Shadow Banking and the Real Estate Bubble: Is Financial Crisis a Real Possibility in China?

Anushka Maheshwari, Research Intern ICS

Image: Property-hungry Chinese millennials and shadow banking could fuel a financial crisis
                    Source: South China Morning Post

The Chinese economy, due to the strict measures adopted by the government to curb the spread of the Covid-19 virus,  is back on track, with output back to pre-pandemic levels and a surge in credit activity. China’s financial regulators are having a hard time containing risks at home while limiting disruptions from abroad as the economy is opening to foreign investment. The fear of missing out has stoked the investors’ expectations and many people are now buying property for investment or speculative purposes, which Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, termed as “very dangerous”. The household debt in China had reached 150 percent of its disposable income in December 2020 driven by a rise in property prices and seems to be concentrated among the millennials. The youth of China is clearly banking upon the government to sustain this growth in real estate prices, but a major portion of this debt is financed by shadow banking. People’s Bank of China (PBOC) defines China’s shadow banking as “credit intermediation involving entities and activities outside the regular banking system”.Since this sector is outside the formal banking sector, it lacks a safety net that comes from being financially backed by the government through deposit insurance publicly guaranteed or ‘lender of last resort’ facilities by China’s central bank. This raises an important question: Is China on the verge of a financial crisis like the one faced by the US in 2008-09?

China escaped the 2008 financial crisis primarily because of its booming domestic market and little exposure to the overseas market for wholesale funding. But the contraction in capital inputs through foreign direct investment during the crisis and fall in exports made the government announce a $586 billion stimulus package to provide a boost to the economy. Major infrastructural activity, constituting 72 percent of the package was undertaken, and only 30% percent of this was financed by the central government. The rest had to be funded by the local governments, and since they couldn’t borrow funds themselves, local government financing vehicles had to take on debt on their behalf from banks. But banks had severe restrictions in terms of lending such as caps on lending volumes imposed by the PBOC, mandatory bank loans to deposits ratio, restrictions on lending to certain industries, reserve requirements, among others. Due to this, shadow banking activities grew along with an increase in fixed investment, driving economic growth but at a high cost, so much so that the corporate debt to GDP ratio reached a record 160 percent in 2017 as compared to 101 percent 10 years prior to it. 

The Chinese leadership claimed that it had successfully defused the housing bubble that had formed in China by the end of 2014 due to these shadow banking activities. So, in order to uplift the dampening economy in 2015, it eased restrictions on second-hand home purchases and the property market since then has been booming, with more households buying houses and property developers borrowing more to engage in construction activities. There are many factors causing an increase in shadow banking activities, which in turn contribute to the growing real estate bubble. Firstly, Chinese authorities are trying to sustain high GDP growth rates through credit borrowing which puts strain on financial institutions of the country. Secondly, zombie companies that have little to no productive use, are borrowing more and more simply to meet their current obligations. Thirdly, many state-owned and private companies in China have property subsidiaries, and property loans made to these subsidiaries are sometimes presented in the books as going to the parent company. This results in the share of property-related debt being much higher than what is available in the official data. The overall impact was that the amount invested in Chinese housing hit $1.4 trillion in June 2020, while the total value of houses and developers’ inventory, according to a Goldman Sachs report, had reached $52 trillion in 2019.

Image: Shadow banking in China has ballooned into a $10 trillion ecosystem that connects thousands of financial institutions with companies, local governments and hundreds of millions of households.
Source: Bloomberg Quint

The shadow banking system in China works independently of its monetary policy, amplifying increases in the money supply but working opposite when the restrictive interest-based policy is imposed. Thus, it can be inferred that in spite of the Chinese policy changes to curb the real estate sector, the negative role of shadow banking is why the bubble continues to build. President Xi Jinping’s statement in 2017 that “houses are built to be lived in, not for speculation”  clearly indicates that the PLA government is sensitive to this issue. The government in China has adopted stringent measures to stop the rise in property prices over the past few years, and the latest mandate in August 2020, restricted credit supply to both developers and investors. These new regulations that mandate all lending institutions to decrease the quantity of loans given to this sector are going to stay in place until the real estate cools off. There are two forms of shadow banking in China, one is the channel business of Chinese banks that hide some of their lending activities to keep them outside the purview of the auditors and regulatory bodies. The other is P2P(Peer-to-Peer) lending platforms like trust companies, factoring companies, etc. In order to contract both these forms, the Supreme Court in China has lowered the interest rates on microlending, which will make it unprofitable for lenders while the CBIRC(Chinese Banking and Insurance Regulatory Commission) has forbidden trust companies to finance developers that do not meet the necessary requirements of shareholders and capital or lack necessary licenses.

The PBOC has significant control over lending activity in China as compared to the independent decision-making possible in the U.S. markets, which implies that the situation in China is more stable. There are many structural differences between the shadow banking systems in China and the United States, such as in China, market-based financial instruments do not play as significant a role as they do in the USA. Also, in China, smaller banks went off-balance sheet as they were constrained by liquidity requirements as compared to the larger banks in the US that were constrained by capital requirements. All these factors considerably lessen the chances of a financial crisis like that of 2008-09. Also, the Chinese real estate market has higher-than-normal down payments, sometimes as high as 40-50 percent of the transactions as compared to the 10-20 percent in most western markets. This implies that the debt to transaction price ratio is low, which discourages people from the lower socioeconomic strata of Chinese society to purchase high-priced properties, thereby reducing the risk of defaults. The PBOC and the CBIRC stepped in to take over the Baoshang bank when it collapsed in 2019, whichhas both positive and negative implications.  On one hand, it indicated that the Chinese government may intervene in case of any crisis-related situations caused by defaults in the shadow banking sector, but on the other hand, it may also encourage risk-seeking behaviour from creditors depending on the government to back the financial system. The Chinese government is caught between trying to curb shadow banking activity in order to reduce system risk in the country due to the real estate bubble and ensuring liquidity in the economy. Thus, although the possibility of a financial crisis is low, China does need to reduce risks posed by its shadow banking sector and ensure financial stability.

It’s high time that BRICS should work towards Youth Empowerment

Dr. Sushmita Rajwar, Assistant Professor, Maharaja Agrasen College, University of Delhi


Image: BRICS 2021 Summit logo
Source: BRICS Youth Energy Agency

We have come a long way from when the term BRIC was coined by Jim O’Neil in 2001 which later included South Africa in 2010. We should remember that BRICS nations came together at a time when there were many changes in geopolitics. It was a time when the 9/11 attacks were changing world politics, China had joined the WTO in 2001, Russia was recovering from the 1998 financial crisis, and India also coming out of the sanctions imposed after the 1998 Nuclear test. The BRICS nations were seen as quite different from each other but there was a great deal of complementarity that existed – China was seen as the ‘manufacturing factory of the world’, India was seen as ‘pharmacy of the world’ and IT Power, Brazil as the ‘granary of the world’ and Russia was seen as the ‘energy hub of the world’ and later South Africa was included as it was the most significant country in the African continent. India also had most of the young population and China is the most populated country among all.

There are many expectations from this year’s BRICS Summit. 2021 marks the 15th anniversary of BRICS and hence, it is an opportune moment to review its work, as the theme suggests “BRICS@15: Intra BRICS Cooperation for Continuity, Consolidation & Consensus”.

One should also understand that the BRICS represents is not just a political configuration but the economic potential to give greater voice to the developing world. The young population of India has had to face many challenges during the pandemic in matters of education and training, finding decent jobs, mental well-being, and the digital divide and it is the right time for BRICS to prioritise these issues.

How can BRICS help?

The initiatives taken up by BRICS countries should prioritise issues of the youth. One of the most important outcomes of BRICS has been the establishment of the NDB in 2014. China hosts the headquarters of NDB & regional offices have been set up in member countries and there is a demand for opening a regional office of New Development Bank (NDB) in New Delhi also. The NDB has funded 18 development projects in India, providing assistance for      Covid-19 emergency relief,  the rapid rail transport network, metro, roads, bridges, irrigation, renewable energy, etc. India has already been granted a US$ 1 billion loan from the NDB for the Mahatma Gandhi National Rural Employment Generation Scheme (MGNREGA). The NDB’s regional office in India would allow young people to gain employment opportunities as well as participate in the decision-making process in the new project proposals too. India can certainly focus on empowering youth by promoting new and nascent start-ups by the young population in India. The Make in India campaign of the Indian government has sought to encourage young entrepreneurs.

If we look in terms of challenges for the youth, there are many, but the China-India Galwan conflict in May 2020 has also raised tremendous challenges to BRICS solidarity and created a huge trust deficit. There has been a rise in strong anti-China sentiments among the youth. The results of the conflict was a series of economic sanctions against China by India – for example, the canceling of a contract by the Indian Railways and opposition to contracts being given to Chinese firms for the construction of the Rapid Railroad Transport System between Delhi and Meerut (this is the same development project that has been granted funding by the NDB in India). The Indian government banned 52 Chinese Apps in India including Tiktok, We Chat which was a huge business loss for these firms. Having around 200 million users of Tiktok in India meant that a sizable portion of this is youth. Indian influencers on apps like Tiktok were adversely affected and had to look for other applications,  losing around US$ 15 million last year.

A large number of young people also lost either one or both their parents to Covid-19. While the government has brought out some schemes to provide free education to such children or youth, we all know that it isn’t going to be enough. There can be many ways through which such people can be provided help. There is a need for the governments of the BRICS countries to look into providing adequate education and training to the younger population. India already has a strong network in providing tele-education to many countries. Therefore, an idea of starting a BRICS Virtual University where young people can choose to study from a variety of courses from different disciplines in hundreds of Universities in BRICS countries can be proposed. This would also enable them to gain suitable employment too. BRICS countries can also come together to help young people find suitable employment in these countries.

There are many Indian medical professionals working around the world. Many young people go to Russia for medical education and become trained doctors and paramedics. These young people can be provided employment in BRICS countries through a substantial framework.

Mental health needs special focus in India through education. The social structure of families, peer groups, religious associations, and caste associations have done little to address mental health issues. Despite the Central Board of Secondary Education (CBSE) making it compulsory to have counselors at schools, only 3 percent of private schools have done so. Solutions should firstly point out the need to recognise the problem and then make efforts to remedy it. Introducing mental health as part of the curriculum would really help school-going youth to understand the fundamentals and seek help when they need it.

India has a huge shortage of healthcare services. As per the WHO the density of doctors per 1000 people should be 1, while only 6 states in India have been able to achieve this. There is a huge shortage of doctors in many other states. Most doctors are also concentrated in urban areas, creating a shortage of medical professionals in rural healthcare. Suggestions to the  BRICS countries could be to create a pool of medical healthcare professionals that can help the youth.

BRICS countries can help in supporting the rural areas of India to enhance IT technology. Specialised training in IT for people living in rural areas should be initiated. NDB can also fund such training programmes to set up IT infrastructure in rural villages so that school and college-going students can undertake online classes. Since the pandemic is here to stay and online courses are becoming more and more feasible, IT centres can be established in rural areas with fibre broadband internet services that can provide space and services to students to undertake their lectures. 

The implications of the pandemic on a country like India are immense. Despite the help that India has been able to provide to different parts of the world, India needs support from the global community. By the time India hosts the G20 Summit in 2023, India should be able to boost its economy. Being part of the BRICS grouping would mean benefits for each other. Therefore, this is the right time India can push for BRICS to help support each other to recover from this pandemic.

The Indian Ocean Region (IOR) during the COVID-19 Pandemic

Ananya Raj Kakoti, ResearchIntern, ICS

The new world order has been in the making for long, and the COVID-19 pandemic has only acted as a catalyst towards its formation. The axis of power of this world order is tilting toward the geopolitical and geo-economic construct of the Indo-Pacific. This has also led to the subsequent rise of the Indian Ocean Region within the larger geopolitical context. This region has already been dealing with several non-traditional security threats; COVID-19 further adds to this. COVID-19 has not only severely affected public health on a global level, deeming it to be a pandemic but has also put the economy of the world in turmoil along with various geopolitical disruptions and security considerations.

The last decade has seen a rise in regionalism and also a shift of the axis of global power from the West to the East, especially in the context of the Indo-Pacific region at large, and particularly the Indian Ocean Region. The pandemic has ensured that the world can witness this shift and balance of power within the region at an accelerated pace. A post-COVID world will require states to find new alliances and geopolitical alignments to secure their interests. The Indian Ocean Region (IOR) is also witnessing a race among the rival powers to establish their authority amidst this chaos.

National interests and goals of the countries will be pivotal in determining the new geopolitical partnerships that the countries will get involved in the Indian Ocean Region to maximise their gains.

The lockdown led to an economic slowdown, which will force more countries to look for other sources of revenue outside their borders, leading to them being drawn into debt-traps. These traps will be used to their strategic advantages by the investing nations. The Indian Ocean island countries lack the capacity to take advantage of their maritime resources. They also have a hard time facing the threats of piracy, illegal drug-trafficking, and the flow of illegal migrants. The consequential socio-economic challenges put forth by the pandemic has highlighted the internal fissures, which can ultimately cause domestic political instability in a number of countries. Their economic vulnerability leads to increasing internal power conflicts, which are exploited by the external states, causing further fragmentation.

As the vaccine race takes its pace, Russia has already offered Sputnik V to UN employees for free, while China has extended its vaccine diplomacy to Indonesia. However, with its profess in vaccine development, India is on track to emerge as the leader in the new “vaccine diplomacy.” India is not only using this new tool as a way to gain strategic allies in its neighbourhood extending all over South Asia but also beyond its immediate border and all the way to Africa.

The lockdown has also come as a threat to the advancement of globalisation as the pandemic has forced the countries to look inward than outward to meet their needs. The interdependency because of globalisation also aided in forming alliances. With the Indian Ocean Region at the centre of geopolitical realignments, one must understand some important aspects while analysing these trends from the perspective of the geopolitical interests of the various stakeholders, comprising of island countries, regional power, revisionist power, and the hegemonic power. The realignments forced by COVID-19 has also threatened the idea of a ‘Free and Open Indo-Pacific’ in the Indian Ocean Region.

In the Western Indian Ocean, the inability to enforce the laws makes it vulnerable to drug smuggling, human trafficking, terror financing, and ease of terrorist and criminals movements both on land and at sea. This region has rampant illegal, unreported, and unregulated (IUU) fishing activities as well. The pandemic is further adding to the misery of the countries in the Horn of Africa through its uncertainties as they are still struggling with issues such as food insecurities, humanitarian issues, ethnic conflicts, economic challenges, debts, and locust swarms. One can witness an increasing competition for establishing naval bases, especially in the post-COVID-19 world order, amplifying the concerns about securing navigation routes as it signifies an intense race among the stakeholders to control the choke points.  One can also witness the rise in tensions due to the ongoing conflicts which threaten the freedom of navigation through the Strait of Hormuz, which is a critical passage in the global trade route in the Persian Gulf. The modernisation drive of the Pakistan Navy can disrupt the existing regional balance of power, especially because of China’s strong naval alliance with Pakistan. The Arabian Sea witnessed the Malabar Exercise, which saw the participation of India, the United States of America, Japan, and Australia, who form the ‘QUAD.’ This exercise concluded with the intent of sending a clear message to an expansionist China.

The Eastern Indian Oceansubregion is threatened by human trafficking, drug trafficking, piracy, and Jihadist militancy. The weaknesses of the littoral states around the Bay of Bengal acts as a catalyst to these problems. The region is also prone to extreme weather conditions, which further weakens the states. However, one can observe the changes in the Bay of Bengal region, as the naval capabilities of the littoral states are increasing. This proves that these states are becoming aware of the importance of their maritime zones, which can be observed in their capacity building operations to ensure the region’s security. The Bay of Bengal also witnessed the first phase of the Malabar Exercise involving the ‘QUAD’.

The reactive approach of the USA gives the impression that it is unlikely to play a significant role in shaping a new maritime system in the region. The existing national security perspective of America focuses largely on strengthening an advantageous political environment in the Middle East and the Persian Gulf, along with managing the Chinese naval presence. Although China does not have an officially recognised policy on the Indian Ocean, the Chinese involvement in the Indian Ocean Region can lead to a change in the regional balance of power, disrupting the existing security architecture. India, on the other hand, has come up with SAGAR, “Security and growth for all in the region” policy, and the Shangri-La speech vision of India for the Indo-Pacific is rooted in the concept of a free, open, and inclusive maritime order. India has taken up the approach of becoming a “net security provider,” considering the Indian Ocean Region to be in its backyard and intending to keep the Indian Ocean as India’s Ocean’ as pointed out by KM Panikker. Under ‘Mission Sagar’, India has been assisting Mauritius, Maldives, Seychelles, Comoros, Madagascar, and so on, with not only COVID-19 but also with dengue outbreaks. One can also observe increasing logistical and tactical interoperability of nations involved in the MALABAR series of exercises that facilitate enhanced situational awareness.

France is a littoral state to the Indian Ocean through its overseas territories allowing France to maintain a strong military presence in the region. Realising the importance of the construct, France announced its Indo-Pacific strategy in 2018. Although traditionally France has focused on the Western Indian Ocean, it is expanding its interest towards the Eastern front as well, while acknowledging India as a Strategic Partner in the region. For Germany, the Indian Ocean has become a “strategic and diplomatic priority” with its rising geopolitical and geo-economic significance. In November 2020, the defence minister of Germany announced their warship will patrol the Indian Ocean Region to manage China’s influence in the region.

Given the dynamic turn of events, stakeholders should move promptly to build a holistic maritime security system in the Indian Ocean. Priority should be given to strengthening maritime security and safety through capacity building and dealing with various traditional and non-traditional challenges. It is crucial to maintain stability and peace in the region, and hence, must be on the agenda of all the stakeholders involved, irrespective of their national interests. The Indian Ocean is important to India, and being located at the heart of the region, India should move beyond ‘sea denial’ to a ‘sea control’ approach and, given the present situation and opportunity, develop robust maritime diplomacy. The security dimensions in the Indian Ocean are bound to change, and it will be a deciding factor in the future of global power politics. The current world order will change, whether some like it or not, and the pace of the change has quickened surprisingly, because of a virus.

How China Plans to Further its Technology Ambitions – A Snapshot from Semiconductor Industry

Megha Pardhi

       Source: Marketwatch.com

Even as scientists call for a Marshall Plan to preserve US dominance in computing power, its technology war might have turbocharged China’s ambitions instead of scuttling them. The Communist Party has responded to America’s ‘decoupling’ strategy with a clarion call for self-reliance while using post-COVID19 recovery efforts to galvanize its entrepreneurs, researchers and even retail investors. Recent developments in China’s semiconductor industry indicate that progress there might serve as a playbook in the future for other segments of the technology world.

Semiconductors form the backbone of high technology used to make integrated circuits (IC) (chips) for use in electronic gadgets ranging from digital clocks to avionics. The current crop of chip industry leaders hail from US, Europe, Taiwan, and South Korea. China’s ambitions to dominate this industry are not a secret but despite a plethora of State-led policy measures such as special funds, tax incentives and even alleged espionage, Chinese companies are nowhere close to their foreign peers.

Focused support for the semiconductor industry can be traced back to 2014 when China released the National Semiconductor Industry Development Guidelines and set up the China National Integrated Circuit Industry Investment Fund. This 200 billion-yuan (US$29.08 billion) fund aims to back the research and innovation in the semiconductor industry. Moreover, the semiconductor industry in one of the ten sectors prioritized under ‘Made in China 2025′ initiative.

A new policy introduced by the State Council in August 2020 exempts corporate income tax on enterprises based on specified criteria. For example, integrated circuit (IC) projects and enterprises that have operated for more than 15 years will be exempted from corporate income tax for up to 10 years if they employ the 28-nanometre processor or more advanced nodes, while projects from 65nm to 28nm will get five years tax-free and qualify for a 50 per cent discount on the corporate rate for the subsequent five years. The ‘thousand talents program’ of China aims to attract Chinese diaspora in high technology areas, including AI and semiconductors. According to a study by MacroPolo, China still lags significantly behind the US in terms of expertise in AI. While 29 per cent of global AI researchers hail from China, only 11 percent of them work in China. On the other hand, 59 per cent of AI researchers work in the US. With the ‘thousand talents program’ and other similar initiatives, China aims to bridge this gap. Despite setbacks due to COVID19 and trade war with the US, China has persisted with its efforts to develop chip manufacturing capabilities. In September 2020, China included the third-generation semiconductor industry into China’s upcoming  14th Five-Year Plan (2021-25). The details of this policy are still unknown and likely to be available after October 2020.

In addition to State agencies, the Chinese private sector has also played a crucial role in furthering the chip self-sufficiency ambitions of China. First, the private sector has been vital in acquiring key strategic semiconductor technologies and companies. For example, a recent Reuters report unearthed an extraordinarily complex series of transactions which landed Microprocessor without Interlocked Pipelined Stages (MIPS), a leading US chip technology, in the portfolio of China registered CIP United. Second, the private sector in China is also engaged in research and development of advanced semiconductor technologies. Huawei’s fabless IC company Hisilicon is currently one of the most advanced IC companies in China. Chinese tech giants like Alibaba and Baidu also have their semiconductor chips design companies. Moreover, numerous startups in China focus on semiconductors. Some of the top startups in China are CXMT, Senscomm, Yangtze Memory Technologies, ProPlus Electronics, Spectrum Materials, and ASR Microelectronics.

The culmination of all these efforts is that China’s semiconductor industry is slowly inching forward despite challenges posed by trade war and COVID19. Self-sufficiency in funding is perhaps easiest to achieve. Semiconductor Manufacturing International Corporation (SMIC), a Chinese foundry with government stakes, was recently listed  on Shanghai STAR stock exchange after delisting in the US. The listing received fast-track approval within a record 19 days and SMIC shares gained 245% on the first day of listing. This offering made STAR the exchange with the second-most funds raised in the world in 2020, behind Nasdaq and ahead of Hong Kong.

Several challenges plague China’s ambitions to become self-sufficient in semiconductor design and manufacturing. First, the COVID19 has affected several industries including semiconductor manufacturing. The semiconductor chip manufacturing industry is one of the truly global industries with the operations spread out across several locations. The COVID19 situation has affected the global supply chains and in turn, the semiconductor industry in China. Despite the COVID19, market sentiment in China’s semiconductor manufacturing remained positive. Second, the poor planning can likely be an obstruction in achieving the Chinese dreams of self-sufficiency in manufacturing. For example, reports have emerged of a US$20 billion government-backed state-of-the-art semiconductor manufacturing plant in Wuhan being stalled due to poor planning and lack of funding. Another US$3 billion government-backed chip plant owned by Tacoma Nanjing Semiconductor Technology was reported for going bankrupt. Third, the semiconductor industry in China is generations behind the top manufacturers in the field. SMIC has just started mass production of 14nm 1st generation FinFET technology ICs while world’s largest semiconductor foundry Taiwan Semiconductor Manufacturing Co. (TSMC) is moving towards manufacturing 5nm technology. Moreover, as per the SCMP China Internet Report 2020, China still lacks 20 key technical materials and 30 advanced technology processes. China plans to overcome this technological gap by concentrating on ‘AI chips’. AI chips are specialized chips optimized for Artificial Intelligence computations. The limitations of chip design, as postulated by Moore’s law, are making it difficult for chip makers to design and manufacture cost-effective chips. AI chips can be manufactured using relatively older technology and are comparable in terms of performance. AI chips have low barriers to entry as compared to the traditional chips. Hence, it is easier for startups to enter the chip industry. Third, the US-China Trade War has severely hampered China’s plans. However, Chinese government and private industry are determined to counter the loss due to this trade war. For example, gauging the difficulties caused due to the US-China Trade War, China’s tech veterans have launched a fund to support the Chinese tech companies sanctioned by the US.

These technological and political obstacles will at most delay China’s goals but are unlikely to halt them.  If recent trends in China’s semiconductor industry gain momentum, they are likely to form part of a template of the high-tech industry seeking self-sufficiency.

The Case of Rising Divorces in China amid COVID-19 Lockdown

Bihu Chamadia, Research Intern, ICS

China announced a nationwide lockdown on January 23 to combat the Coronavirus outbreak. As soon as there was a visible decline in the number of reported cases of COVID-19 in China, the rules of lockdown were eased and many government offices started to function normally. While China tries to pull itself out of the pandemic, there has been another outbreak in the country: the rising cases of divorces.

After the government started lifting the lockdown in late February, marriage registration offices of various districts started receiving high number of divorce cases. The offices of many districts in Xi’an city of Shaanxi province received a record number of divorce cases. According to local Chinese sources, the incoming divorce cases in the marriage registration office in Yanta district in the city of Xi’an had surged to the point where the marriage registration office did not have vacancy till 18 March this year. The situation was similar in other parts of China including Beijing, Shanghai, Yunnan and Sichuan.

Even though an increase in divorce cases is a common trend in China after the Spring Break, according to a report in Global Times, compared to the same period last year, there has been a surge in the number of divorce cases this year. In Tongzhou district in Sichuan Province, the Civil Affairs office received 232 cases from late February till end March, while the number of divorce cases registered last year during the same period was 180.

Marriage as a social institution in China has been facing serious challenges since many years. According to the Ministry of Civil Affairs, there has been a significant hike in the rate of divorce since the reform and opening up era. But this trend witnessed a steep rise after the liberalisation of Marriage Law in 2003. Once considered a taboo, even the number of divorce cases doubled in the past one decade. In 2010, the total number of divorces in China stood at 1.96 million which has more than doubled recently. Recent figures mentioned by Ministry of Civil Affairs, shows that it stood at more than 4 million in 2019.

The  closing down of factories during the lockdown which had led to the laying off of workers and a dip in household income, was one of the primary factors that contributed to rising tensions between married couples during this period. Moreover, the gendered nature of household chores, where it was socially accepted that men who worked outside the household did not have time to lend a helping hand for household chores, was effectively busted during the lockdown when work happened from home; household work was still managed by the female partner during the lockdown. Women had to shoulder the entire burden of household duties including grocery-shopping and taking care of children with little to no help from her male counterpart. While these issues existed earlier, the lockdown period witnessed an overlapping of mental pressure along with problems such as inequality, gendering in roles and stereotyping of work which eventually accelerated divorce cases after the lockdown was lifted.

Infidelity was another major reason for divorce among married couples. The changes in the Marriage Law in 2003 allowed wives the right to divorce if the husband was abusive or had an extramarital affair. Many cases of infidelity were uncovered during the lockdown which otherwise would have remained under the veil during normal conditions. According to a 2016 report in Global Times, on an average 75% of the divorce cases filed are due to infidelity. In a speech made of 6 November 2019, Zhou Qiang, the Chief Justice of China’s Supreme People’s Court mentioned 74% of the total divorce filed between 2016-2017, were initiated by women.

While issues such as infidelity, financial issues and non-sharing of household burden have been the most common reasons for divorce in China, the lockdown aggravated these issues and exacerbated tensions between couples, and even led to a spike in cases of domestic violence. Divorce lawyers, in particular, have noted an increase in cases related to divorce and pointed that problems which would  have earlier been a cause of little strife in the household were now leading to divorces due to an increase in interaction between couples during this period.

A combination of better socio-economic status leading to new aspirations, increasing tolerance among the masses towards divorce have influenced this trend. But most importantly, the liberalization of the marriage laws in 2003 played a significant role in the rise in divorce cases in China. Changes in the marriage laws in 1981 and 2001  led to a gradual increase in the number of divorce over the years but it was after the amendments in the Marriage Law in 2003 such as lower cost of filing divorce, faster pace of granting divorce and non-requirement of employer’s approval for filing a divorce which made it easier for women to seek divorce leading to the number of divorce in China rise exponentially after 2003 (see graph below).

Parallel to these developments was the rising average income of the female population in China since the reform and opening up.  As average female income rose, the number of divorces also began rising. Earlier, job stability and owning a house were enough for a woman to ‘settle down’ but as women become increasingly educated and financially independent, their expectations also expanded. They no longer accepted to live in an abusive marriage or marriages where there was no compatibility. Moreover, while in the past, custody of the child was often given to the ex-husband after divorce and the wife was ostracized and faced difficulty finding a job – a major deterrence for women to seek divorce- this has changed today due to change in the level of income of women in China. Therefore, an already rising trend in the number of divorce cases witnessed an acceleration during the lockdown period when couples were forced to live together.

Although revoked, the demographic shifts caused by the One-Child policy is now causing a ripple effect both on China’s economy as well as the society. A rapidly ageing  population and a fall in the average age of workforce have become a major concern for the central government as it grapples with lower birth rates and shortage in cheap labour. In 2019, China’s birth rate fell to its lowest in seven decades causing massive concern of the CCP. China’s population dwindles and the rate of marriage also goes down, the Chinese government fears that the number of workforce, taxpayers and consumers will also witness a steep fall.

The growing concern of the government towards rising divorce cases is reflected in the measures taken to address to issue such as free counselling for couples and the introduction of a “cooling off” period to slow down the divorce rate. While earlier it was adopted only by a few local courts, recently, the 13th National People’s Congress that took place in May 2020, voted in favour of adopting ‘cooling off’ as a part of China’s first ever Civil Code. This has caused a massive outrage  among the Chinese population where the Party has been accused of abandoning progressive ideas of promoting gender equality. On the other hand, family planning policy which, in 2016, was amended to allow married couples to bear two children has been absent from the 2018 Civil Code draft. This has led to speculations of government further easing the restrictions on family planning or scrapping the bar altogether on the number of children a married couple could bear.

Despite government efforts to prevent any fissures in the institution, and its push to preserve “traditional values” for a stable and “harmonious society”, divorce cases in China continue to rise. The Covid pandemic has only acted as a catalyst that has unravelled the pre-existing fractures in the society and economy. Rising costs of social pension and shortage in supply of cheap labour have created a huge burden on the falling GDP of the country. As demographers warn that China’s population will begin to shrink in the next decade derailing China’s economy with far-reaching global impact, the need to preserve the institution of marriage has become even more important. The recent adoption of the Civil Code where marriage takes up considerable space in the text of the Code exhibit the gravity the case of rising divorces pose for Beijing.

Cross-Strait Relations amid COVID-19: Multilateralism with Chinese Characteristics

Hariharan Chandrashekaran, Research Intern, ICS

COVID-19 has catastrophically emerged as one of the deadliest pandemics of the modern era, reshaping the dynamics of Cross-Strait relations, which has been characterized by limited contact, tensions, and instability. Although China managed to contain the virus, it was accused of a lack of transparency in communication. Meanwhile, Taiwan, with its proximity to China and an ideal destination for mainland tourists, was expected to have the second-highest number of imported cases during the initial stages of the outbreak. However, it was lauded globally for its swift execution of control, propagating the region’s perception in a positive light. Amid all the chaos globally, the World Health Organization (WHO) endured flak from critics for its approach towards the crisis and alleged remarks of being sympathetic towards the Chinese cause.

COVID-19, China, and the WHO.

Not ceding to a “Chernobyl moment”, after a prolonged period China successfully flattened the curve by effectively mobilizing its resources. It has since picked up the mantle to quickly restore its image through soft power measures such as formally dispatching medical equipment, ventilators and face masks to European nations such as Italy, Spain and other crisis-hit countries; now termed as “Mask Diplomacy”. Also, it maintained communication with the WHO,  providing updates of the virus and its transmission, contrary to the criticisms.

With early reactions being mainly positive from resource-strapped countries, including its African allies, a discriminatory racial incident within the Chinese mainland against African ethnicity hindered its progress. Additionally, claims of faulty equipment and its return questioned the candour of such measures.

Nevertheless, at the 2020 World Health Assembly (WHA), China pledged to contribute $2 billion to aid the WHO response towards the pandemic and the socio-economic development of the crisis-hit countries, especially Africa. Additionally, it called for global solidarity and collective mobilization of efforts against the virus by supporting WHO. But, mounting criticism resulted in the parallel emergence of the “Wolf Warrior” diplomacy. 

“Wolf Warrior” diplomacy refers to the growing assertiveness of Chinese foreign policy towards the West. COVID-19 has only amplified direct engagement of China through a battle of narratives against its critics, chiefly the US, condemning it for politicizing the issue. This development marked the Chinese contribution to the gradual shift of discourse from global institutionalism to hypernationalism. This new direction aims to portray China’s story – a country, attempting to “rise to the challenges of global leadership” by striving in a climate of declining multilateralism.

The Taiwan Cause

Harnessing its experience from the SARS outbreak, the Taiwanese government reacted quickly by entering a strict lockdown mode and enforcing stringent policy measures, gaining universal acclaim. Its technological capabilities tracked down the source of the virus within its area; additionally, it developed a range of testing kits to hasten the process of the containment of the virus. Taiwan succeeded in flattening the curve, showcasing a rare, strong well-executed response, even by WHO standards.

Furthermore, Taiwan took a page out of China’s policy of engagement by initiating its version of ‘Mask Diplomacy’. It was achieved by supplying masks (Taiwan is the second-largest producer of masks after China) and providing technological action frameworks to the affected countries, especially Western powers, thereby, emulating its ability to compensate the lack of its economic power. It had significant implications on its bilateral relations through further cooperation such as ongoing Taiwan – Danish cooperation to develop vaccines and the US amending its position by supporting Taiwan’s membership to the WHA, significantly denting the “One China” policy.

However, its achievements were unacknowledged categorically due to the politics of the WHA, which recognizes the region as part of China, leading former’s exclusion from WHO meetings. It resulted in the emergence of pent up anger amongst the nationalist groups who sought to move away from the Chinese identity. However, the government response was limited to castigating WHO by questioning its non-political nature.

Balance of Tide 

It was due to the Taiwanese cause for representation after a prolonged struggle that it finally received the observer status invite to WHA in 2008 Taipei’s observer status at the WHA exemplified a historic shift in Cross-Strait relations. Nevertheless, the Assembly revoked its membership since 2016, owing to the UN Stance on “One China” Policy. Since then, China has actively blocked the prospect, thereby resulting in the reversal of whatsoever gains for positive relations over the years.

In addition to actively blocking Taiwan’s membership bid since 2016, it was also a timeline of heated economic quarrels between the US and China. Also, the Hong Kong protests had a profound impact on Taiwan by significantly affecting the results of the Taiwan presidential and legislative elections in early 2020 favouring the incumbent party and raising its image as a democratic nation. The evolved imagery and the simultaneous allegations on China over lack of transparency immensely accelerated the US legislation of  TAIPEI Act – 2019 to make it US policy to advocate Taiwan’s participation in international organizations. However, it was strongly rebutted by China who described it as an “act of hegemony”.

Nevertheless, the battle of narratives between the US and China resulted in the former halting the financing WHO. Complementing it was the announcement of US terminating its relationship with WHO as an attempt to pacify its populace for its lack of preparedness. Moreover, Australia demanded an independent assessment of the performance of the WHO and China in handling the crisis. Both responses drew sharp criticism and rebuttal from China. Nevertheless, moderates such as Germany and France urged transparency for the global good, resulting in China ceding to the demand for investigations, albeit post-crisis, making WHO a battleground of politics.

Conclusion

In tracing the dynamics of Cross-Strait relations, the ongoing situation not only demonstrates the vulnerability of international institutions’ functionality amidst political crises but also marks a growing shift away from reliance on global institutionalism. However, for Taiwan, this development brought a temporary rejuvenated hope for the government to maintain its independent co-existential nature. In contrast, with China sticking to the “One China” policy, it expects other countries to reciprocate its policy of non-interference[*]. However, the pandemic has catalyzed its assertiveness as evident in the central leadership’s decision to enforce the “New National Security Law” in Hong Kong, creating similar potential implications for Taiwan’s cause foregrounding resistance from the US. To conclude, Beijing has exploited the shift by stressing cooperation over isolation under the umbrella of the WHO by providing a differing perspective of multilateralism with Chinese characteristics that calls for solidarity without interference – a perspective steered by the rising nationalistic Wolf Warrior diplomacy.


[*]This policy of non-interference is in direct contrast to the U.S. foreign policy of selective international engagement that interferes with domestic issues.


China’s Health Diplomacy in Africa during COVID-19: Discerning Prospects and Problems

Dr. Veda VaidyanathanVisiting Research Associate, ICS

LI Nan, a South Africa’s Chinese Embassy representative, left, elbow bumps with Zweli Mkhize, South African Minister of Health, during the handing over for the emergency medical equipment for COVID-19 from China, at OR Tambo Johannesburg, South Africa, Tuesday, April 14, 2020.

Source: AP Photo

At the margins of the third session of the 13th National People’s Congress, as Foreign Minister Wang Yi fielded questions from the press, China’s role helping other countries fight COVID-19 was brought up and China’s assistance to Africa, in particular, found considerable mention. As is usually the case, high doses of morality and altruism accompanied stories of China’s health cooperation in the region. In Wang Yi’s words

China is always willing and ready to help others. When our friends are in distress, we never sit by and do nothing. A case in point is our assistance to Africa during the Ebola epidemic. While some countries evacuated their personnel from the affected areas, China rushed to Africa’s aid despite risks of infection, sending in medical teams and badly needed supplies and fighting alongside our African brothers and sisters until victory was declared.”

However, this does not take away from China’s multifaceted contribution to the African region in its fight against COVID-19. Actors including the state, provincial governments, companies and entrepreneurs have been contributing to different countries in varied forms. The Chinese government sent medical expert teams to Africa’s 5 sub regions while the resident medical teams based in 45 African countries have also been very active and have held over 400 training sessions for medical workers. On the 18th of March, the first teleconference of experts was held between China and countries in Africa. Over 300 people including representatives from over 23 African countries, the African CDC, officials from the WHO posted in the region attended the meeting with experts from the Chinese Academy of Sciences, the Chinese CDC, the first hospital of Peking University. Since then over 30 video conferences have been held. China has also been upgrading health infrastructure, like a $500,000 donation to the Wilkins Infectious Diseases Hospital, the main Covid-19 centre in Harare, Zimbabwe. Provincial actors like Chongqing municipal government sent supplies along with a delegation to Algeria and a team of 12 medical experts from Hunan province brought medical supplies to Zimbabwe.

Chinese media houses have also been critical to its ‘Corona diplomacy’ in the continent. A website hosted by China Daily called “Fighting COVID-19 the Chinese Way” is used to share facts, updates and stories about managing the virus. Another platform called “COVID-19 Frontline” by CGTN is an online live show for medical workers and officials to share information. One of the shows hosted was titled “Fight as one: Exchange of COVID-19 treatment experiences between China and Zambia” where Doctors from the First Affiliated Hospital of Xi’an Jiaotong University, who served on the frontlines in Wuhan shared their experiences with their Zambian counterparts. Similarly CGTN invited experts from Jiangsu Province who worked in Wuhan to share their experiences with colleagues in Tanzania. Links to such platforms have been advertised in the websites of Chinese missions in various African countries. In addition to the Chinese State, Alibaba’s Jack Ma and the Alibaba foundation have also contributed to the African fight against the pandemic by providing thousands of detection kits, PPEs, face shields, infrared thermometers, extraction kits, surgical masks, swabs and gloves among others. Other Chinese firms active in the region have also been donating to local charities.

However, Chinese assistance during the pandemic has not always been received positively in the region. There is an increase in xenophobia and this has resulted in several unpleasant exchanges. One of first reports that came out in this regard saw several Africans in Guangzhou being discriminated against, evicted from their homes and forced into quarantine. This attracted an unprecedented and strong response from a group of African ambassadors in Beijing who “immediately demanded the cessation of forceful testing, quarantine and other inhuman treatments meted out to Africans”. A few weeks later news broke that three Chinese nationals were murdered in Lusaka. According to the Zambian police, the suspects killed the victims who were working in a Chinese clothing company and set their warehouse on fire. While many commentators have discussed how deep-rooted racism is a longstanding issue in China-Africa relations, officials like Zambia’s ambassador to China doesn’t seem to be too perturbed; stressing thatSometimes, our people or your people make mistakes out of anxiety. It is not good to amplify these small negative points. We should pursue cooperation under a bigger picture”.

Nonetheless, one of the major expectations from China, beyond knowledge sharing and supply of medical equipment, is to forgive loans and ease debt repayments. As several countries in the continent are struggling with weak health systems, rising domestic dissatisfaction due to unemployment and cessation of economic activity, they are not in a position to make repayments on debt. Considering that China has been the largest trading partner of the region ($208 billion in 2019), one of the largest investors ($110 billion stock) and holds a fifth of Africa’s sovereign debt, this takes centre stage. A case in point is Kenya: by March 2020, Kenya’s total national debt reached an all-time high of Sh6 trillion ($57 billion), very close to its 70 per cent national debt ceiling of Sh9 trillion ($90 billion), of this its debt to China stood at Sh660 billion ($6.6 million). While China has supported the call of the World Bank and IMF and will join the G20 nations to forgo repayments, officials have stated that they will also conduct bilateral meetings to discuss further debt relief. It is very likely that China will forgive significant African debt, not only because there is a precedent, but also due to the fact that in the post pandemic world, where investigations looking into the origins of the virus are underway, African support will be critical to China.

Similarly, Africa could also gain tremendously from China’s close engagement. As global supply chains are hard hit, intra Africa trade could increase, kick starting the African Continental Free Trade Area, and major economies in the region including Kenya, Nigeria and South Africa could start supplying to other countries and Chinese cooperation in this regard would be vital. There have already been several instances of states turning to domestic production to meet demand. The Ugandan President for instance, launched two production lines at a Chinese firm in Uganda, Lida packaging Products Ltd, that employs over 300 people and has the capacity to produce 560,000 masks a day. Similarly, the tech, digital and e-commerce spaces that have been growing rapidly – including coming up with home grown solutions to problems posed by the pandemic – stands to benefit from close cooperation with Chinese actors. Like many other geopolitical equations, China-Africa relations in the ‘new normal’ will also undergo a reset. A narrative is already building around Africa’s unwavering loyalty to China, especially during the pandemic. For instance, the Chinese ambassador to Zambia, Li Jie, stated that when the pandemic broke out in China, Zambia was one of the first countries to call and extend support and therefore Beijing will provide substantial support to Lusaka in this trying time. It would be prudent therefore, that other actors engaged in the region, like India, pay close attention to the myriad forms Chinese assistance to the continent is taking and how they are received, because it will not only influence Africa’s fight against the pandemic but will also help shape a narrative that projects China as a ‘voice of reason and judgement’ in a landscape that is seemingly devoid of global health leadership.

COVID-19: Chinese Dominance over Global Supply Chains under Threat?

Akshit Goel, Research Intern, ICS

Since the beginning of the COVID-19 pandemic, nations around the world have scurried to contain the spread of the pathogen which has left the global economy in shambles. The physical measures put in place to ‘flatten the curve’ such as travel bans, lockdowns and social distancing norms have revealed the fragility of global economy. The lockdowns have severely affected the economies at home due to loss in production as major industries and factories are shut down. Further, there is also a dent in consumer spending as households are burning through their savings with their incomes impacted. The combination of these factors spell disaster for the world economy as the International Monetary Fund (IMF) predicts the recession due to the pandemic may be worse than the 2009 global recession.

Prospects such as availability of cheap skilled labor and advancements in technology has increasingly moved the production and assembly chains of major corporations from their countries of origin to nations abroad. This trend of overseas production has left the global economy far more integrated and dependent on each other. This model of production outsourcing has been one of the driving forces that has transformed the Chinese economy into one of the manufacturing hubs of the world. China is part of some of the most important supply chains in the global economy. Availability of cheap skilled labor as well as a well-developed supply chain network alongside an integrated infrastructure which cannot be easily replicated elsewhere has helped China solidify its position as a lucrative source of cheap and steady manufacturing for many large firms around the globe. As income of individuals grew due to privatization and rapid economic growth, private household consumption also rose. This led to the creation of large domestic consumer markets in China which further incentivized manufacturers to move production here. Moreover, these supply chains fuel a major portion of the industries in South-east Asian nations such as pharmaceuticals, automobile, garments, and many more by supplying them with machinery and components which are imperative for their sustenance. The electronics industry is one of the most important industries which is dependent on the South-east Asian supply chains. Therefore, with the outbreak of COVID-19, not only is the Chinese economy affected but due to the shutdown of industries, supply chains across the globe have been disrupted.

The epicenter of the corona pandemic, Wuhan is a major manufacturing hub located in Hubei province. According to a report by Dun & Bradstreet, a business think-tank based in US, 51,000 companies have one or more direct suppliers in Wuhan, while 5 million companies have one or more tier-two suppliers in the region. This supply shock is not only going to affect the South-East Asian nations but rather a major chunk of the globe as supply disruption appears more widespread. Moreover, as per a report by Institute for Supply Management, nearly 75 per cent of companies have reported some form of impact on their business due to disruption of global value chains. Further, around 44 per cent lack any contingency plan to combat this sudden drop in supply as lockdowns chokes production. Wuhan is a major supplier of electrical components and assembly of smartphones for some of the biggest firms in the world such as Apple, which were some of the worst impacted by the disruption. Although the company has invested to diversify its assembly chain into Vietnam and India, it is still highly dependent on China in maintaining its inventory.

Moreover, China is highly integrated in the supply chain of auto parts around the world and with the onset of lockdown, the automobile industry around the globe has suffered. Fiat had to temporarily suspend production in its plant located in Serbia. This was due to a shortage in supply of auto parts from China. This was not a unique occurrence as automobile firms around the globe are facing the same issue. In a similar bid, Hyundai, world’s fifth largest automobile company had to halt production in South Korea. Wuhan supplied the world with auto components worth over USD 2 billion in FY 2018-19. India, although self-sufficient in its supply, still imported auto components worth USD 4.5 billion in FY 2018-19 from Wuhan.

This economic disaster revealed how overdependence on China, simply put, having all the eggs in one basket, could pose a problem. There is now a resounding demand in the global economy for the diversification of supply chains to nations other than China. Some of the main contenders, who could fill this supply vacuum left by China are Vietnam, Cambodia and India. The trend to move out of China gained traction just before the outbreak, in the wake of the trade war between US and China. With the imposition of tariffs, many Multi-National Corporations (MNCs) which had relied on China for manufacturing, had already started to look for alternatives to China. Apple had been, for a while, trying to move its assembly to Vietnam and India. But this is easier said than done as most of these nations themselves depend on China to fuel their industries. Vietnamese manufacturing is dependent on China for the supply of heavy machinery, components and electronic equipment that are required in manufacturing industries. Moreover, these nations still lack the skilled manpower which is required to take on any surge in demand from the US which makes them a lesser reliable supplier. Since the beginning of the lockdown in early February, China has got its grip on the spread of the virus. Factories and industries in Wuhan, and rest of China, are back online with production. But as the supply of manufactured goods begins in China, the rest of the world still grapples with the pandemic with the lockdowns in place which in turn led to shortage in demand for the Chinese industries. Although economists around the world were hoping for ‘V- shaped’ recovery, the reality seems far from it as the pandemic continues to unfold and the scope of the economic damage done by it slowly comes to light.

Can Taiwan’s COVID-19 Diplomacy Help It Make Permanent Friends?

Sanjana Krishnan, Research Intern, ICS

The world today is full of uncertainty due to the outbreak of COVID-19. While the rest of the world is still in the grip of COVID-19, one small island, namely Taiwan has been successful in flattening the curve. This was made possible by the proactive measures it took immediately after the first news of  the outbreak emerged from China. In a way, Taiwan was already in a state of readiness after the outbreak of SARS in 2003.  It was able to respond quickly by integrating the working of various ministries and employing advanced technologies to achieve good results. It implemented measures such as on-board quarantine, 14-day home quarantine, health declarations, fever screening and so on. The travel details of people are stored in their National Health Insurance cards to alert the concerned authority about any spread of the virus by using the GPS technology. This has helped in curbing individual and community spread.

Taiwan, a self-ruled island that has been denied entry into the World Health Organisation (WHO), is not only setting an example to the world by the way it has handled its internal situation but also through its help to other states by exporting medical equipment, especially medical grade masks. The territory is now the second largest producer of masks after China. According to its Economic Affairs Minister, Sheng Jong-chin (沈榮津), Taiwan produces 15 million masks every day. In March, it had relaxed the ban on export of face masks  and in April, shipped PPE and masks to its diplomatic allies and the worst hit countries in Europe. Taiwan  also announced that it would donate 10  million masks to the most needy countries and 100,000 masks per week to the United States. It has also promised to share its electronic quarantine system that employs big data analytics.

These measures helped raise considerably the profile of this self-governed island but, in turn, has attracted Beijing’s anger. Even as Taiwan received praise from various parts of the world for its effective measures and the help extended, China termed these a political game played by Taiwan to gain admission into the W.H.O and the acceptance of the world community. This accusation was made while also pointing out that Taiwan had banned its mask export when China was in its most vulnerable state with respect to the Corona virus outbreak.

China considers Taiwan a part of its sovereign territory, awaiting reunification even by force, if necessary. Today, there are only a handful of nations in Central America and the Oceanic region, that recognise Taiwan. Taiwan has even been kept out of most of the international organisations such as the United Nations, W.H.O and so on. The island is in a geo-political absurdity owing to the fact that even its most important ally, the US does not recognise its status as an independent state, its territory is under constant threat as it is claimed by a powerful state such as China and its sovereign status slowly erodes with both states and MNCs withdrawing their engagement with it due to the threat of upsetting China. In this context, the latest engagement of Taiwan holds significance.

The world is now forced to recognise the advanced healthcare and technological capability of Taiwan. The helping hand extended by the island definitely aids the improvement of its image globally. It has made Canadian Prime Minister Justin Trudeau, Japanese Prime Minister Shinzo Abe and U.S Secretary of State, Mike Pompeo call for greater inclusion of Taiwan in the work of the W.H.O. This move however, is sure to be blocked by China even though it marks a departure in spirit from the 2009 arrangement that China had agreed to for Taiwan’s participation at the annual World Health Assembly from 2009 to 2016 as an Observer. There has been a change since then. Taiwan has rejected China’s main condition for the former to be a part of the W.H.O, i.e, to accept that it is a part of Mainland China in May this year.

Taiwan today faces an opportunity to strengthen ties with other states and improve its international standing. Beijing has sought to strengthen its relations with Europe by sending them medical equipment. However, this has not meant necessarily that member countries of the E.U. have succumbed to Chinese pressure on Taiwan. Many of these states have accepted help from the island and openly acknowledged this help through Twitter.

Both China and Taiwan have been able to curb the first wave of the virus. But what brings praise to Taiwan is the fact that they did it without any support from W.H.O. Taiwan also shared COVID-19 related data with W.H.O. Although China is trying to bring in a narrative of it being helpful to the world, reports of suppression of news of its early outbreak from the media as well as export of faulty equipment has adversely affected these efforts. This has in turn been a supplementary factor in improving Taiwan’s image. While both China and Taiwan engaged in mask diplomacy, Taiwan has had more apparent and immediate success. Thus, exporting medical equipment, especially masks, has also become a tool of political expression.

Taiwan’s mask diplomacy has chances of increasing the support it gets from other states. The important question here is, how long this support will last and how far it will extend. Supporting Taiwan means directly going against Chinese interests. While such support may appear today as a necessity, this cannot last for long. States often behave differently under normal conditions and under emergencies. The common determinant here is national interest. While it might be in the national interest to accept Taiwan’s help and show acceptance towards it, it might not appear so in the future when such a policy will mean locking horns with a formidable power such as China. As the world gathers more knowledge and experience in handling the pandemic, its dependence on Taiwan will decrease. In international relations, there are no permanent friends or permanent enemies. There are only permanent national interests. Some alliances last only as long as some issues do. Therefore, the effect of ‘mask diplomacy’ by Taiwan may last only as long as the pandemic lasts.

China’s waning export-led growth: COVID-19 to accelerate the trend?

Karthik Satheesh, Research Intern, ICS

Since the late 1970s, China had started to shift from a centrally-planned system towards a market-oriented economy. One of the most notable features of the post-1980s China’s economic development was its increasing participation in international trade. Chinese exports rose on average 5.7% in the 1980s, 12.4% in the 1990s, and 20.3% between 2000 and 2003. By 2003, China’s export growth rate was seven times higher than the export growth rate recorded by the world as a whole. By 2006, the year when China recorded the highest trade (exports and imports), trade constituted 64% of China’s GDP.

Many countries have followed the export-led path to growth in the past and have achieved rapid growth in GDP. However, the threat of facing a global demand crunch always looms large for these economies. During 2008-09 (global financial crisis) period, China faced the same situation- its export as a percentage to GDP (see graph below) fell to 24% in 2009 (as opposed to 36 % in 2006) and its GDP growth rate fell from 14% in 2007 to 9% in 2008. This is indicative of the fact that exports were imperative to China’s growth, and when faced with a global demand slump it fumbled. Even though China managed to have a relatively high growth rate in that period, such a situation is a nightmare to an export-led economy.

Since then there has been a steady decline in exports’ percentage in GDP for China. In 2018, this figure stood close to 19%- similar to that of countries like Egypt and Uganda. Meanwhile, GDP growth more than halved during this period from 14% to around 6% growth rate (in 2019).

Source: World Bank

The steady decline in exports and imports points to the fact that China is gradually reducing its dependence on exports. This can be further coloured by the fact that both exports’ and imports’ share in GDP have fallen massively, in this decade. This means that the consumers in China have been absorbing what otherwise would have been exported and as private demands are increasingly being met domestically the imports have also slumped (from 28% in 2006 to 18% in 2018).

China now seems to be focussing on boosting domestic consumption after decades of export-led growth strategy. According to the Economist Intelligence Unit, private consumption will soon constitute nearly half of China’s GDP. But is such a shift possible and if so, how? These are a few factors that have significantly boosted domestic consumption:

  • China’s per-capita income has more than doubled in the last decade thanks to its rapid growth. This means that an average Chinese have more than double the means to consume than he had a decade ago.
  • Another factor is the high adaptability and competitiveness of the Chinese retail market which ensures that home-grown retailers are always on the front line to extend goods and services to the booming consumer demand. Chinese retail market has shown extreme resilience and creativity and for the same reason, it is soon expected to emerge as the largest retail market in the world, surpassing the US.
  • Additionally, the fast-moving consumer goods market has shown excellent growth with around 4.3% growth rate in 2017 and it is expected to account for more than half of the whole economy by 2030 according to the Economist Intelligence Unit.
  • Consumer behaviour in China has been changing from conservative high savers to potential spenders. This fact is highlighted by tourism spending in the year 2018: Chinese tourists spent around $277 Billion which accounts to nearly 18% of global tourism spending which is higher than any other country.
  • Moreover, as of 2018, nearly 60% of China’s population lived in cities which indicated a high rate of urbanisation (urban population growth is around 2.4% annually). This bridges the gap between the middle-class buyers and the booming retail market in the country, which in turn helps in boosting private consumption.

All these aspects, combinedly, have bolstered the shift of Chinese economy’s dependence towards domestic consumption.

A similar trend could be seen in the shift from an industry-based economy to a service-based economy; in 2006 industry contributed 13% more to China’s GDP than services while in 2016 it was the other way round. A service-based economy is a salient feature of most of the developed countries.

If we observe these trends, China seemed to have been making a steady transition from an export-led industry-oriented economy to a domestic-consumption-led service-oriented economy. However, the novel Coronavirus pandemic has left its economy hanging in uncertainty. According to World Economic Outlook, China’s growth rate is expected to shrink by more than 5% this year; the GDP growth rate is expected to be 1.2% in the year 2020 while this figure was 6.1% in 2019. The great lockdown has affected the Chinese economy very much- retail market, tourism, export declining due to global demand crunch- all of which will have a negative influence on the economy. Although nations around the world are foreseeing a recovery as soon as possible, experts do not expect this to be a v-shaped recovery. The recovery period might give China, which has already lifted lockdown restrictions, an incentive to focus more on its domestic consumption and strengthening its retail market. Even though exports in China has bounced back significantly higher than expected in the month of April (though it has and will remain quite low because of the existence of lockdown in many of China’s partner countries), domestic demand appears to be resilient and increasing– a trend we have been witnessing even prior to the lockdown.

Global merchandise trade is expected to decline 13-32% due to COVID-19 and the WTO has commented that the decline in world trade due to this pandemic will likely exceed the one accompanied by the global financial crisis of 2008-09. The post-pandemic period most likely will witness an accelerating trend of declining dependence on export-led growth for China for various reasons:

  • Deglobalisation: Even before the pandemic struck, deglobalisation was increasingly spreading around the globe, fuelled by the Sino-US trade war and the financial crisis. The pandemic has further instilled a feeling of self-reliance and accelerated this phenomenon- politicising travel and migration, cross accusations and exposure of anarchy in global governance in the recent crisis has contributed to the promotion of deglobalisation.
  • Global Value Chain (GVC) under pressure: By becoming a hub for cheap and efficient manufacturing, China was an integral part of the supply and value chain of many goods. However, after the COVID crisis, major economic players are planning to shift their manufacturing and production facilities back to their own countries, away from China, foregoing the manufacturing efficiency and cost minimisation that globalisation has offered them in the past. This increasing pressure on GVCs means that China’s exports and manufacture sector will be affected in the coming years.
  • Lockdown in partner countries: During the height of the coronavirus outbreak in China (January-February period) exports plummeted 17.2% and in April there was a surprising 3.5% jump in exports. However, even though China came out of lockdown successfully its trade partners are still in lockdown and fighting the virus. Hence, global demand is expected to remain low for the months that follow.
  • Trade war: Even before the pandemic, the US-China trade war shook China’s trade with its largest trade partner, US. A small relief in the trade war came in January, in the “phase-one” deal, when both sides agreed to give concessions on heavy tariffs imposed before. Recently, the cross accusations and mutual blame have further threatened the progress that lies ahead of “phase-one” negotiations and could even aggravate the problem further. A trade-war at this point will be heavy on China’s side and will affect its trade drastically.  
  • Direct interventions: The Chinese government has adopted policies to boost domestic consumption in the country to mitigate the heavy losses in exports that accompanies the slump in global demand. These policies are aimed at brand promotion of Chinese owned brands and on the same hand reducing the market for imported goods. Additionally, there are efforts to establish domestic duty-free shops, encourage domestic tourism and also to attract foreign tourists which could boost domestic demand and result in increased domestic consumption.

The COVID crisis could accelerate the Chinese economy’s dependence on domestic-consumption, owing to the various factors discussed above, that are currently at play. Therefore, the trend that we can expect is a “reducing dependence” on exports in the coming years and an increasing dependence on domestic consumption, accelerated by the COVID-19 pandemic.