Understanding the new China
The Doklam standoff could be part of a strategy of Beijing bosses to ensure that a rising middle class does not question its legitimacy
It might be sensible to see the impasse in Doklam as more than yet another example of China’s need to periodically rattle India’s cage. Chinese nationalism has been on the rise for almost a decade now and its acts of military aggression and the stridency of its state media in legitimising these have grown both in frequency and pitch. While issues such as India’s refusal to go along with its northern neighbour on its ‘One Belt One Road’ plan or the former’s overtures to Japan could have been the immediate trigger, Doklam has to be viewed against the backdrop of what is clearly a somewhat different approach that China has to its Asian neighbours than in the past.
It is difficult to exactly figure who or what determine China’s foreign policy. However, it would be remiss to overlook the correlation between China’s economic slowdown over the last five years or so and the rise in its chest-thumping. The headline numbers are there to see: From recording an average of growth of around 10 per cent in the previous decade, gross domestic product (GDP) growth is down to below 7 per cent and is likely to stay there as the “new normal”.
However, correlation, as the first chapter of any statistics next book says, is not causation. Thus it is important, indeed imperative, to look beyond the headline numbers and recognise that China’s economic model has changed dramatically over the past few years. This would help avoid two things. First, the tendency to view the slowdown as a sign of things going terribly wrong with China’s economic policymaking and instead see deceleration partly as an inevitable consequence of the change in model. Second, the temptation to extend proxies that worked well (electricity consumption for instance) to gauge economic performance in the old regime to the “new China” and arrive at misleading conclusions.
What is the new China all about? For one thing, its growth is no longer the result of massive and often (unviable) investments and aggressive exports. After a period of rapid acceleration in consumption spending, from 2014 consumer expenditure has beaten investment to become the primary driver of growth accounting for about 60 per cent in 2015 and a whopping 73.4 per cent in the first half of 2017. Dig deeper and you will find that consumer demand is coming increasingly from smaller towns and not Tier-1 or Tier-2 cities such as Beijing or Shanghai. The bulk of China’s urban population incidentally lives in tier-3 and Tier-4 cities. While Tier-1 and Tier -2 cities house roughly 320 million more than a billion people live in the smaller towns. A surge in incomes in the smaller towns meant that 55 per cent of disposable income of consumers came from them in 2016. While past data is difficult to get, the fact that long-term China watchers like investment bank, Morgan Stanley see this rise to around 65 per cent in about a decade indicates the pace of these incomes.
Part of this rise is due to migration from China’s much-neglected rural economy largely into these smaller towns. In 2010, roughly 50 per cent of Chinese were urban. The number is about 56 per cent now. Going by the consensus among analysts, urbanisation is likely to increase to well over 60 per cent by 2020 and close to 70 per cent by 2030.
Interestingly, investment patterns in China are also changing to complement this transformation in income and demand patterns. While private investments are flowing into things like e-commerce, it is surprising to see that governments (Hangzhou province has recently introduced a pilot scheme) are pump-priming the economy not through the clichéd highways to nowhere and ghost towns, but instead through investments in internet access and e-commerce.
This data paints a picture of slower but “better quality” growth stemming from better income distribution. The flipside of this is that of rapidly growing middle class who are likely to be more political aware and critical of a political system run by a lessthan-transparent monolith. (In visits to China in the glory days of 10 per cent plus growth, we were surprised by the number of affluent middle class Chinese in Beijing and Shanghai who expressed a visceral dislike for the government). With better distribution of incomes, this problem could have multiplied. The counter from the Chinese establishment to this appears to be aggressive nationalism and the aspiration for unipolar Asia dominated by Beijing’s bosses.
That said, it is important to jettison some of the age-old China bogeys that are often raised in diplomatic tussles with China. The most critical of them of them relates to China’s currency, the yuan, and the fact that it “manipulates” its currency. This is misleading.
China has for some time now moved away from being a low-cost hub for manufacturing cheap goods and using an undervalued currency to flog them to the rest of the world. Yes, China does peg its currency to the US dollar but most measures suggest that it is quite severely overvalued, not undervalued. In fact, over the last couple of years the Chinese central bank has spent a fortune preventing its currency from depreciating. Different versions of the real effective exchange rate, the standard measure of currency valuation, suggests that it is overvalued by about 20 per cent.
The twice-a-decade National Congress of the Communist Party will be held this autumn. This is a major leadership transition bringing in a new politburo. Perhaps some of the sabre-rattling is really a run up to this. If as is almost certain, Xi Jinping is elected again as general secretary of the party, things could settle down a bit for a while. However, it is quite likely that the government will stick to the aggressive nationalist line to ensure that the “new China” does not question the legitimacy of the political system.