China’s benchmark stock index is now 50 per cent below its bubble-high in 2015, and there’s little sign the selling will end any time soon. The USA is intensifying its trade war with China and the last quarter growth was 6.5 per cent, lower than what the Chinese had expected. There are signs of weakening domestic demand for cars to air-conditioners, and there is a concern that the yuan will weaken past the level of 7 per dollar, factors that weigh on stock market sentiment. Investors in China are running scared.
The Shanghai Composite Index tumbled another 1.5 per cent to a four-year low, cementing its position as 2018’s worst global benchmark. The Chinese stock market is still the worst performing in the world since January 2018—Losing enough value that combines the market capitalisation of Brazil, India and Russia.
China’s stock market is now worth $5.4 trillion, less than Japan’s. Economic experts are predicting a prolonged cold war like period with several countries including the European Union which, like America, has woken up to how China engages in Intellectual Property theft. It has passed a law that high tech companies can no longer be sold to China.
China’s Belt and Road Initiative has put many nations under insurmountable debt such as Sri Lanka, Kenya, Cambodia, Laos to name a few. Malaysia was quick to stop the railway line that the Chinese were building for them. Most developing countries will not be able to pay China back so it will be left with huge infrastructure projects that will not be viable and will, in fact, create even more debt for China. China plans to spend a trillion dollars in 70 plus countries on infrastructure.
Economists claim that China’s own debt to GDP is around over 356 per cent, and growing while its economy is slowing. The debt is due to the massive infrastructure projects that China undertook in the last decade. Some reports suggest China used as much cement in ten years than the whole of the United States used in 100 years. This has led to 70 million empty apartments and ghost cities; bridges that are hardly used; millions of miles of underused roads; a huge rust belt with steel mills that now lie empty and some ports that are practically abandoned. Millions of migrants who provided labour for these industries have had to go back to their farmlands, where there is not much work. Though the government is trying to rein in overcapacity it will mean shutting down more factories and laying of thousands more. In addition, the labour force in China has become too expensive and many companies are relocating to Vietnam and neighbouring countries.
Then there is a huge growth in shadow banking, a term for the collection of non-bank financial intermediaries that provide services similar to traditional commercial banks, but outside normal banking regulations. Experts say they do not know how large or pervasive this is and how much debt it has accumulated.
In addition, there is Peer 2 Peer lending platforms some in the form of investment companies who borrow from the people on a fixed rate of return and lend it to projects such as a small farmer or an IT company that it hopes will grow. Recently, one of the largest Peer 2 Peer went bankrupt and hundreds who had lost their money went to the authorities but the Chinese police rushed them out in buses. In Beijing, there were hundreds of army veterans lined up who had not got their pension. This too was resolved by busing them away. No one really knows how those who lost their money will be helped nor how much non-performing assets the banks have built up.I recall the city of Xian in China where all you could see were hundreds of skyscrapers, dotting the skyline and giant cranes everywhere. Even then it struck me that this kind of rapid building would not be sustainable. Most of the complexes were too expensive for the lower middle class but the sheer extent of construction happening at breakneck speed was breathtaking. President Trump is adamant that China has not been playing on a level playing field and has imposed tariffs on $250 billion worth of Chinese imports to the US, which he intends to ramp up if China does not come to the table.
Vice-President Mike Pence’s no-holds-barred attack on China earlier this month where he said that no longer would China be allowed to provide subsidies to their export houses in order to dump them at low prices in the United States or steal intellectual property rights by forcing American companies to give them up if they want to enter the Chinese markets.
Then there was the imposition of sanctions on China under CAATSA for purchasing Russian Su-35 fighters and S- 400 missiles, the cancellation of US-China military dialogue and a dangerous encounter between an American and a Chinese warship in the South China Sea. There is also the charge that Chinese spies have infiltrated the networks of several US companies by installing very small chips in the server boards manufactured in China that are used in the systems of these companies. If the US confirms this, it could lead to a major effort to remove China from the global supply chains.
The powers in China are genuinely scared of Trump as he keeps them guessing. Recently, I heard a top Chinese economist say that he bought 50 books of Trump’s Art of a Deal, in Chinese to give it to the policymakers. Trump is the first President that is trying to curtail China’s power in three fronts at the same time: trade, military and ideology.
Xi Jinping’s authoritarian rule has not helped either. His hegemony over the South China sea; militarising islands that are nowhere near the Chinese coast has angered Vietnam, Malaysia and the Philippines. His utter disregard for the rule of law and maritime routes led to the Quad (India, Japan, US and Australia) and the Indo Pacific, which will help to keep sea lanes open as well as have naval exercises together. This is another threat to China’s hegemonic tendencies.
China does not like it. Xi Jinping told the US Defence Secretary when he visited him in June this year. “We cannot lose even one inch of the territory left behind by our ancestors.” I wonder how he claims Tibet as belonging to his ancestors!
In an interview on TV, Gordon Chang an expert on China said that he does not even trust China’s numbers of 6.5 per cent growth and says it is more like 3 per cent. Vehicle sales have dropped by 11.5 per cent, is one indicator. He also says that Xi Jinping is tough and he cannot lose face by coming to the table on trade negotiations with the US.
“He has deinstitutionalised the Communist Party in the last six years. There are no longer these rules that guide succession, which means that if he loses power he could easily lose his freedom and maybe even his life. We are going back to Maoist style politics.”Chang added that Xi is not going to give up without a fight and feels that he may take the economy and the People’s Republic of China down with him.
Freelance journalist Ashali Varma has authored the biography of her father late Lt. Gen. PS Bhagat — ‘The Victoria Cross: A Love Story’. She was executive producer with the International Commentary Service Inc, New York in 1990. She was the executive publisher of The Earth Times, New York (1992- 98). She has also worked as the editor of Choices Magazine, United Nations Development Programme. She writes on various issues including human rights, population and sustainable development. This article first appeared in October 23, 2018, in the Times of India blog, No Free Lunch.