A couple days ago the inevitable happened when Moody’s downgraded China’s sovereign rating. For the first time since 1989, China had to suffer the ignominy of a ratings downgrade. Not surprisingly, Chinese officials slammed Moody’s for getting things wrong. “It’s absolutely groundless for Moody’s to argue that local government financing vehicles and state-owned enterprise debt will swell the government’s contingent liabilities,” was the Chinese authorities’ tart response to Moody’s move.
It is ironical that a rating agency, given such companies’ badly tarnished reputation since the 2008 financial crisis, had to confirm that all is not well for the Chinese economy. China, the engine of the global economy for over two decades now, has been clearly living beyond its mean in the last few years. Since the 2008 economic meltdown the Chinese economy has been on steroids, sustained by heavy doses of stimulus. Economist Ruchir Sharma estimates that China’s overall debt has zoomed from a more sustainable 150 per cent of its GDP to 260 per cent.
China has been saddled with over-capacity, created by years of investment-fuelled growth, which is making things worse. Though the Chinese authorities have been taking steps to redeem the situation of growing debt and asset bubbles, things don’t really look good for the dragon at the moment.
Limits of investment-led model
In an interaction I had over ten years ago with economist Eswar Prasad (at that time with the IMF, now a professor at Cornell University), he told me that the IMF had been advising China to shift to a consumption-led growth model from an investment-led one. And this was before the 2008 financial tsunami hit the global economy. This clearly shows that multilateral agencies like the IMF, and I’m sure even economists in academia, were aware of the clear limits of China’s investment-led, exports-dependent growth path and the risks involved.
So, how has China been responding to the unfolding crisis? Apart from taking some domestic measures to tackle the growing crisis, it has been looking outward to solve its problems. China’s hugely ambitious and controversial Belt Road Initiative (BRI) — where it attempts to connect China with Europe, Africa and other parts of Asia through a string of port and railway projects — is the most important of its initiatives.
Exporting debt?
Though India has consistently opposed this initiative, citing sovereignty issues over the CPEC project (China Pakistan Economic Corridor, which will run through Pakistan-occupied Kashmir) and which is a part of the BRI or OBOR, other critics have also been quick to point out how China is trying to solve its debt problems by exporting them.
China has been saddled with huge overcapacity, especially in the steel and cement sectors, and is severely constrained by weak domestic demand. So, through the ambitious BRI initiative, China is cleverly trying to create demand for its industrial and infrastructure sectors for the next few years. Since the credit for these projects is likely to come from China’s banks, the authorities there are also giving the Chinese financial sector a helping hand. Needless to say, it is the Chinese construction companies that will bag most of the port and rail construction projects under the BRI.
Besides the perceived economic benefits, through the BRI initiative, China is hoping to position itself as a major superpower in the global sweepstakes. In a world where the US under Trump is looking more inward and insular and with a Europe gripped by protectionism and paranoia over immigration, Asia has emerged as the beacon of free trade and neo-liberalism — and China sees itself as a major player.
Though most countries across the globe, with the sole exception of India, enthusiastically sent their representatives to Beijing in mid-May for the opening of BRI, there are growing murmurs over the secrecy and opacity of this massive initiative.
Neo-imperialism
China, in some circles, has also been accused of acting in a ‘neo-imperialist’ manner. This is hugely ironic for two reasons —one, China is still governed by a Communist party. And, two, this tag was traditionally reserved for the US and European powers in the past.
So it will be interesting to see how things play out for China in the coming years, both in the economic and political spheres, and also how the BRI will shape the economic and political futures of countries that have signed up for this club.
As an aside, one can’t help wondering what Chairman Mao would have thought of the great game being played by China.