Category: Economics

Experience of Chinese Technologies and Products for the Industries of Eastern India

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Amitava Banik, Research Intern, ICS

Source: Indian Industry Plus

China’s progress in manufacturing

China is considered as the world’s manufacturing powerhouse. China had been successful in building infrastructure supporting world corporations to make their products in the country. Over time, the world’s leading companies have shifted their manufacturing assembly lines to China. Also, the home-grown manufacturing industry in China is itself quite big. China is successful in manufacturing and exporting a whole range of products from simple electronics to complex machineries.

According to Yue and Evenett (2010), China attracted huge FDIs between 1979 to 2007 of which 70 per cent went to the manufacturing industry. The concentration and development of the global value chains of all industries, including the high-tech industry, on the eastern coast of China have boosted the country’s exports, resulting in the “Made in China” phenomenon.

Multinational corporations such as Siemens have set up facilities for assembly and manufacturing of many of its products including high-end medical equipments such as CT Scanners for their South Asian market in China, taking advantage of low manpower cost and good connectivity networks. A world-renowned instrumentation company such as Yokogawa of Japan, manufactures and exports their meters and oscilloscopes from China. The Chinese are considered to be good with reverse engineering capabilities, which have helped grow a lot of domestic manufacturers across industrial sectors.

China’s market for capital goods and spares in Eastern India

The Chinese machineries and capital items occupy the top of India’s list of imports from China valued at US$ 19,103(2019-20). Unlike China, the global multinationals are more focused on making India a marketing hub for catering to the huge domestic market of India and South Asia rather than India being a global manufacturing destination. Thus, India’s manufacturing capacity for capital goods like other high technology products is low.

In Eastern India, where there is dearth of both capital and new industries, China has successfully filled the vacuum to some extent with its cheaper and competitive products and industrial solutions. According to a survey conducted by the author, traders and businessmen are of the view that there could be further enhancement of Chinese market in this part of the country if the Chinese companies could set up manufacturing and assembly lines for their products – both capital goods and spares in Eastern India. China has made considerable inroads into the industrial market in Eastern India both for high value capital goods as well as low value tools and spares. However, there is dearth of specific data on import of capital goods and spares parts from China by the industries of Eastern India, so this assumption is based on practical experience and field survey as illustrated in Table 1. According to some of the users interviewed from these industries, the satisfaction level of the industrial customers and the value for money proposition is good for Chinese products and their installations. The traders interviewed are of the opinion that easy loan and financial credit facilities are available for buying Chinese machineries. Companies such as Donfang Electric Corporation doing power projects have also set up offices in Kolkata to oversee their projects, marketing, and customer services, etc. The traders are vocal about dealing with China’s ease of doing business. According to them, it is easy to get dealership of Chinese companies and start doing business with them, and Chinese manufacturers are also prompt in responding to trade or dealership enquiries.

Eastern India is primarily a mineral rich belt of India producing steel, ferroalloys, power, etc. Earlier, most of the installations in old plants had been of Russian, US or German technology, but now most of the plants, particularly those built on private investments are using Chinese technologies (Refer Table 1). Even in many of the tenders called by the central and state PSUs*, Chinese companies are the lowest bidders and many of them are ordering Chinese products.


Just like industrial installations of capital goods in Eastern India, Chinese manufacturers have made considerable penetration into the market for low-end manufactured products, tools and spares. The trading communities in Kolkata and other places import Chinese products at lower price and sell them in the market at a premium and make considerable fortune. The result of the survey of a leading bearing trader in Kolkata is put up in Table 2.

Present Situation

The military standoff situation like the recent Galwan Valley clashes and its aftermath creates anxiety among the trading and industrial community, which affect business sentiments. As the Chinese influence is currently highly embedded in Indian economy, trade and commerce, complete decoupling may be expensive for India especially in the present Covid-19 pandemic scenario. However, though decoupling is tough, at the same time it is not possible to entirely ignore border and security issues in the face of economic or business considerations. Thus, India needs to look at economic growth with leverage on China.

Conclusion

Chinese economy (about US$ 14 trillion) is much bigger than that of India (about US$ 3 trillion). India is home to 1.3 billion people (17 per cent of world population) but has only 3-4 per cent of the world GDP. Although the two countries try to co-operate on several international forums such as WTO, BRICS, G20 etc., strategic rivalry is visible. This shows that while there is an understanding on many common matters of concern, the two economic giants sharing a common boundary and geopolitical and historical landscape are often at loggerheads on issues of diverging interests, geopolitical and economic ambitions.

In view of the evolving world order during the pandemic, several multinational companies are looking to relocate their manufacturing facilities out of China. It may be an opportunity for India to pitch in and fill the void by offering incentives to these corporations as well as to Indian corporates for setting up more manufacturing facilities in east and northeastern parts of India, and other untapped industrial belts. This may also help in developing these deprived regions as new industrial pockets. If this happens, it would lead to overall growth and development of these regions and augment the value chains for the industries.

Party Influence in Chinese Economy

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 Arnav Batra, Research Intern, ICS

China has a unique role in the world economy, with it being one of the most attractive places to do business which is clearly indicated by its status as the world’s largest exporter, the second largest recipient of FDI and the second largest consumer market. On the other hand, compared to other economies that seek to attract foreign investment, the economic setup for conducting business is very different, as China’s economic system is called a ‘socialist market economy’ to which some academics have referred to as ‘state capitalism’ or even just an unstable form of capitalism. The rise of Chinese economy in recent decades was driven by open market activities, and the Chinese economy has  grown by a factor of several times largely due to becoming a ‘supply economy’, manufacturing goods meant for export, and also due to the burgeoning middle class in the country, and their rapidly growing consumer spending.

Since President Xi Jinping came to power, there has been a shift in the economy towards a larger role of the state, as has been evidenced by the central role of state-owned firms in the Belt and Road Initiative, and a growing shift of bank credit towards state-owned firms from private firms. This is also indicated by the assets of state-owned enterprises (SOEs) growing at double the pace of the national average pace of capital formation between 2012 and 2018.  

An important indicator of the state’s growing demand for influence on the economy has been the change of legislation to make it compulsory to establish a Communist Party organization for its workers in each company, whether state-owned, private or foreign. The purported purpose of these are to fulfil the role of a trade union, arguing for workers’ rights and fair wages. No management or governing role for these party organisations has yet been formally specified in the company law of the PRC.

In the last four years, many SOEs, and even those listed in Hong Kong with a combined market capitalisation of several trillions of dollars have changed their articles of association  to give key decision-making powers to these party organizations which are separate from the powers of the executives and the board of directors. At the end of last year, on 30 December, 2019, a landmark change took place, and a new regulation was put forward for the first time by the Central Committee of the Chinese Communist Party which formally requires every state-owned enterprise to recognise the role of the party organizations in its articles of association. According to the regulation, each important business decision must be discussed with the party organ before being approved.

At first glance, this does not seem like an alarming change, because it only strengthens the control of the state on the state-owned enterprises. But this is in contradiction of the Chinese government’s earlier commitment to implement a modern corporate governance system, which puts the board of directors at the helm, so that Chinese State Owned Enterprises can compete with foreign companies.

There are also some reports, mainly from Hong Kong that this change in the corporate governance of SOEs is against the wishes of private investors who even voted against these changes in the company meetings, and these changes in the articles of association of the state owned companies were approved only because the state holds the majority stakes. Some investors even say that the recent changes have just formalised existing party influence on the companies, which it had been exercising through channels such as private meetings with the company executives, and attractive financing for those companies which comply with the party wishes.

These changes hint at a growing tendency of the Chinese state to use companies as political weapons and take key decisions influenced not only by business strategies but also as geopolitical considerations, which has been evidenced in the recent tendency towards “debt-trap diplomacy”. In a prime example of this, Chinese SOEs have taken over Sri Lanka’s airport. These changes could lower the efficiency of Chinese companies, by forcing them to take decisions that they would not take on their own. It opens up room for discourse on the attractiveness as a place for doing business . It will be quite instructive to see till what extent the Chinese state is willing to give up economics for politics. The party’s push for control is not only isolated to SOEs, as some yet unconfirmed reports have suggested that the party is pushing for more influence even in private enterprises and foreign joint ventures by demanding an increased role of the party committees in internal decision making through changes in the articles of association. The attitudes of the Chinese officials indicate a growing desire for influence in private companies, and this implies that the Party Committees will eventually be instrumental in imposing Party will on the decision-making process in both private and state-owned companies. The role of the Party in the decision-making process of Chinese companies should be carefully considered by foreign investors who seek to invest in China, as they might find that their money is not directed towards their company’s best interests, but to further the cause of the state.

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

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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.

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

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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.

Strangers in the City: Migrant Workers in Indian and Chinese Cities

While political systems, level of State capacity and trajectory of development may vary, cities in China and India have retained many common threads of socio-spatial exclusion of migrant workers

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P.K. Anand, Research Associate, ICS

The ‘visibility’ of the migrant workers is the biggest urban predicament that is being witnessed during the nation-wide lockdown, which has now crossed 50 days. The images of their ‘reverse migration’ — whether entirely by foot, or through modes of transportation that are heart-wrenching — lay bare the desperations and anxieties emerging from the loss of livelihood and security.

Not that many of these journeys have happy endings — deaths due to exhaustion, or accidents leave behind more than just a trail of dead bodies. It is equally significant that since the lockdown started on March 25, there also exists a long list of casualties that cannot be pinned on the virus per se — including those related to mental health, often left at the periphery.

The brutal social experiment that is the pandemic has only reinforced and exacerbated the systemic exclusion and dispossession of circular/seasonal migrant workers/footloose workers, who inhabit Indian cities. A report titled Unlocking the Urban, released by Aajeevika Bureau —a non-profit organisation working among seasonal migrants in western India — released on May 1, highlighted the longstanding vulnerabilities of rural-urban migrants in cities. They often receive less than minimum wages, are engaged in manual work which last for long hours, which, are often even dangerous.

They remain unaccounted for by national statistics and are invisible to city-level administrations; precarity undergirds their working and living spaces, rendering them ineligible for social schemes and welfare programmes. These further lead to them being denied access to urban residence and governance; their survival in the cities is dependent on daily negotiations with informal actors, ranging from petty contractors to security guards, and even landlords.

The socio-spatial exclusion of migrants from Indian cities, and their statelessness in some ways, mirrors the nongmin gong (peasant workers) in China’s urban spaces, pejoratively called ‘floating population’; though the Chinese state has changed the terminology to xin shimin (new city residents) in order to fully ‘integrate’ them into urban centres, the desired results have not followed.

China’s Rural-Urban Dichotomy

The demarcation of citizenship in China into rural and urban is a legacy of socialist planning. In 1958, the hukou(registered residence permits), was introduced to regulate the flow of resources, especially labour, and sustain an agrarian countryside, while the State subsidised urban living. The economic reforms of the 1980s led to easing of rural-to-urban mobility, which, in turn, kick-started the long journey of labourers from the rural areas to the industries and companies in coastal provinces. The migrant workers have been crucial in the growth of many megacities in China today.

However, this infrastructural and economic growth of Chinese cities happened even as the migrant workers remained peripheral in China’s urbanity. The urban hukou — the foundation for a well-entrenched city life with access to public services, healthcare and education — is highly stratified and segregated, with eligibility based on the level of education, skills and status. The hukoucreates a division between privileged and entitled urban residents and the migrant workers. Though the migrant workers are tagged as ‘essential’, in reality they are ‘placeless’ and unable to make claims for a ‘right to the city’. The constant fear of eviction from their informal neighbourhoods and being at the receiving end of law enforcement’s brutal high-handedness, mirror the story of their Indian counterparts. Furthermore, the marginalisation of migrants in city spaces has also impacted the lives of their children in claiming access to healthcare and education.

Urban Citizenship

While the high level of decentralisation in China’s political-administrative system give the local governments significant decision-making powers, city governments — especially those in the megacities — remain intransigent in reforming the hukousystem. Beijing has repeatedly mentioned the need to reform the system but it more or less remains on paper. While small and medium sized cities have experimented with various models and pilot programmes, there remains reluctance from the big cities. It highlights the skewed nature of China’s tax and revenue systems favouring the central government, while the local governments bear the fiscal responsibilities. Thus, the big cities are resistant to reforms that add to their burden.

By the same count, with laws and regulations largely divided between the Union government and the state governments in India, local bodies (such as municipalities) are rendered powerless, without significant responsibilities. Such disempowerment of cities create constraints in developing specific and contextual regulations (for instance, in many cities migrant workers are not even enumerated).

Clearly, while political systems, level of State capacity and trajectory of development may vary, cities in China and India have retained many common threads of socio-spatial exclusion of migrant workers.

Originally Published as ‘Urban Spaces | Migrant workers remains invisible in India and China’ in Moneycontrol.com, 21 May 2020

The Malacca Dilemma: No panacea but multiple possibilities

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Sanjana Krishnan, Research Intern, ICS

The death of Mao Zedong in 1976 gave rise to a series of dramatic political changes that led the emergence of Deng Xiaoping as the next leader of the country. Deng led China through a path that has now made the country the industrial giant it is now. This was made possible through Deng’s policy of ‘Reform and Opening Up’ and the “Four Modernisations”. What fuelled this industrial expansion was a heavy dependence on energy giving birth to a new vulnerability to China, namely energy security. While China is still heavily dependent on mostly its own coal reserves and imports of coal for its energy requirements, the reliance on imported crude oil is also increasing.

In 2017, China became the largest importer of crude oil in the world, surpassing the United States and 70% of this was met through oil imports mainly from the West Asian region. In the coming twenty years, these oil imports of China are expected to grow by 10%. Therefore, energy security and oil supply in particular have profound importance for China considering that the huge and powerful economy of China might derail and dwindle if that oil supply diminishes leading to not just an industrial break down but also impact on the China’s overall credibility as a great power in the world which rests, to a great extent, on its economic prowess. The dependence of the Chinese economy on its oil imports is thus an established and critical fact.

The transport of oil through the maritime route from West Asia to China passes through many strategic choke points. One of the most important among these is the Malacca Strait through which 80% of the energy import to China takes place. More than 50,000 merchant ships ply this narrow strait which amounts to 40% of the world trade. China’s economic security is closely tied to maritime trade security as 60% of its trade value travels by sea. Much of the trade between Europe and China enters the South China Sea through the Strait of Malacca. Similar is the case with the trade between China and Africa. Therefore, even for trade, the Malacca Strait holds significance for China.

Lying between the island of Sumatra and the Malay Peninsula, this narrow stretch of water known as the Malacca Strait is the main shipping channel between the Indian Ocean and the Pacific Ocean and is one of the most important shipping channels in the world. However, this strait is not depended upon only by China but other major powers too which has been a concern for the Chinese leadership in the past, fearing that these powers might be trying to control the Strait. A control of the Strait of Malacca by anyone will also mean that they control the oil routes to China and thus the economy too indirectly. This created what is known as ‘The Malacca Dilemma’, a term coined in 2003 by Hu Jintao, the then president of China. When it comes to the Strait of Malacca the fear of other states controlling this strategic transit is greater than the ambition to control the Strait itself.

In 2003-04, here was a threat of piracy in the region which the littoral states, namely Malaysia, Indonesia and Singapore were able to curb to a large extent. This however gave an opportunity to states like US and Japan to try to get more involved in the region in the name of security, which China heavily criticised. The littoral states invited capacity building  and rejected permanent stationing of any outside power. Singapore, which is in the southernmost tip of the Malacca Strait has excellent relations with the U.S. The relations between U.S. and Indonesia are cordial.

ASEAN being the collective voice of the region has a strong say in the functioning of the Strait. Following the threats by piracy and great power involvement, today the countries of the ASEAN have sought to create a Peace and Security Community (APSC) based on three key characteristics: a “rule based community of shared values and norms”; cohesive, peaceful, stable and resilient region with “shared responsibility for comprehensive security”; and a dynamic and outward looking region in an integrated and interdependent world. But the relations between China and many of the ASEAN states have been soured due to differences in territorial claims in the South China Sea. This has added urgency to China’s need to find an alternative to the Malacca Strait. Moreover, in the recent past, India has increased her naval presence in the Andaman Sea from its base in the Great Nicobar Islands largely due to its own perceived threat perceptions emerging from China’s ‘String of Pearls’ that have emerged as a result of the Chinese activities of the past. Given its projection capabilities in the Indian Ocean, the Indian Navy is able to keep a close watch on the PLA Navy in the region.

However, China has a few options in hand which are costly but worth trying. The Kra Isthmus Canal seen to the Asian Panama Canal as well as the Strategic Energy and Land Bridge have both seen a lack of much enthusiasm due the massive cost as well as the lack of trust between China and Thailand. Thailand is considerably powerful and will be hard to press. The Lombok and Makassar Strait are longer routes and would have additional shipping costs which can reach more than $200 billion per year making it a less viable option.

While nothing currently has the capacity to completely replace the Malacca Strait, two options available for China that can completely avoid passing through the Malacca Strait and many of the other strategic choke points is the Gwadar-Xinjiang pipeline and the Myanmar-Yunnan pipeline, although the latter can be affected by Indian presence. These options serve the additional purpose of opening up lesser developed regions of China like Xinjiang and Yunnan. The Gwadar-Xinjiang line will allow the Chinese energy imports to completely circumvent the Malacca Strait. However, the pipeline in Pakistan is faced with major logistic difficulties due to some of the harshest and the most rugged terrains in the world being present there, which can prove technically difficult as well as very expensive to navigate. The region is also ridden with terrorist activities which can potentially disrupt the supply or if the worst materialises, control these and be at an advantageous bargaining point. All these factors stand as difficulties that require investment in the form of infrastructure and security.

The Kyaukpyu Port which is being developed by the Chinese government in Myanmar is another alternative for China. The oil from the west can be docked here and transported to China via the Myanmar-Yunnan pipeline. However, now the pipeline only transports 420,000 barrels per day compared to the 6.5 million barrels per day that pass through the Strait, bound to China. The speeding up of the China sponsored infrastructural development, as a result of the increasing ties between the two countries, which was cemented during the January 2020 visit of Xi Jinping to Myanmar, has the potential to solve this problem to some extent. However, it cannot increase the capacity of this alternative as much as the Malacca Strait. Therefore, comparing the capacities of the various alternatives available to the Malacca Strait, it is evident that there is no single replacement for the latter.  China can rather rely on multiple routes for the transfer of energy sources and trade to sustain the humungous economic machine. It is to be noted that the multiple alternatives, with efficiencies which cannot rank up to the Malacca Strait pose a dilemma in solving the Malacca Dilemma. Thus, the best option that China has in hand is to lower the contestation in the Malacca Strait and to find a peaceful way to work with.

COVID-19 Crisis: Is the Communist Party of China facing a Crisis of Legitimacy?

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Mahesh Kumar Kamtam, Research Intern, ICS

Today the world is witnessing an outbreak of a pandemic ‘COVID-19’, unseen in the recent past, illustrating the fragile nature of a globalized world. As the virus outbreak continues to create global reverberations, the case of ‘COVID-19’ becomes even more relevant to the Communist Party of China (CPC). The pandemic could put the regime in a precarious position, threatening the unwritten social contract between CPC and Chinese people, since the legitimacy of the Party is driven by its ability to deliver economic prosperity to its citizens.

China is more connected to the world today than in the past. According to the World Economic Situation and Prospects Report 2020, released by the United Nations Commission on Trade and Development (UNCTAD), China alone contributed 0.75 percent out of an average 3 percent of the global growth. These indicators not only reflect a major trend in globalization, but also the extent to which China is connected in a globalized world. Global economic integration has driven China’s domestic growth in the past. But with global growth set to slow down significantly due to COVID-19, early predictions show signs of recession. As the IMF rings alarm bells on a possible recession, CPC is set for more challenging times as the world enters an era of instability driven by COVID-19.

Increasing global integration and complex challenges due to globalization have domestic repercussions. The inability to maintain economic growth and rise in inequality fuelled by low growth in future are more immediate threats that could undermine the social contract between the people and the Party causing domestic instability. The rise in ‘uncertainty’ casts a shadow of doubt on the goals set forth by the Party, particularly when China is entering into a “New Era”—where Xi Jinping targets to achieve a “moderately well-off society” (Xiaokang society) by 2021— the hundredth anniversary of the formation of CPC.

What is more worrying for the CPC at the moment is the echoing of the anger from Chinese people themselves against Xi’s rule. Xi has been facing criticism of his handling of the COVID-19 crisis and social stability threatened by a slump in production are one of the biggest challenges that CPC is set to face in the next few years. Although CPC has shown the ability to manage ‘domestic uncertainties’ by delivering economic results, mastering propaganda and controlling the flow of information in the past, these strategies are becoming increasingly ineffective for ensuring legitimacy of the Party and its leadership.

There was mounting discontent among Chinese citizens in the early stages of the outburst of COVID-19 as local officials tried to hide the truth about the outburst. The death of Li Wenliang, the doctor who alerted Chinese local officials during the early stages of the virus outbreak, became a breaking point. Li was forced into silence by local officials who hid the truth about the outburst. This event led to widespread discontent among netizens. Popular social-network sites Sina Weibo and WeChat surfaced with the lyrics of a song, Do you hear the people sing” popularized during the Hong Kong protests in 2019, denoting public anger and failure of early response to COVID-19. CPC blocked the ‘anthem of protest’ in mainland China and subsequently, launched a massive propaganda operation to regain lost legitimacy. Eventually, it was forced to sack Hubei Party chief Jiang Changling and Wuhan mayor Ma Guoqiang in an attempt to calm down public anger and channelize resentment away from the Centre while trying to alleviate growing citizen distrust of the central leadership and Xi, in particular.

The newly appointed Provincial Secretary of Wuhan launched a “gratitude education campaign” during the outbreak, to create a favourable impression of party’s image in fighting COVID-19. However, it backfired as the Party was criticized for placing itself above the hardship endured by Wuhan residents. They were enraged because of poor conditions in hospitals, lack of adequate timely care and soaring food prices. In yet another instance, real estate tycoon and princeling, Ren Zhiqiang penned a powerful article that got circulated on Weibo. He was critical of Xi’s handling of the COVID-19 crisis and called him “a clown with no clothes on who was still determined to play emperor”.

These incidents provide early indications of Xi losing control over the CPC narrative and thereby, his legitimacy to lead. However, Jude Blanchette, Director of China Studies program at the Center for Strategic International and Security Studies argues that the “CPC has reoriented itself from time to time to meet the changing demands in the society and CPC is more focused on ‘long-term threats’ than the short term disruptions like COVID-19 crisis”.

Indeed, it is true to some extent that COVID-19 may be a short-term disruption rather than a long-term threat to the stability of the Party and Xi’s leadership. The mounting discontent against the state is a sporadic outburst of anger rather than a sustained and coordinated movement challenging the ‘Party’s mandate to rule’. However, we can still expect that it could bring more democratic order in Party though not necessarily democracy, by furthering “intraparty regulations”, promoting information disclosure particularly by local party offices at the time of emergency crisis like COVID-19, thus pushing for more transparency in the Party.

This article was earlier published in The WION under the title ‘Communist Party of China and the crisis of social contract in a globalised world’ on 13 April 2020.

Eye on Labour amidst Lockdown: Taking a China lens

The images of migrants on roads across India should perhaps help us re-evaluate the often romanticised images of the massive movement of workers annually in China

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P.K. Anand, Research Associate, ICS

The nationwide 21-day lockdown announced by Prime Minister Narendra Modi to contain the spread of the COVID-19 pandemic in India has completed 10 days. Being the second-most populous country in the world, India’s lockdown has been a massive exercise involving stopping all forms of public transport, closing down educational institutions, and recreational facilities, and all other avenues of gatherings/congregations across the vast territorial swathes of the country.

The lockdown has generated considerable debate not only on its viability and necessity, but also on its implementation and the resulting effects.

The incrementalism adopted in India’s approach ever since the outbreak in China occupied news space in mid-January — from airport screenings, to visa restrictions and later tracing of contacts and travels of infected people — has also been subjected to scrutiny by public health scholars and experts. The reasons for reluctance of the government to scale up testing at a mass level, even as cases spiked across India, appears to be twin-fold — to avoid a panic and chaos on one hand, and reckoning with the reality of a creaky health infrastructure, amplified by the lack of requisite resources, personnel and equipment, on the other. Even now calls for mass testing than just mere lockdown continues to go unheeded.

Even though Italy was the first country to impose a nation-wide lockdown, the playbook has emerged from China in its complete shutdown of Hubei province (while allowing other provincial and sub-provincial administrations to calibrate measures as deemed necessary in their jurisdictional regions). However, there has been enough reams and ink spent on explaining the impossibility of replication of the Chinese model — which has been undergirded by the authoritarian one-party state system that is decentralised, possessing extensive reach and high-organisational capacity — in democratic, diverse political systems. Further, the party-state massively employed technology to ensure social and political discipline. The party-state’s efforts to ramp up testing and large-scale mobilisation of resources have acted as force multipliers in its combat against the contagion even though the initial cover up, censorship and failure to track it in the first place have come in for criticism.

Nowhere has the planning and viability of the lockdown been questioned than by the heart-wrenching images of displaced migrant workers and their families, fleeing cities to their native places in the Indian hinterland on foot, riven with fears and anxieties of lost livelihoods and absent State support. In fact, these images and stories have generated significant traction to the argument of privileging the middle classes and urban elite in India, who have the wherewithal and space to practice social distancing as well as be able to exercise the option of work from home. Unlike them, the poor and daily wage, low-paid workers who constitute the informal sector and are at the frontlines in keeping essential services thriving, have a hand-to-mouth existence.

The images of migrants on the road also engages us to perhaps re-evaluate the often romanticised images of the massive movement of workers annually in China, for Chunyun, or the 40-day period with the onset of the Lunar New Year holiday, cramping through trains and other public transport (incidentally that movement this year was termed to have accentuated the spread of the virus).

That China’s migrant workers, often termed as floating population, have to traverse great distances to work in manufacturing and services, mostly in coastal regions or bigger cities, reflects the failure to develop viable regional economies. This is line with the high level of inequality prevalent in China, both regional and income related. The obduracy and rigidity of the country’s urban registration system — or, Hukou — that excludes the low-paid migrants from accessing rights and services in Chinese cities, also finds echoes in how ‘invisible’ the migrant workers have become in Indian scenario.

While democracy versus one-party state value judgements have often tended to dominate India-China comparatives, ideally the metric to test the State has to be State capacity; the ability of the State to provide goods and services to its citizens, especially during times of crises and distress. Herein, in spite of its authoritarian State system, with censorship and restrictions on freedom, China has a higher State capacity compared to India. That in turn, means a more formalised economy, with even social protections built into employment contracts (even if the implementation on the ground has been tardy).

Rome was not built in a day, and that applies for State capacity as well. Perhaps this pandemic and the lockdown, and the stark images left in its wake, will finally activate the Indian State to unlearn and learn, and reshape itself as a provider than remain only as an enforcer.

Originally Published as ‘Labour, lockdown and the State’s predicament’ in Moneycontrol.com, 3 April 2020

Situating Labour in a Pandemic: Corona Virus Outbreak’s Social Costs

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P.K. Anand, Research Associate, ICS

As the Chinese pick the pieces of the outbreak of the novel Coronavirus, COVID -19, and the much-vaunted State capacity becoming frail, the pandemic has left more than a trail of dead in its wake. The direct or indirect impact on various segments of the polity, economy and society are being seriously felt and some of the cascading and ripple effects may be in the long-term.

The economic ill-health has significant bearing for not just China, but also for the rest of the world; in fact, the slowdown of the economy predates the outbreak with surge in inflation, and structural factors complicated by the trade war with the United States. While the Chinese had scaled down from high- to medium-term growth in early 2015, with reference to the term ‘New Normal’, the slowdown reflected that things had veered away from the expectations.

Much before the National Day last year, the surging prices of pork (a staple ingredient in Chinese food), along with other red flags on the economic front, had signalled life becoming harder in China. In fact, the pork prices have continued to rise amid shortages during the lockdown.

The ‘manufacturing centre of the world’ tag has taken a hit, as factories, enterprises and production units across China are either still closed or yet to restart completely, with cases of even an extension of the Lunar New Year holiday. Being the centre of automobile production in China, Wuhan has borne the maximum impact. Further, the ripple effects have in effect ceased production in automobile factories in South Korea and Japan, as closure of factories manufacturing auto parts in China.

The prospects of an extension of the economic recession also carry social costs, with significant consequences for labour in China. The travel of migrant workers — the fulcrum of the Chinese urban manufacturing story — at the onset of the new year from cities to their home provinces was often visually showcased with fascination over the years. While this masks the weaknesses of the regional economies within China by illustrating the inequalities between coastal and inland provinces, the movement also causes apprehension of spread of the virus.

The workers are also confronted with a dilemma while making decisions on returning to the workplaces — the need to make income by selling their labour versus (in)adequacies of health safety. More often than not, circumstances condition the workers to choose the former. The more days the things remain in limbo and cause disruptions including non-availability of transport for workers to reach workplaces, the more rise in workers’ anxieties.

The workers in manufacturing enterprises and their significance have always dominated the discourse on labour in China, and therefore, their absence through closure of workplaces and dilemmas do command news space. However, of equal, if not more, importance are the workers in the services sector — those in essential services such as sanitation workers, security guards, drivers and those on the low-end, not only in China but also in Hong Kong.

Along with them, hundreds of workers employed to power the platform/gig economy are also on the frontlines, especially food delivery workers. Even though extra precautions are exercised through usage of safety equipment, reporting the body temperature of employees to customers and quality checks, the food delivery workers are under added pressure in addition to the need to make deliveries in time, even though heralded as lifeline during the pandemic, and valourised for their selfless service.

However, dig a little deep, and the rosy picture starts turning bleak — workers for platform services are among the most vulnerable and precarious workforces in China without adequate workplace protection, or entitlements, and are also victims of accidents in the rush to ensure speedy deliveries and for customer satisfaction. Moreover, the rating-driven ecosystem where a high number of deliveries become the benchmark for evaluation, frustrations and alienation also set in.

Avowedly, China has national laws to regulate work contracts and to implement social security, but the translation of the same into action on the ground remains lopsided and inadequate. Precarity is intermingled within the system, as tough urban registration system called hukou, that segments and stratifies residents, renders migrant workers in the services sector to the margins, without access to services in the city where they reside.

The (in)capacity of the local-state to come up with problem-solving solutions to properly integrate the workers in the services sector also has echoes in India; even though there is cognisance of the prevalence of informal workforce in the urban system, adequate legal/formal inclusive measures are few and far between. This leaves them exposed to the vagaries of the market, which leads to the glorifying of their ‘resilience’ bringing forth a low-level equilibrium.

Undoubtedly, the social costs of a pandemic are in the long-term and therefore, the need to learn and unlearn.

Originally Published as Coronavirus exposes the brittleness of China’s economic prowess in Moneycontrol.com, 18 February 2020

BRI through India? An Idea that Still Stays Grounded

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P.K. Anand, Research Associate, ICS

When an idea grips the masses, it becomes a material force – Karl Marx

German philosopher and political theorist Karl Marx’s quote depicts the power of ideas and how, if other factors remaining stable and equal, the value of ideas to generate transformation is very potent.

However, in the world of policy-making, ideas are not mere abstract concepts; in its germination from a seed to reach full fruition, they often have to navigate through the thick architecture of systems, structures and processes. Mostly, the shape of the ideas would have been altered significantly, to the extent they might even be indistinguishable. If this is the story with ideas that have potential traction, what about those which are yet to even lift off the ground, or even be difficult to execute due to systemic, and political-economic constraints?

Bharatiya Janata Party (BJP) leader Subramanian Swamy’s recent suggestion of getting the Chinese to redirect their Belt and Road Initiative (BRI) through Mumbai and Kolkata ports falls into the latter category — incoherent, and without attention to details. In domestic politics, Swamy’s extreme Right-wing opinions and verbose are often ignored by his party and the Union government. However, on this count, he attempts to indicate seriousness to his idea, by indicating the apparent affirmation of the Chinese leadership.

Juxtaposed with the concrete realities on the ground, it is doubtful that his signalling would get across to the intended sections in the government. This is largely due to the avowed opposition of the Indian government on the BRI though it is yet to come out with a concrete, well-articulated response to the initiative or offer a credible and tangible alternative. Rather, oft-handed comments and terse statements are all that are available for analysts to parse through to understand the official position.

If one were to build a macro picture going by those comments as well as looking at the Chinese assertiveness, the non-transparency in most of the projects and increasing contrarian voices on the BRI from some of the participant countries, it is difficult to imagine that merely keeping out of Pakistan occupied Kashmir (PoK) would resolve the issue.

As a rising power, India aspires to play an equally enhanced leadership role in the world and, therefore, competition with China is inevitable, at multiple levels. In this context, any involvement in the BRI with next to no control on the narrative would be perceived as playing second fiddle. Furthermore, the China-Pakistan Economic Corridor (CPEC), even with all its fragilities, is now moving to the second phase and therefore, the chances of Beijing revising its position are slim.

Swamy’s comments on the Mumbai and Kolkata ports — though BRI is not only about transportation and movement of goods but also infrastructural expansion — provides the opportunity to highlight the pressing concern of weak infrastructural capacities in India. In the hypothetical possibility of flow of goods through both the ports, the (in)capacities in the form of human and material resources, ill-equipped mechanisms, and red-tape, remain plaguing issues and cast serious doubts on preparedness. Given that the Chinese also like to put the money where the mouth is, absence of enhanced basic infrastructure will discourage potential investments.

The lack of resources and structural constraints brings to the fore the critical question of State capacity, or why, despite having high population and economic growth around same levels, China was more responsive than India in distributing resources and directing development? The high degree of organisational capacity of the Chinese State being under one-party rule notwithstanding — and thereby looking beyond the simplistic notion of type of regimes, or multi-party democracy vs one-party State — the key to the answer might lie in India’s weak public institutions.The inability of the State to perform the functions of economic and social development due to constraints of societal rifts or administrative barriers negatively impacts the people. The ongoing churning on ideas of belonging and citizenship has only exacerbated the lack of faith and trust in institutions, questioning their efficacy and effectiveness.

Clearly, material force, and concrete conditions, are key factors in actualising ideas.

Originally published as Why BRI through India is wishful thinking at best in Moneycontrol.com, 23 January 2020