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Is China Winning The Economic Competition? It's Complicated, But Yes


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At first glance, China's global leadership strategy looks like it's on the verge of total failure. Over-assertive "Wolf Warrior" diplomacy has pushed away potential allies, putting the country into a diplomatic hermit's cave at a time when it needs more help, not less, from other countries. The country's salami-slicing strategy of pushing further into disputed territories bit by bit so as not to invoke resistance, finally came to a breaking point in June of this year when Indian and Chinese troops engaged in unarmed brawls in the Galwan Valley.

Chinese companies are feeling the consequences of their country's diplomatic failings.  England and France have announced plans to block Huawei developments, and India has blocked 59 Chinese companies from operating within its borders.

China's bid to expand its influence is not over yet, however. If China can show its economic system to be better at weathering the downturn of the pandemic as it did with the 2008 financial crisis, China could see its global influence increase. Despite all the diplomatic setbacks, China has won some crucial victories in the economic realm. According to Market Watch's Tanner Brown, it is the only country likely to see full-year 2020 economic growth. China's trade surplus was a massive $700 billion in July. Manufacturing activity expanded in August, slightly missing expectations. According to the National Bureau of Statistics of China, China's unemployment rate was 5.7 percent in July, down from the year's high of 6.2 percent in February. By comparison, the U.S. unemployment rate was 10.2 percent in July. China's economic measurements are not perfect, but as Tom Orlik writes in Foreign Policy, they are not fabricated. And although most countries are turning away from China, the middle kingdom has at least one new partner; Iran. According to a leaked document, China and Iran are entering a 25-year strategic partnership. For Iran, the agreement ensures the sale of its oil and gas to China, and it places Iran in a better bargaining position with the west. For China, the pact ensures the country's energy security (and Iran agrees to sell the gas at a discounted price!) and paves the way for China to play a larger role in the Middle East through its Belt and Road Initiative. In 2016, India and Iran signed an agreement to build a railway that would link Iran's Chabahar Port to Zahedan, and link India to Afghanistan and Central Asia. Iran accused India of delaying an investment under U.S. pressure and dropped it from the project, allowing Chinese developments to take its place. According to Alam Saleh, and Zakiyeh Yazdanshenas, China now has the chance to connect Chabahar Port to Gwadar in Pakistan, a crucial hub in the Belt and Road Initiative. However, some analysts argue that new development projects in Iran will actually overshadow the Gwadar port in Pakistan. Adnan Aamir writes in Nikkei Asian Review.

"Although the document does not specifically mention the Belt and Road Initiative, the proposed agreement fits the framework of Xi's ambitious project, envisioning that China will help Iran develop the coast near the mouth of Strait of Hormuz, through which much of the world's oil exports pass. Once the port at Jask is operational, Pakistan's port of Gwadar on the Arabian Sea will lose its unique strategic value to China, according to experts."

How is China doing so well with the pandemic? For one thing, its state capitalist model allows it to have better control over where it's money goes. China's decision to provide funds for both multinational companies and domestic ones was intentional, unlike the fact that millions of dollars from the U.S. Payment Protection program went to Chinese owned companies.  China's banks are on the forefront of the effort to save the economy. Whereas in the U.S, The Federal Reserve has to buy treasury bonds to affect lending behavior, China is able to directly command it's banks to take losses in order to support the economy. According to CNBC's Yen Nee Lee, the five largest Chinese banks posted at least 10% year-on-year declines in profit for the first half of 2020

“The banks have been asked to ... perform ‘national service.’ They’ve been asked to support the economy at the expense of their own operational strength,” Jason Tan, research analyst at CreditSights, told CNBC’s “Squawk Box Asia” on Monday.

Another factor is that social cohesion in China is at a much higher level than that in the U.S. When China asked citizens to take up street vending as a temporary unemployment measure, many of them complied. The fact that the Chinese government asked it's citizens to become street vendors casts some doubt on its official unemployment number, yet it shows that China's citizens are willing to work together with their government to bear the tough times. In the U.S. by contrast, trust in institutions has fallen and beliefs about the impact of the pandemic differ along partisan lines.

The pandemic also raises concerns that countries that took loans from China may fall into a "debt trap", something which may be good for Chinese companies and the Chinese economy, but bad for other countries. China is known to seize assets when loans cannot be repaid. A John Hopkins University study that tracked more than a thousand Chinese loans found that between 2000 and 2018, Chinese loans to 49 African governments and state-owned companies were worth $152 billion. In 2018, an estimated $64 billion was still owed to China. Based on falling commodity prices and decreases in trade, the IMF forecast that the economies of Sub-Saharan African countries will shrink by 3.2 percent this year, a fact that could make it harder for countries in debt to China, to pay back. As Adriana Stones and Yigal Chazan point out in Geopolitical Monitor, the vast majority of Chinese loans will not be suspended as part of debt re-servicing.

They write,

"In June, President Xi told African leaders that he would write off interest-free loans due this year, but these are said to account for less than 5 per cent of Chinese lending to Africa. Worryingly for the continent – 39 of whose countries are part of the BRI programme – it seems that Beijing does not consider preferential loans to be up for negotiation.  An article in China’s state-owned Global Times said the loans are “not applicable for debt relief” due to the commercial character of the projects they finance. The article stressed, however, that repayment problems could be dealt with by several approaches, such as China adding grants to help revive projects; use of Chinese firms to assist operations, or conducting debt-for-equity swaps."

If China does conduct debt for equity swaps, then more property in countries like Djibouti and Kenya, places where China has financed important projects, could fall into the hands of Chinese companies. 

Although China is losing the diplomatic game, the country is set to come out on top economically. State capitalism, higher social cohesion, and an empire of overseas investments and loaning all work in China's favor during a time when the rest of the world is struggling.

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