Chinese Economic Policies vis-à-vis Power Dynamics

 

Pic courtesy: knnindia.co.in

Several factors including the spread of COVID-19 and the Ukraine crisis have created a state of complex, severe, and uncertain economic conditions throughout the world. Countries the world over are trying to re-energise their economies.

 

Chinese Aim. China has two economic aims. The first is to ensure that the yearly GDP growth target of 5.5 percent is attained. The second is that the Chinese economy expands at a higher rate than that of the United States to demonstrate “the superiority of the Chinese system”.

 

Pic Courtesy: vifindia.org

Reasons for the Chinese economy taking a beating.

 

  • COVID-19 outbreak in major cities including Shanghai and Beijing.

 

  • Snarled logistics, faltering manufacturing output, and lagging consumer spending.

 

  • Chinese companies listed on the New York Stock Exchange and Nasdaq were asked to quit the U.S. market to avoid possible “leakage of state secrets”.

 

  • China’s tit for tat approach toward Washington’s decision to bar American businesses from investing in Chinese companies with links to the military and intelligence.

 

Self-inflicted Injuries. The policy of “common prosperity” was used as a pretext to squeeze domestic tycoons. The ambitious expansion plan of IT giants (Alibaba’s Ant Group and Didi Chuxing), private education companies, and video game producers were suppressed. Billions of yuan worth of fines were levied upon e-commerce firms (Alibaba and Tencent) for allegedly failing to observe market regulations and several IT tycoons (including Ma Yun and Ma Huateng) were forced to donate billions of yuan to state coffers.

 

Power Struggle. China has complex dynamics of a power struggle like “The game of thrones”. By actions taken above, Xi has weakened the business tycoons, shown them their place in the power hierarchy, and taken their money to inject it into the faltering economy.

 

Policy U-Turn. China has now liberalised measures on its technology firms, announcing a policy to promote a “healthy development” of the internet platform economy through “normalizing control over the tech sector,” and specific measures to boost high technology industries (especially information technology).

 

Tighter Control. Xi has stated at a politburo study session that different types of capital (state capital, the capital of collectives, private capital, foreign capital, and firms with mixed capital components) are allowed to co-exist in socialist China. However, he emphasised the necessity for strict control (supervision and management) over them. This signals that the high-tech multinationals and successful enterprises will continue to be controlled by party.

 

Other Measures. China has devised multi-pronged tactics to boost the economy.

  • Lowering interest and mortgage rates as well as the reserve requirements for banks.

 

  • Encouraging the domestic market by making spending coupons worth 500 million yuan being made available to citizens.

 

  • An ambitious program to boost infrastructure development with priority allocated to the telecommunications, electricity, waterworks, transport, and energy sectors.

 

  • Earmarking of a multi-billion yuan budget for cutting-edge technologies such as artificial intelligence, quantum computing, microchips, and logistics to offset decoupling attempts by the west.

 

Concept of United National Market.  China is pursuing this concept to curb artificially demarcated regional markets and open up key blockades which limit national economic circulation. China feels that this concept will eliminate bureaucratic red tape and prevent provincial protectionism while ensuring fair competition and full transparency.

 

Theory of Internal Circulation.    This is a strategy to reorient China’s economy by prioritising domestic consumption. Internal circulation is seen as laying the groundwork for self-reliance should further decoupling between the Chinese and U.S. markets occur.

 

Balancing of Re-energising the Economy and Consolidating Power.   The concepts of internal circulation and a united national market would allow the party leadership to enforce state plans and curtail decentralized decision-making.

 

China is deciding its economic policies based on both external and internal power struggle aspects. The 20th party congress is planned for the latter half of the year. The future of these policies would be clearer after the meeting.

 

Bottom Line

 

 De-coupling with China is not easy.

 

 

Question

will China be able to sustain her economic growth?

 

Suggestions and value additions are most welcome

 

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References and credits

To all the online sites and channels.

 

UKRAINE WAR: MAYBE THE BIRTH OF A NEW GLOBAL MONETARY ORDER

Pic courtesy: The Borgen Project (Internet)

 

Western Sanctions on Russia

 

  • The United States and European Union have frozen nearly half the Russian central bank’s $640-billion foreign exchange reserves held in banks outside Russia.

 

  • Russian companies have been debarred from doing transactions in dollars and euros.

 

  • 400 odd western firms have closed operations in Russia.

 

  • A majority of the Russian banks have been cut off from the SWIFT (Society for Worldwide Interbank Financial Telecommunication), which executes financial transactions and payments among banks worldwide.

 

Expected results

 

  • The sanctions and curbs were expected to result in a big sell-off of the rouble.

 

  • It was expected to create insolvency risks for the Russian economy.

 

Rouble Performance

  • The rouble was trading at around 76 before the invasion.

 

  • It went down to a record low of 139 on March 7.

 

  • The rouble appreciated to 83 to the dollar intraday on 29 Mar.

 

  • The rouble has recouped most of its losses.

 

Sanction Effect (So Far)

 

Considering the severity of European and American sanctions on Russia, the effect on the rouble is modest. The recovery in the rouble suggests that the impact of the West’s economic sanctions is much lower than anticipated.

 

Likely reasons

 

  • European countries continue to buy oil and gas from Russia. The European Union gets 40 percent of its natural gas from Russia.

 

  • Major emerging markets (including China) continue to trade with Russia.

 

  • The biggest jump in the rouble occurred when the Russian president announced that unfriendly countries (EU, USA, Canada, Australia, New Zealand, Japan, South Korea, and Taiwan) would have to pay in roubles. This increased the demand for the rouble.

 

Implications

 

  • Energy Crisis. The sanctions on Russia might lead to a global energy crisis.

 

  • This could be the beginning of the de-dollarisation of global trade, especially in oil and gas.

 

  • This could be the beginning of a new global monetary order.

 

  • The new monetary order could be based on commodity-based currencies.

 

  • This would weaken the Eurodollar system.

 

It is wait and watch for long term repercussions.

 

Bottom Line

It is all about Money.

 

Question

Is this the end of the Petro-Dollar?

 

Suggestions and value additions are most welcome

 

Links to previous posts on Ukraine war:

USE OR NON USE OF AIRPOWER IN UKRAINE WAR

UKRAINE CRISIS & INDIA (02 FEB 22)

RUSSIA – UKRAINE CRISIS BLOWS UP: 24 FEB 22

UKRAINE CRISIS: A GAME OF DOG AND THE BONE

RUSSIA – UKRAINE CRISIS ESCALATES (24 FEB 22)

For regular updates, please register here

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References and Credits

To all the online news channels.