China's Communists celebrating party's 100th birthday may be sitting on a ticking time bomb

New Delhi, July 1: As the Chinese Communist Party (CCP) celebrates its 100th birthday today, pundits say that the much-hyped China model of growth, which steered the country into becoming the second largest economy in the world, needs to be re-booted. Besides, the outbreak of the Covid 19 pandemic has spotlighted China, which has become the world's largest creditor.

Foreign policy watchers told India Narrative that the social and economic cracks are now beginning to surface.

Starting from gross human rights violations in Xinjiang to the murky and opaque lending pattern that the country adopted to fuel President Xi Jinping's dream project, the multi-trillion Belt and Road Initiative (BRI), Beijing's social cohesion and financial health have come under the scanner. China's international loans now amount to over 5 per cent of the global GDP, not so rosy statistics.

A few months ago, Spanish economist Daniel Lacalle in his blog, said that China's is a "planned GDP" and that the growth is not demand driven but is pushed by a tactfully expanded government expenditure.

Since China made investments easy, foreign companies rushed in, especially as the country offered low cost and abundant labour. "It was all good and China escaped any stringent scrutiny till the Covid 19 virus controversy hit. Tables turned for Beijing after that," a foreign policy analyst said.

DK Srivastava, EY India's chief policy adviser said that China will find it difficult to sustain the growth rate that it has been witnessing so far since the reform process kicked in. "Sustaining that kind of growth will be difficult as several bottlenecks have come up. Already it has witnessed wages going up and on top of that the BRI is becoming a cause for concern as returns on investments are uncertain," Srivastava told India Narrative.

Opaque lending pattern

China has carefully window-dressed its lending pattern. Most of it has been undertaken by local governments and state owned enterprises, which technically categorise as non-government borrowing. "Therefore, it has escaped any major scrutiny until now but when considering the total liabilities, one would find it to be about 300 per cent," Srivastava said.

"While China's lending traditionally comes from the major state-controlled banks, there has been a gradual shift towards less transparent alternative lending sources that can produce high-risk loans and contribute to China's debt woes. This lending is at times done through smaller local and provincial banks that sell lightly regulated investments," wrote ChinaPower.

Ageing population hitting labour market

Along with that China has been hit by a greying population leading to labour shortages amid apprehensions that consumption will eventually slow down. According to Moody's Investor Service report, the country's one child policy, while it succeeded in curbing population growth, it also led to coerced sterilisations and sex-selective abortions that exacerbated a gender imbalance as many parents preferred male children.

The census, released on 11 May, showed that the population grew at its slowest rate during the last decade since the 1950s, to 1.41 billion, fuelling concerns that China would grow old before it gets wealthy as well as criticism that it had waited too long to address declining births. The census may have prompted the latest change, recording 12 million births in 2020, the lowest since 1961.

China's rise since reforms introduced

Touted as the factory of the world, China became the favourite investment destination. In 1984, German carmaker Volkswagen set up its first Chinese factory in Shanghai. With low cost and abundant labour, flexible environmental norms and land, foreign investments poured into the country. Exports boomed and jobs were created.

The economic reform process was kicked off in 1978 under the leadership of Deng Xiaoping, when for the first time, the dragon opened up the economy to the private sector, which until then was almost non- existent. Subsequently, in 1979, in a major policy decision, the CCP introduced the controversial one-child policy to ensure that population growth did not become a burden on the country, which prioritised economic growth and food supply.

The World Bank in a report said that since China began to open up its economy, GDP growth has averaged almost 10 per cent a year, lifting more than 800 million people out of poverty.

But in the last one decade—since the global meltdown in 2008-09, the economy has been primarily debt-dependent. Things worsened as the Covid 19 crisis hit the world which resulted in a 360 degree shift in the geopolitical contours.

More and more companies, as they prepare for the post Covid phase, are now looking at de-risking their supply chain network and shifting their manufacturing facilities outside China.

Uncertainty ahead

With more and more Chinese people getting educated, under-employment has become a new challenge. This year, about 14 million young Chinese graduating from schools and colleges will be added to the work force.

"This is a challenge for China to create so many jobs. The educated Chinese millennials refuse to take up blue collar jobs, which are low paying. These youngsters are ‘lying flat'. They do not want to get married to invest in homes," BR Deepak, expert on China and Professor at Jawaharlal Nehru University (JNU) said.

In the reform years, China encouraged its own private sector to bloom.

In fact, the private sector accounted for 80 per cent of the urban jobs. "That space is getting more and more constricted as the CCP goes after successful tech companies including the homegrown Alibaba," another analyst said.

Besides, China's new three-child policy—an attempt to encourage couples to have more children—is unlikely to have any result.

Deepak added that people are used to having one child. On top of that, the cost of living has increased, which acts as a disincentive for Chinese couples to opt for more than one child.

EY's Srivastava also said that as several countries fall in China's debt trap, Beijing will not go unscathed either. "After all, huge investments have been made, if there is no return, it will create a mammoth problem for China in the coming years," he said.

Clearly, despite the lavish centenary celebrations grabbing headlines, many China watchers fear that hubristic Beijing may be sitting on a time-bomb, which could explode with enormous force, unless the entire economy is urgently rebooted.

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