Chinese Chequers

Chinese Chequers


In Chinese Chequers, the skill lies in vaulting over one’s opponent’s counters, into his or her “home”. Ahead, that is, of him or her doing likewise into yours! The Red Chinese have, over the decades since Comrade Deng, proved themselves to be good at this game using a very successful export-based model. But how good is that in absolute terms? Has some of the reportage and commentary on Chinese dominance and mastery run somewhat ahead of itself?

China has indeed invested nearly $2 trillion of its reserves in US Treasury Bonds. But doesn’t this money support the very economy that buys most of Chinese export? And didn’t this export, till recently account for a full 38% of Chinese GDP? So, isn’t the money placed in US Government Bonds helping China as much as it is financing a proportion of the US deficit? And aren’t the Gulf countries and other producers of petroleum eagerly doing the same thing too?

As for the opaque Chinese Renminbi, it is linked to its banking sector, sitting, it is rumoured, on very large non-performing assets, (NPAs). And these NPAs are not acknowledged. But obviously they do have a bearing on the true strength of the Yuan and the national balance sheet despite apparent double digit growth.

Note also that the bulk of the export is made up of labour intensive, low unit value, consumer goods. This suits high wage environments, to have items manufactured cheaply to fixed price contracts in China. It also employs a lot of people at the selling-end of things but doesn’t alter strategic realities. And everywhere in the commercial space, we are reminded that price warriors are vulnerable to diversification of dependence, over which they have little or no control.

To get out of this precariousness, China will have to turn its economic ship to stimulating domestic consumption, particularly when the export gravy train is derailed temporarily or for more sustained duration.

But stimulating domestic consumption in a largely agrarian country with low per capita income is not going to be an easy thing. And keeping the numbers up via export into new territories like Africa will not be quite the same. But for the time being, the growth figures are fine because of the ongoing infrastructure spends spurred by the $650 billion stimulus package.

But later, the export dependence will have to be replaced by manufacturing and services for domestic consumption, and doing that by subsidy, as in exports, will not work. Besides, there is little or no political freedom outside of Hong Kong and this will exert its own pressure particularly as the economic gap keeps widening between the millions in the city and the billions in the countryside.

Technologically advanced countries have been happy to cede the low end of commerce to China and others in favour of high-end technologically evolved armaments, super computers, planes, technical know-how and so forth. But even with a degree of developed competence, nobody is buying high-tech Chinese. Unless, that is, you count Pakistan and other nations and organisations unable to get their small arms, ammunition, larger ambition missiles and even nuclear how-to-do-it kits, from elsewhere.

Historically too, the strength of Chinese exports owes itself to the most favoured nation treatment China received after the Nixon-Kissinger tilt towards China. But that tilt was designed to counteract the influence of the USSR. The USSR is now gone, and it may be time for China, raising its profile, to draw some new conclusions for itself.

With regard to Chinese grumblings about the weakness of the US dollar affecting the value of its own reserves, it may lack both leverage and conviction. Because, China’s Yuan can neither fund the world, any more than a much stronger Euro can, nor risk full convertibility, without losing control over its manipulated books of account. And talk of Special Drawing Rights (SDRs), as an alternative to the US dollar as the reserve currency of the world is, as yet, wildly premature.

But there is decided change in the air brought on by the economic downturn. There are quality and safety complaints. And a recent American poll showed over 73% now resent the ingress of Chinese goods into America. This may or may not portend protectionist sentiments, but the atmosphere is charged, and should China push too hard, the US could move away from it economically. Especially when, and if, the domestic political cost-benefit analysis reveals unaffordable costs!

One or two US regimes, such as the present one, or Bill Clinton’s before it, may indeed try naive appeasement as a stop gap. But sooner or later, America and its NATO allies will have to call China’s bluff and withdraw a proportion of its economic largesse to deflate the so-called Chinese miracle.

China, despite its aggressive military spends and infrastructure build-up, cannot seriously engage in overt military adventurism in today’s world; not even with regard to India. And its clumsy attempts at pressuring the West by proxy, using a host of countries including North Korea, Pakistan and Iran, is transparent. As it is in the Asian theatre as well, via its support to insurgents and rogue regimes and its unsubtle bullying. But will all this deliver the global leverage and regional dominance China seeks or help to consolidate opposition to it?

But even without getting any deeper into the true strength of China, there is a hopeful lesson for India to learn. China has changed its status from third world country into contention as an economic growth engine on the back of a mere three trillion dollar economy and promise of further double digit growth.

But even then, as the beauteous Maria Bartiromo of CNBC put it, China’s three trillion dollar economy cannot rescue America’s 14 trillion dollar one! This is so much any port in a storm talk, and the best thing about it is that India and China and Brazil and Russia are still growing when others are not.

But it does make for some heady flattery from America, and all India has to do to receive similar stardust, is grow its economy three-fold based on its famed domestic consumption. They say the first million, or in this case trillion, is the most difficult, but we’ve already done that and that's without counting our parallel 'black" economy!If we keep this up, we might get good at Chinese Chequers too.

(1,060 words)

20th November 2009
Gautam Mukherjee