China seeks gain in current climate of crisis

Almost everyone recognises that we are living in an era of great flux. Political instability, wars and, the economic crisis are likely to shape the future world order. Most of those affected are rudderless ships, drifting with the tide and hoping for the best. Some, however, are trying to ensure that they retain control and maintain a steady course after some
buffeting.
And then there is China, the engine of the world manufacturing, a great world power through most of its history, which is seeking to see how the world’s present predicament can be used to come out ahead both politically and economically.
There is nothing sinister in what China is doing. All countries are in the game of furthering their interests when the opportunity arises. The present economic crisis has presented China that chance and it is grabbing it with both hands. But the reality is that China is in a position to exploit the situation by the dint of the hard work and sacrifice of its people in the past two decades, and the abilities of its leaders.

Recession

The Chinese are prepared for a recession. According to an IMF official resident in China, “by running prudent and careful fiscal policy in previous years — reflected in low deficits and debt — China has created fiscal space that it can now use to fight the downturn.” But the Chinese cannot cope with a prolonged recession, or a depression, that would take years to overcome. A Japan can lose a decade in the process, but China’s leaders sit on an agenda of unfinished promises and unmet expectations. A recession lasting several years would be disastrous.
The global economic crisis has hit China hard. Exports have collapsed and taken with them large swathes of manufacturing. Beijing has lost a great deal of money in the banking crisis. While its US Treasury holdings are secure, its State Administration of Foreign Exchange lost an estimated $80 billion according to Financial Times, mainly because of the losses in its ill-timed diversification into US equity portfolios. Meanwhile, the China Investment Corporation, the $200 billion sovereign wealth fund, lost more than $4 billion in bad investments.
But the Chinese leaders are dealing with the economic crisis with great energy and sophistication. The always works best in a crisis. The country’s fiscal stimulus package of $600 billion, second only to that of the US, is aimed at an outcome in the period following the present crisis. It seeks to make its companies more competitive by retraining migrant labour and boosting domestic research & development. Provincial governments have got large subsidies to run vocational-training programmes to enhance the skills of its workforce. Guangdong province alone will put four million workers through three-to-six month re-training programmes. That such programmes will also reduce social distress and maintain social stability is a bonus.
China is backing its premier companies to go on a global acquisition spree. Huawei Technologies, one of the top Chinese telecom companies, is sharply enhancing its operations across the world. As it is, the company’s share of deals to supply mobile infrastructure doubled from 7.2 per cent in 2007 to 15.5 last year.

Opportunity

Troubled companies around the world are looking to Beijing for a life-line. The $19.5 billion that a Chinese aluminium company put up to buy convertible bonds issued by troubled Australian mining giant Rio Tinto with interests in Chilean copper and South African iron ore came from a special fund created by the Chinese government to spend on mines and companies. A Chinese server and software maker is in talks with insolvent German memory chip maker Qimonda to set up a factory in Shandong province.
Just how China views this situation is evident from the fact that it now plans to put another $2 billion in its African investment fund which was in fact set up to take advantage of opportunities created by western investors fleeing the continent. Currently the fund, set up in 2006, has a capital of $1 billion of which it has invested $400 million.


On Monday, the Chinese commerce ministry announced that it had simplified the procedures for Chinese companies seeking to make acquisitions of non-financial businesses abroad. Power to approve investments had now been given to local governments except for very large transactions. The Ministry is also embarking on its first mergers and acquisitions trip looking for companies in automobiles, textile, food energy, machinery, electronics etc.
The Chinese focus on dealing with the crisis as an opportunity in the economic sense inevitably flows into the realm of the political.
China most certainly hopes, and is working towards the goal, to ensure that its standing in the world order will go up a couple of notches, just as that of others, including the United States, goes down a few.
In times of wars and recession, countries focus on the essentials. For China and the US, this means an enhanced effort to build cooperative ties with each other. The exchange of visits by the US and Chinese foreign ministers in February and March are merely the first straws in the wind. US Secretary of State Hilary Clinton’s Asia visit, the first since she took office, had China as its focus.
Last week, Chinese foreign minister Yang Jichei visited Washington as part of a practical effort to set the stage for the first summit between Chinese leader Hu Jintao and President Barack Obama on the sidelines of the Group of Twenty meeting in London on April 2. According to China Daily, Yang told Obama when he called on him last Thursday that Beijing was “willing to work with the US” to make the meeting a success.
The shape of the new relationship was hinted at by Chinese Premier Wen Jia Bao’s remark in mid-March, that he was “worried” about the safety of China’s $1 trillion investment in US government treasury bonds. He called on the US to “maintain its good credit, to honor its promise and to guarantee the safety of China’s assets.” The statement was both subtle and blunt — oxymoronic, but very Chinese.
On Thursday, this week, Zhang Yunling, director of Institute of Asian and Pacific Studies at Chinese Academy of Social Sciences, said at a press meet in Tokyo that China expected that the value and the role of the US dollar will change after the economic crisis. But, he added, “China hopes to have a stable and gradual transition rather than a radical revolution.” Beijing was so heavily invested in the US, that any drastic change would precipitate a crisis.

India

The Chinese are therefore viewing their ties with the US in terms of a partnership. The Chinese action against a US survey ship off Hainan island is probably part of the process through which Beijing is seeking a relationship of equals with Washington, a relationship where both clearly recognise each other’s lines in the sand.
Inevitably the question arises as to what India can do? A Sino-US condominium dominating the world order is not likely to be a comfortable place. Already, it is becoming clear that the Indo-US love-fest is more or less over.
In some ways the same opportunities that China is exploiting are available to New Delhi as well, though in a smaller measure. But we are less well placed to exploit them. It is not just that India went into the election mode as the economic crisis deepened in the last couple of months. It has to do with our systems which are simply not geared for synergised thinking and coordinated action.
Each state government, ministry and service is a satrapy, and trying to get people to work together as a matter of habit is a difficult task. Forward planning, and even the plans themselves are often seen as emblematic exercises. There is nothing sacrosanct about the targets. As for accountability, it simply does not exist.
This article appeared in Mail Today March 20, 2009