Crouching Dragon: Chinese influence set to rise in post-Covid global economy

Indian curbs on Chinese FDI
China’s quest for influence over Asia has received a mixed response from countries in its traditional sphere of influence.

By Reji K. Joseph

The world will witness major changes when it reopens after the Covid-19 pandemic and the near shutdown of economic activity. China will continue to strengthen its economic, scientific and technologic capabilities which will be acknowledged by the entire world. The European economies may go into isolation to protect themselves from Chinese expansion and the transactional approach of the US under President Donald Trump.

The last decade witnessed the emergence of industrial policies antithetical to the ideology of neoliberalism due to the growing concerns over unemployment and sustainability of the development agenda. In 2018, 18 members of the EU issued a joint statement calling for the adoption of an industrial policy. This was followed by a Franco-German manifesto for a “European industrial policy fit for the 21st century” in 2019. It stated that “a strong industry is at the heart of sustainable and inclusive growth”. The US also witnessed a discussion in favour of an industrial policy. Two key officers in the Obama administration recently wrote in the Foreign Policy that, “Advocating industrial policy was once considered embarrassing -now it should be considered something close to obvious.”

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The slip-ups by advanced economies while handling the coronavirus pandemic brought the welfare state back into public policy discourse. Advanced countries that were facing rising unemployment and inequality will find Covid-19 and fear of Chinese emergence as convenient excuses for a re-think on neo-liberal economic policies. It will challenge the global economic institutions and they will struggle to remain relevant in the new world. And the new environment will be considerably influenced by China, both in positive and negative ways.

Why China will matter

Since the global financial crisis of 2008-2009, China has emerged as the most significant economy in the world in many respects. In a decade, the Chinese economy has reached $13.6 trillion, nearly two-thirds of the world’s largest economy, the US. In purchasing power parity terms, Chinese economy overtook the US in 2018, according to World Bank data. In the five years to 2019, while the highest annual GDP growth rate by any G-7 country was 2.5%, the lowest rate for China was 6%.

The recent years also witnessed China securing the top position in international trade in goods and services. China became the leading trading country in merchandise goods in 2017. During the 10 years between 2008 and 2018, China became the second largest trading country in commercial services from the seventh position. In both the cases – goods and services, imports grew faster than exports implying that it was increasingly providing market access than seeking market. In commercial services, while the increase in exports was 83% during the period, growth in imports was more than 200%. Share of exports (of goods and services) in China’s GDP declined from 33% to 20% between 2008 and 2018. This means that economic growth in China is increasingly becoming driven by domestic consumption. The growing Chinese market will continue to be significant for the economic growth of many countries.

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The world can no longer ignore the capabilities that China has achieved in the area of technology as well. Out of the 10 Covid-19 vaccines that are into human trial phase, six are from China. Vaccine developed by Cansino, a Chinese firm, is the only vaccine that is fully into phase II clinical trials. Studies have shown that rising global temperature will lead to the release of dormant bacteria and viruses trapped for hundreds and thousands of years in glaciers and permafrost. There are reports indicating that release of such microorganisms infecting animals and human beings. In the context of climate change, the world needs to gear up for the potential emergence of new infectious diseases. The situation calls for enhanced global cooperation for finding solutions and the contribution by China towards that end would be quite significant. The confidence gained by China in biopharmaceutical innovations is manifested in the fact that the proposed data exclusivity regulation of China has a 12-year period of exclusivity for biopharmaceutical innovations. This matches with the data exclusivity regulation of the US, which has the longest period of data exclusivity.

China is also set to replace the US as the largest R&D spender. The Science and Engineering Indicators 2018 report of National Science Foundation, US, shows that China’s domestic expenditure on R&D in PPP$ has exceeded that of the entire EU countries and closed in on that of the US by 2015. While the US spending was PPP$497 billion (26% of global total) China spent PPP$409 billion (21%). During the two-year period from 2013, the US spending on R&D grew at 9% while that of China at more than 20%.

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In terms of number of patents granted by patent offices in domestic countries and foreign countries to the residents, which is the most widely used outcome indicator of R&D expenditure, shows that China tops the list with 3,77,305 patents in 2018, which is 31% more than that of the US. A decade before, in 2009, China had only 43% of the number of US patents.

Given the economic and technological prowess of China, it will be difficult for countries to completely delink their economies from China. This will be so especially for many developing countries in Africa. In 2017, China was the largest trading partner and source of finance for Africa. About four-fifths of China’s outward FDI (OFDI) is destined for developing countries in Africa, Asia, and Latin America. During the first half of this decade, the OFDI stock of China in the least developed countries (LDCs) tripled to reach $31 billion, making it the largest source of FDI in LDCs.

China is likely to remain a key player in solving global problems. Nearly half of the global investment in renewable energy is taking place in China. In the recently concluded 73rd World Health Assembly, Chinese President committed that any vaccine successfully developed by China would be a global public good, implying that the intellectual property rights over it would not be a roadblock for other countries is using the vaccine. The US which is also a major player into the race for vaccines was not able to make such a commitment. Nevertheless, China will find major challenges in replacing the US as the most powerful economy of the world.

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Challenges to China’s global leadership

Although there are both internal and external factors constraining the aspirations of China, the internal factors are predominant. China is fast becoming an ageing society. The share of population below 15 years of age is steadily declining in China over the last 25 years. It has declined from 40% in 1995 to 25% in 2018. This decline is much faster than that of several advanced countries. In the case of the US, the fall in this share was from 34% to 28% during the same period. This implies that the availability of labourers will be a major issue in China in the future. Unlike the Western counties, where the political system is transparent and accountable and which are more open of different cultures, China may not be in a position to address the issue through immigration.

The opaqueness that China maintains in terms of the origin of Covid-19 virus and its resistance to global demand for an international inquiry have led to a gradual shift in the attitude of many European countries towards China. Even when the US had imposed sanctions against Huawei, before the outbreak of Covid-19, some European countries went ahead with granting contracts to this company for rolling out 5G networks. Lack of cooperation from China for an international probe and the pressure of the US have now made some countries to review their approach towards Huawei. For example, UK had resisted the pressure of the US and permitted Huawei to supply 35% of its 5G infrastructure in January this year. However, recently the National Cyber Security Centre of the UK has initiated a fresh review of Huawei which could result in more restrictions on the company.

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Another factor that has dented China’s image as a responsible and mature global power is the ruthlessness of its officials and enterprises. There seems to be a marked difference in the attitude of the Chinese after 2008-09. Kishore Mahbubani in his recent book “The Chinese Challenge to American Primacy: Has China Won?” narrates the experience of a British diplomat who said that it was only in China where he was told “what you have to remember is that you come from a weak and declining nation”. Similar is its attitude towards foreign businesses in China. The fact that the US President did not face any significant opposition from the US businesses that have invested heavily in China in the wake of his trade war with the country supports this trend.

Ruthless behaviour of Chinese enterprises to increase their stake or take control of foreign enterprises during the Covid-19 crisis has kindled anti-China feeling among many countries. Australia, Germany and India have tightened their FDI regulations to guard their enterprises from Chinese aggression during the crisis. Other countries are increasingly becoming suspicious of investments from China, even by private enterprises, as political interferences in the operation of such investments cannot be ruled out. It will be extremely difficult for China to overcome this stigma given the nature of the political system in China.
Growing suspicion over the intention of China is resulting in the formation of alternative groups of like-minded countries that will reduce reliance on China for market access, value chains, investment and technology.

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The US is pushing the establishment of Economic Prosperity Network, a network of trusted allies Australia, Japan, India, New Zealand, South Korea and Vietnam, to deepen economic ties and moving supply chains away from China. The UK is reportedly planning to form a 10-country group, called as D-10 (10 Democracies), including all the G-7 countries together with Australia, South Korea and India for the creation of alternative suppliers of 5G equipment and technologies to reduce reliance on China.
Although China has made tremendous advancements in the science and technology front, it will be very difficult to gain an edge over the US. China will not be in a position to compete with the US in terms of taking advantage of innovations in other countries through FDI and venture capital financing.

FDI markets data of Financial Times on greenfield FDI on R&D (R&D and design, development & testing) during the period between 2003 and 2018 shows that the US, as a source country, has a global share of 41% while China has only 4%, which is slightly more than India’s share of 3.3%. Similarly, out of the top 25 investors in Unicorns (in terms of number of unicorns invested) in the Hurun Global Unicorn List 2019, 15 are form US. China follows with six investors. In future, it is likely that Chinese investments in foreign technology firms and start-ups will see a decline.

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Challenges ahead for multilateral institutions

Multilateral and plurilateral institutions governing cross-border trade and investment relations is likely to face a turbulent time ahead. The growing tendency of the US to withdraw from multilateral institutions such as the WTO is creating a leadership vacuum. This will significantly influence multilateral negotiations. China, which is keen to fill this vacuum and assume the role of global champion of globalisation, is set to face a setback. Many countries were willing to accept a lead role that China could play in international economic relations. But China’s handling of the Covid-19 crisis has made them suspicious. They will increasingly endeavour to use legitimate policy measures to protect their economies from undesirable foreign competition.

Wherever, they find constraints in the use of legitimate measures, countries may resort to national security exemptions. This will, in effect, make the most favoured nation (MFN) clause in international trade and investment instruments redundant. We will have to wait and see how the multilateral institutions adapt to the new situation and continue to play a critical role in the global governance of economic relations.

(Reji K. Joseph is Associate Professor at Institute for Studies in Industrial Development, New Delhi).

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