257: 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

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249: 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)

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242: UKRAINE CRISIS & INDIA (02 FEB 22)

 

The Russian attack on Ukraine has put India in a spot. New Delhi is facing demands from the West and Ukraine to condemn Russia while needing to preserve its changing, but still vital, relationship with Moscow.

 

Tight Rope Walk

India has good relations with both Russia and the US and siding with one of these countries could cost India its relationship with the other. India has to maintain its neutrality.

India along with China & UAE abstained when a resolution opposing the military Russian operation against Ukraine came up for a vote at the UN Security Council (UNSC).

Various reasons have been given for this decision. The fact remains India is not in a position to any sides. Ukraine is not happy with the Indian stand but even Ukraine has not supported India in the past.

Russia and USA have expressed that they understand the Indian stand probably due to their commercial interests in keeping India engaged.

 

Geo-Political Effects

This Crisis will strengthen the Russia – China relations.

Russia is already averse to the Indo-Pacific concept and the Quad as a revival of Cold War bloc politics and views them as being against its Asia-Pacific interests. This conflict will strengthen Russian opposition to these concepts and forums.

The two blocs i.e. eastern and western would take a more prominent shape. The tight rope walk for India will become more difficult.

 

Effect on Defence Deals

Russia has been a traditional military supplier sharing platforms and technologies that others wouldn’t. Russian hardware still accounts for approximately 60 – 70 per cent of India’s defence equipment, especially with respect to fighter jets, tanks, helicopters and submarines among others, while several major deals are in the pipeline. India requires a functioning supply chain relationship with Russia and Ukraine for spares and support, which is critical for its military.

Ukraine also plays a vital role as a supplier to India’s military, providing crucial subsystems for Russian systems.

With tensions escalating between Russia and the West over the Ukraine crisis, India, which has major defence cooperation with Moscow and also with Kyiv, faces uncertainty over timely deliveries.

 

Air Force

Ukraine and India were engaged in the process to upgrade the Indian Air Force’s fleet of over 100 Antonov An-32 transport aircraft. The Antonov upgrade programme was briefly disrupted by the conflict in Crimea in 2014.

After the Balakot air strike in 2019, the IAF made an emergency procurement of R-27 air-to-air missiles for its SU-30MKI fighters. At Aero India in February 2021, Ukraine signed four agreements, which includes the sale of new weapons as well as maintenance and the upgrade of the existing ones in service.

Delivery of the Russian S-400 AD Missile system is underway and India is expecting a waiver of U.S. sanctions on this. This conflict will complicate both the delivery of the system and the possibility of the US waiver.

 

Navy

The Indian Navy’s relationship with Ukraine is from the time of the USSR for dependence on ships and equipment. Ukraine’s Zorya Mashproekt supplies the crucial Marine gas turbine engines to the Indian Navy. Around 30 ships of the Indian Navy use these gas turbines. These ships include Veer class missile boats, Rajput class destroyers, Visakhapatnam class destroyers and frigates of the Russian-designed Admiral Grigorovich class.

Gas turbines are complicated systems and warships are designed around their engines.  These engines are designed for specific features and cannot be replaced easily. Even some of the spare parts for the overhaul of these engines come from Ukraine. More spares would be required once the existing stock finishes. The conflict in Ukraine could lead to several complications for spares and new construction, including exorbitant costs for even simpler components and small parts.

In addition, Russia is manufacturing two stealth frigates for the Navy. They are to be delivered next year onwards, while another two are being manufactured by the Goa Shipyard Limited under technology transfer.

(Similar situation was faced when USSR broke up. Everything points towards need for being self-reliant in defence production).

 

Evacuation of Indians

India has a lot of  students studying medicine in Ukraine. India is making effort to get them out.

Air India has been flying special flights to evacuate the stranded Indian students. Four ministers are being sent to neighbouring countries to coordinate and facilitate the evacuation. Even the Indian Air force has been asked to join in the effort.

(India has always been proactive in evacuating its citizens from problem areas. Indian Air Force has been at the forefront in this effort)

Over advertising of the evacuations creates a problem. The impression generated is that India’s only concern is to get Indians back. Further, it creates a problem for the diaspora abroad. Although the Indian flag on vehicles going towards border areas in Ukraine is being respected, however, some reports have emerged that Ukrainians are creating problems for them. This may be due to the feeling that India is not helping Ukraine.

(Similar impression was generated during the Nepal earthquake crisis. Most of the missions were for taking relief material to Nepal. Since aircraft were coming back empty, Indians wanting to return were accommodated. However, over highlighting of the evacuations created the impression that aircraft were being sent primarily for the evacuation of Indians).

 

Effect on Indian Students

Thousands of students from India study medicine in Ukraine. The reasons are:

    • Degree costs a fraction of what it does in India.
    • Paucity of seats in India.
    • Global acceptance of MBBS degree from Ukraine.
    • Opportunities in India on return.

Future of these students would be uncertain. Some of them would have already paid a large sum of money.

 

Effect on IT Industry

Though Indian IT companies don’t have large operations in Ukraine, they have big centres in Eastern European countries such as Hungary, Romania, Poland and the Czech Republic.

According to research firm ISG, about 50,000 tech workers and 200,000-odd technology freelancers in Ukraine could be affected by the crisis, and in turn, affect operations of tech companies around the world.

Disruptions due to cyber-attacks is another possibility.

The banning of mobile apps would be another factor to be considered.

As the Russia-Ukraine crisis escalates, India’s IT and business process management industry has to wait and watch.

 

Energy

Russia’s invasion of Ukraine and subsequent Western sanctions will contribute to high oil and natural gas prices in the coming months. Global energy prices skyrocketed just hours after news broke of Russia’s invasion of Ukraine.

This will adversely impact the economy of major oil-consuming countries like India.

 

 

Question

What is the best way forward for India?

 

Suggestions and value additions are most welcome

 

Links to previous posts on the subject:

UKRAINE CRISIS: A GAME OF DOG AND THE BONE

RUSSIA – UKRAINE CRISIS BLOWS UP: 24 FEB 22

RUSSIA – UKRAINE CRISIS ESCALATES (24 FEB 22)

Latest on Ukraine-Russia Conflict (23 Feb 22)

 

 

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References and credits

To all the online news channels.

 

 

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