China turns to Global South ahead of Trump tariffs, India needs to be wary

China’s annual Central Economic Work Conference (CEWC), usually held at the end of each year, is eagerly awaited as it indicates how the Chinese leadership is assessing the country’s economic performance over the past year and how it proposes to meet the challenges that lie ahead.

 

This year, the CEWC met on December 11 and 12 under the shadow of the incoming Trump administration in the US. It was preceded by a meeting of the Politburo of the Central Committee of the Chinese Communist Party, which decided on the message to convey regarding the health of the economy and the policy directions for the future. The CEWC elaborates on these, but as in the past, there were no specifics. While the report of the conference mentioned an adverse international economic environment, it made no reference to the potential risks posed by a tariff-wielding Trump in the White House.

 

When contrasted with the proceedings of the CEWC meeting of 2023, the following points are noteworthy:

 

One, recognising the seriousness of the persistent slowdown of the Chinese economy, with stagnant domestic demand and worsening external economic headwinds, the leadership has opted for a more expansive economic stimulus. Its earlier stress on “prudent monetary policy” and on “targeted intervention than sweeping change” has now been replaced by a “moderately loose monetary policy” overall.

 

This means lower interest and mortgage rates, lower bank repo rates and larger issue of long-term treasury bonds. This terminology was last used during the global financial and economic crisis of 2007-08, when China had unleashed a stimulus package of nearly $600 billion, then seen as massive, to rescue the economy. But while the previous stimulus was mainly focused on infrastructure investment, the current package is targeted towards raising domestic demand and consumption expenditure.

 

Two, China has been very conservative in its fiscal policy, and has strictly followed an informal limit of 3 per cent of gross domestic product (GDP) on fiscal deficits. For the first time in recent years, a rise in fiscal deficit is being embraced. There are reports that a 4 per cent deficit is likely in 2025.

 

Three, despite these more ambitious stimulus measures, the technology-driven “high-quality” growth model that is associated with President Xi Jinping has been reaffirmed at the meeting. Industrial policy will continue to promote a “new type of industrialisation”, focusing on the digital economy and artificial intelligence-led growth.

 

Four, in 2023, the CEWC had stressed “prioritising development before addressing problems.” While economic growth remains the “top priority,” now there must be a “balance between the pace and quality of development.” Bottom line: Xi Jinping is willing to sacrifice higher growth rates in the short term while developing the new, high-tech-driven sectors of the economy.

 

There is a notable omission of any reference to Mr Xi’s signature Belt and Road Initiative (BRI) from the report. Chinese worries over risks posed by Mr Trump to its economic health were, however, front and centre in a meeting on December 10 that Mr Xi  had with the heads of 10 international economic organisations, including the World Bank, the International Monetary Fund (IMF), the Brics Development Bank, and the Asian Development Bank, among others. At this meeting, Mr Xi drew pointed attention to the adverse international economic situation, saying that “with the acceleration of unprecedented global transformation, the world has entered a new period of turbulence and change and once again come to critical crossroads.” He expressed confidence that China would meet its growth target of 5 per cent and continue to contribute 30 per cent of global GDP growth, as in the past several years.

 

He also mentioned the BRI as a major contribution by China to the development of the Global South and sought the partnership of international economic organisations in taking it forward. He made specific reference to China’s relations with the US, expressing readiness to engage in a dialogue, manage differences and cooperate to advance mutual benefit. But he also rejected the American “small yard, high fences” strategy, warning that tariff, trade and tech wars would “produce no winners”. There was a veiled threat of Chinese retaliation, a readiness to “resolutely safeguard its sovereignty, security and development interests.”

 

If Mr Trump remains undeterred and follows through on his tariff war, what will be China’s options? Very few in the short run as China remains joined at the hip with the US and with Western economies (Europe and Japan) in general. In the medium to long term, there will be a pronounced shift towards other trade and investment destinations, in particular Southeast Asia, the Gulf, Africa and Latin America. This diversification is already taking place. Latin America has supplanted the US as the chief source of soybeans and other agricultural products.

 

The Global South is coming into prominence as a preferred economic and commercial partner. There will be direct tit-for-tat retaliation against punitive trade measures. China has already halted the export of rare metals such as gallium to the US, which is heavily dependent on China for these metals used in batteries and computers. China has opened an investigation against chip maker Nvidia in an alleged anti-trust violation. At the same time, it has conveyed its willingness to significantly increase its imports of US oil and gas in a future trade deal.

 

China is not only looking at the Global South as geopolitical ballast but also increasingly as a trade and investment partner. The BRI will continue to be an important lever in this respect. India will confront even more fierce political and economic competition with China in the constituency of developing countries. This re-orientation of China’s strategic direction should be factored into our own calculations.

 

With respect to the US, Europe and Japan, India has so far not been able to take advantage of the shifts that are taking place in global supply chains and investment flows away from China. There are voices, especially from our own corporate sector, arguing that we may gain more from the impending shift that China is making, away from its current heavy reliance on the US and western markets. China is encouraging such thinking. This is a complex issue and requires very careful examination before we are once again faced with a fait accompli fashioned elsewhere.

 

The author is a former foreign secretary