Key Takeaways

• The pandemic has accelerated prevailing trends and triggered new ones in China. Erosion of Deng-era institutions has led to centralization of power and coloured China’s response to the pandemic. An emphasis on ‘dual circulation’ and boosting domestic consumption to reduce reliance on exports will impact China’s position in global supply chains. A pivot towards self-sufficiency, in face of US-China tensions, will prioritize high technology capabilities. The clampdown on homegrown technology giants even as digitization gains prominence, will significantly impede their global ambitions.

• The world is dealing with a new China that has made hegemonic claims and is trying to claim supremacy in Asia and beyond. This new China is also moving away from the Deng-era’s policy of market liberalisation and tightening party’s control over markets with wide reaching consequences for both, domestic and foreign businesses. This display of autocratic power is visible in the narrative of the state media, in the rebuke of MNCs that speak against human rights abuses as well as in the chokehold over tech giants like Alibaba. Interestingly, at a time when China faces a daunting demographic challenge marked by aging population, falling productivity rates and declining economic growth rates, the CCP has taken the counter intuitive strategy of increasing state control over the market.

• Concentration of power within China has gained momentum during the COVID-19 pandemic, especially in the form of weakening of institutions. Economic reforms in the 1980s were built on the institutional foundations like power sharing between elite leaders which allowed for a Chinese style system of checks and balances. However, this system has changed since Xi Jinping came to power. President Xi has personalised power and targeted other elites under his anti-corruption campaigns.

• Further with the advancement of digital and communication technologies, the regime has been able to monitor society to an unprecedented extent. Decentralisation of power had allowed private sector in China to grow, it allowed for immense international collaborations. However, during the pandemic, there has been a further backsliding of democratic procedures and a setback to international cooperation due to rise of nationalism.

• The Chinese economy was displaying warning signs since 2013, already before the pandemic. The new normal is characterised by slowing down of growth rate, overcapacity in certain sectors, an overheating property market and a very high debt to GDP ratio. The pandemic hit the economy and growth rates plummeted even as unemployment sky rocketed. In this context, the relatively smaller stimulus was rolled out not in the form of direct financial support at the industry level but rather in the form of loans to small and medium enterprises, tax relief, new infrastructure spending, etc.

• While the economy has recovered rapidly, the Chinese leadership is walking on a tightrope between maintaining growth and dealing with structural problems which could lead to a middle-income trap and low productivity. Further, the ongoing trade war with the US has raised concerns about resilience of global supply chains and self-sufficiency, especially in high tech products like semi-conductors, to which the government has responded with its dual circulation policy.

• The Chinese economy is undergoing sectoral shift in terms of consumption over investment. In the last few years, investment level has stagnated but consumption has grown with the expanding middle class. Secondly, services have become the driver of China’s growth story over manufacturing. Services are also being used to support traditional manufacturing processes. Thirdly, there is an emphasis on innovation over imitation as a path for development. Fourth, the export story has its limitations but China has now moved on to exports of high tech and intermediate goods, especially to neighbouring countries. At the same time, given its expanse as well as its importance in regional supply chains, the stickiness of the Chinese manufacturing shall stay.

• The trends of digitization and tussle over control of data have been accelerated during the pandemic. The separation between the Chinese government and big tech companies has been obliterated. The Chinese government is looking for new drivers of growth and it wants to be the first mover and set the rules of the game.

• Earlier the government gave a lot of leeway and free rein to the private sector. This enabled rapid digitization of the Chinese society as can be seen with the universal use of digital payments. A lot more data is being collected for pandemic control both by the government as well as thousands of major and minor apps. However, in the current regime, the CCP has tried to reassert its control over the private fin-tech sector via regulatory crackdowns on giants like Alibaba, Didi Chuxing etc. The impact of this heavy-handed party control on innovation is yet to be seen.  Raising capital overseas will become difficult for Chinese technology companies unless regulators in China and US agree on a mechanism for sharing control over data. 

• The political clock is ticking in China. The checks and balances system has broken down under Xi Jinping, which makes it harder for the foreign political or economic elites to trust China. With the 20th Party Congress lined up for next year, President Xi would be aiming for consolidation of power and a third term. In the US, the Democrats have adopted a tough approach towards China and this augurs for a rocky road ahead for global cooperation.

• However, China can still be a major driver for global economic recovery as it not only retains a large share of global manufacturing but is also the major innovator for e.g., in adoption of AI technologies in manufacturing. But this recovery will also be dependent on an inclusive strategy for production and distribution of vaccines, especially in countries with weaker vaccinations.

• Agreements like RCEP, though its scope was reduced by India’s decision to sit out, provide a way for China to set rules and standards in the region. It also allows China to bypass multilateral arrangements and adopt plurilateral negotiations. This will greatly impact India as it ‘Looks East’ because it will have to play according to the standards and rules set by China via BRI and RCEP etc.