The Two Chinas

Today, a new, but very different, “two Chinas” question is emerging. It centers on whether China is best understood as a strong country, with a promising future despite some short-term difficulties, or as a country facing serious structural problems and uncertain long-term prospects. In short, two very different Chinas can now be glimpsed. But which one will prevail?–haass-2015-08#Wljsj1yf0dr49qyZ.99

Uptil a few years ago, the world was living the China Dream. It’s economy was growing above 10% rate – an unbelievable pace – since more than three decades. People all around the seemed attracted to the Chinese model of development. Eve with the world’s largest population, it had managed to transform a substantial part of its rural population into the middle class. Particularly astounding was the fact that with its authoritarian economy, it had been able to mitigate itself from the worst effects of the 2008 Global Recession, which had severely hit USA and most of Europe – severely discrediting the liberal-capitalism theory.

But switch over to 2014-15, things are nowhere the rosy pitch they once were. The Chinese Economy is now at a pace of 7% – way more than India, from where I am penning down this- but it is a far cry from those days. There are also rife speculations that this government figure is also not particularly honest – a typical Chinese authoritarian trait- and that the actual growth rate is only 5%. The seriousness of the situation was reflected in the alarm with which the government froze stock markets in the midst of a dramatic price correction.

Furthermore the August move of China to deregulate renminbi was the most alarmist move made by China is what I feel the last two decades.

And this is coming at a time when the BRICS is launching their New Development Bank as a rival to The World Bank, and China is making plans for inter-trade collusion with Russia with the renminbi as the flagship currency in it. These two headlong collisions with the USA and its allies – armed with a resurgent dollar – has to be done at a time when the renminbi is strong at dawn, not at its twilight.

A big part of this is due to the intense anti-corruption campaign unleashed by President Xi Jinping. More of a power-grabbing campaign rather than a reformist campaign, due to the wave of prosecutions that it has unleashed, officials in China are now more vary than ever while taking decisions – for fear of repercussions which they might have to face in future years.

China’s aging population, an unintended consequence of its draconian one-child policy, poses another threat to long-term prosperity. With the dependency ratio – the proportion of children and pensioners relative to working-age men and women – set to rise rapidly in the coming years, economic growth will remain subdued, while health-care and pension costs will increasingly strain government budgets.

The increasingly apparent conclusion from this whole scenario is that China wants to have the economic growth that capitalism produces, but without the downturns that come with it.  It is vital for the Chinese economy to recover, otherwise the whole world will have to face a backlash from it. Some analysts recommend china to liquidate its immense assets overseas ( China is the biggest foreign owner of real estate in USA ) to pump in cold hard money in its economy, but that is a short-term solution at best.

So whether China is facing short term problems or long term serious structural problems; only time will tell. But one thing is certain, the next three decades will not mirror the past three ones.