China’s Economic Slowdown and the Likely Impact on its Foreign Policy

By Prof. Tridivesh Singh Maini

China’s economy has witnessed a slowdown due to a number of reasons – stringent lockdowns to prevent the spread of covid19, some of Xi Jinping’s tough measures pertaining to sectors such as real estate. In recent weeks, there is a realisation that China needs a course correction and senior officials have made statements in this direction. Given its current economic state, it is likely that China may also rethink its foreign policy and ensure that ties with the west do not go downhill, in spite of the Ukraine crisis. It remains to be seen if Beijing also seeks to reduce tensions with India with an eye on getting economic linkages back on track. Bilateral trade between both countries had risen significantly in 2021  

Introduction

China’s economy has been facing numerous challenges over the past few months, and this was acknowledged by Chinese Premier Li Keqiang during a meeting with China’s top market regulator, the State Administration for Market Regulation in November 2021. During the third quarter of last year, the economy grew at less than 5% (4.9%).In reference to the slow down, Li Keqiang had referred to ‘downward pressures’ and had said that the Small and Medium Enterprise Sector (SME) which had been struggling needed specific attention (China’s SME sector accounts for 80% of Urban Employment). 

China’s economic problems can be attributed to a combination of factors. First, the tough policies vis-à-vis various sectors – specifically the real estate – have contributed towards the slowdown. With the aim of stabilising real estate prices, China imposed strict restrictions on developers for borrowing in 2020 (at the 19th Party Congress, Chinese President Xi Jinping had said that ‘houses are for living in, not for speculation’.) Growth in real estate investment dipped from 38.3 percent in January 2021, to 7.2% in October (the real estate sector accounts for 30% of the country’s GDP). The Evergrande crisis is a strong reiteration of the problems facing the real estate sector. The company’s total liabilities are estimated at over 300 Billion, and it is unlikely that the government will bail out the company. 

Other important factors responsible for China’s economic slow down include power cuts and strict measures to control the covid 19 pandemic, which have been cited as the key reasons for the economic slowdown. The key reason for electricity power cuts was the slow down in coal production to achieve the aim of making the country carbon neutral by 2060. China’s lockdowns have also been far more stringent than other countries.

China’s economy in 2022 

While addressing the Davos Agenda in January 2022, Chinese President Xi Jinping said:

“Shifts in the domestic and international economic environment have brought tremendous pressure”

In a press conference in March 2022, the Chinese Premier while highlighting the possible challenges cut the country’s growth target from 6 percent to 5.5%. 

He also said:

‘The world economic recovery lacks drive, and commodity prices remain high and are prone to fluctuation. All of this is making our external environment increasingly volatile, grave and uncertain’

The Ukrainian crisis and the recent lockdown imposed to control the spread of the covid 19 pandemic will further exacerbate the country’s challenges. In the beginning of March 2022, 14 provinces accounting for over 50% of the country’s GDP (54.4%) had high or medium risk regions according to estimates.

Impact of lockdowns 

 Lockdowns imposed in the month of March could cost the country over 3% of GDP (or $46 billion a month). Restrictions imposed in Shanghai and Shenzhen are particularly important.  While Shanghai contributes 3.8% to China’s GDP, and imposition of the lockdown may reduce upto 0.4% of the GDP in the first and second quarter. If one were to look at the case of Shenzhen, it accounts for a little less than 3% (2.7%) of China’s GDP. Shenzhen is also home to the headquarters of tech giants like Tencent Holdings Ltd., Huawei Technologies Co. and Foxconn apart from financial companies like China Merchants Bank Co. The SME sector of Shenzhen has already got impacted by the lockdown.

As a result of the lockdowns, the official manufacturing Purchasing Managers’ Index (PMI) fell to 49.5 from 50.2 in February, the National Bureau of Statistics (NBS) said, while the non-manufacturing PMI eased to 48.4 from 51.6 in February.

With an eye on the markets and by sending out the signal that the government is keen to address the economic slowdown, Vice Premier Liu He  in March 2022 had said that China will come up with policies which support capital markets and provide a boost to the economy as a whole.

 Impact of the slowdown on China’s foreign policy

China’s foreign policy can not be delinked from the economic challenges at home. As a result of the current geopolitical situation, it needs to make some tough choices. 

 In the case of the Ukraine crisis, European Union (EU) which has close economic relations with China has been trying to get Russia to shed its neutral stance on the Ukraine crisis. A recent example of this is the China-EU Summit

 If one were to examine China-EU economic relations, China-EU Trade in 2021 was estimated at $ 828.1 billion (27% more than the previous year). China and the EU had also signed a trade deal in 2020, which the EU shelved due to Human Rights issues.

 Beijing has been critical of the West and North Atlantic Treaty Organisation (NATO) expansion; it has repeatedly called for a diplomatic resolution of the crisis. During a conversation in March 2022, with US President Joe Biden, Chinese President Xi Jinping reiterated the need for the Ukrainian crisis to be solved through dialogue and negotiation, though he also highlighted the need for the West to address Russia’s security concerns.

Chinese Foreign Minister Wang Yi’s South Asia visit had a strong geopolitical component. During his visit to Afghanistan, the Chinese FM spoke about extending the China Pakistan Economic Corridor CPEC. Wang Yi also met with Foreign ministers of Pakistan and Afghanistan on the sidelines of a Summit held in China on March 30-31,2022. During the meeting, involving Afghanistan in regional connectivity – specifically China Pakistan Economic Corridor (CPEC) was discussed. 

Many analysts believe that Wang Yi’s visit to India, the first by a senior Chinese official after the Ladakh standoff, also sought to revive economic linkages. During his visit, he made the point that it was important for both not to treat each other as threats. India’s External Minister S Jaishankar made the point that until there is a complete pull out by China, from the Ladakh sector and de-escalation along the Line of Actual Control (LAC) it would be tough to get the relationship back to normal.

Trade between India and China, for the year 2021, was estimated at 97.5 billion USD (up a whopping 46% from 66 billion in 2020) and after a thaw last year, the government had cleared a number of investment proposals from companies, in the manufacturing sector including the Great Wall Motor and SAIC motor corp.

While Xi Jinping may have initiated certain economic policies with the aim of reducing disparities, unforeseen disruptions such as those caused by covid19 have proven to be a serious blow to the economy. The Chinese President needs to get the economy back on the rails given that the 20th National Party Congress, where Xi will seek a third term. A number of retired leaders have begun to criticise Xi’s extreme left tilt and it remains to be seen if he makes a course correction. 

In conclusion, Beijing’s foreign policy can  not be delinked from its economic interests. Given the slow down there will be a course correction not just in its economic policy, but foreign policy as well and Beijing may seek to reduce tensions with countries.

Tridivesh Singh Maini is Assistant Professor, Jindal School of International Affairs, OP Jindal Global University, Sonepat, Haryana.

Image credits – CNN

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