released, it is expected to follow the economic strategy spelt out in Li’s report. We have the main signposts to the direction that China is likely to take during the post-Covid recovery phase. 

First, the economy. During the previous NPC session in the midst of the pandemic, no annual target for China’s gross domestic product (GDP) growth had been indicated. A target of 6 per cent-plus has been laid down by the Work Report as against an average 6.6 per cent annual rate achieved during the 13th plan as a whole. This is somewhat surprising given the fact that China was the only country to end 2020 with a positive growth of 2.3 per cent, and the International Monetary Fund estimates that the continuing and strong bounce-back may result in a higher-than-normal growth of over 8 per cent. It appears that there is a deliberate move to damp down expectations in this respect to retain a larger margin of flexibility given that the global economy is seen as continuing to be weak and political as well as economic uncertainties may persist and even intensify. Most analysts believe that on present trends, particularly a stronger-than-expected export surge, will take the economy beyond the target figure. Li reiterated China’s intent to implement the “dual circulation strategy”, which seeks to treat the domestic economy as the “linchpin” even as the opening up to the rest of the world continues. There is specific intent to raise consumption through larger investment in health and education and promoting the service economy, which is currently around 60 per cent of GDP. The report declares that going forward the primary driver of development will be innovation and to this end, R&D expenditure will witness an increase of 7 per cent during the current year. The focus will be on semi-conductors, artificial intelligence, electric mobility and the whole suite of digital technologies.

There are vulnerabilities that have not been fully acknowledged. The debt overhang of over 300 per cent of GDP persists. The exposure is both of local government and state-owned enterprises, which have kept borrowing heavily through off-budget instruments to finance infrastructure development and other investments that are not yielding high returns. Corporate bond defaults reached an unprecedented figure of $25 billion last year. China was careful not to use a large stimulus package during the pandemic unlike other major economies. Li said that China avoided a “deluge of strong stimulus policies” in oblique criticism of the massive stimulus of nearly $600 billion unleashed by his predecessor, Wen Jiabao, in the wake of the global financial and economic crisis in 2007-08. The debt build-up is a legacy of that.

Illustration: Binay Sinha

China confronts a major challenge in its declining productivity. As economist Yukon Huang recently pointed out, in 2005 China spent $3 in capital to add one dollar of GDP. Today that figure has doubled to $6. At this rate China’s GDP growth may well decline to a lower trend line of 3-4 per cent by the end of the 14th plan. The answer to this is technological innovation and a significant shift away from investment-led growth. The latter objective has been stymied repeatedly by the political need to show high growth rates and generate high employment. From Li’s report, one sees that the challenge is recognised but there is extreme caution not to trigger a destabilising dislocation of the economy.

The defence budget will see a larger spike this year of 6.8 per cent to a figure of $209 billion, continuing a longer term trend of expanding and modernising the People’s Liberation Army.

Linked to economic goals is the reaffirmation of Climate Change commitments, in particular the pledge to peak carbon emission by 2030 and achieve carbon neutrality by 2060. The work report targets a 13.5 per cent year-on-year reduction in energy consumption per unit of GDP and an 18 per cent year-on-year reduction in carbon emission per unit of GDP. These targets are for 2021, but it is learnt that they are likely to continue throughout the new Five-Year Plan. These are specific and ambitious targets which will position China in a leading role in multilateral negotiations under the Paris agreement.

On the foreign policy side, the press conference held by Wang Yi, the foreign minister, had a few noteworthy elements. On India-China, he kept closely to what has now become the standard articulation of Chinese position. One that India and China are the two largest developing countries and are friends and partners and not rivals. They have convergent positions on several international issues and should work together to advance multipolarity. The boundary issue is left over from history and does not constitute the whole story of India-China relations. He blamed India for “initiating confrontation” and that China was resolved to safeguard its sovereign rights. As one can see, the Chinese preference is to return to business as usual with India acquiescing in Chinese inroads at the border. He made no positive reference to the disengagement at Pangong nor gave any indication of further steps. This in itself is telling.

Wang Yi reiterated China’s commitment to move ahead with the Belt and Road Initiative claiming that it had not been impacted by the pandemic.

He also confirmed that changes will be made in Hong Kong’s election laws to ensure that only “patriots” govern the city state. The crackdown on dissidents continues and Hong Kong will eventually be indistinguishable from any other mainland city. This is likely to exacerbate tensions with the West.

On Myanmar, Yi adopted a cautious stand, saying that China had maintained good relations with all constituencies in that country, including the National League for Democracy, which is led by Aung San Suu Kyi. He expressed the hope that peace would return through dialogue and that Myanmar would resume its “democratic transition.” This indicates that China may not be supportive of the military junta to the extent it has been in the past. 

The writer is a former foreign secretary and a senior fellow, CPR