The People’s Republic of China has, since 1949, had three transformational leaders: Mao Zedong, Deng Xiaoping and now Xi Jinping. All three threw into the waste basket the agreements and protocols agreed upon till then and negotiated their own versions for adoption, whenever they regarded doing so as advantageous to China. Mao charted an entirely new course in domestic and foreign policy, as did Deng.
The latter had the advantage of the Chinese Communist Party (CCP) leadership rungs all but destroyed by the Great Proletarian Cultural Revolution of the 1960s. He was, therefore, enabled to slice through the opposition of the ideologues to his plans at bringing China into the front rank of the world’s economies when at the time it was lagging behind India, a country that saw a much lower growth rate during the 1950s to the 1970s than even Pakistan.
When Xi Jinping took over from Hu Jintao in 2012, the rest of the party leadership was strong to a degree that it had not been during the period in office of the growth-focused Jiang Zemin and the first term of the softer hand of Hu Jintao. Xi moved carefully but steadily in consolidating his control over the entire machinery of the CCP. The war that he unleashed on corrupt officials proved effective in getting rid of several within the various rungs of the party machine who had been less than enthusiastic about the new boss in town. Although reports continue to surface, especially outside China, about fissures and cabals designed to weaken the now limitless-termed General Secretary of the CCP, the reality remains that by 2017, Xi had achieved mastery over even the People’s Liberation Army, an important—indeed vital—component of the Party.
It was perhaps not entirely coincidental that this was the year when President Donald J. Trump launched a trade war on the PRC, given that Xi had from the start of his tenure not been reticent about his intention to make China once again the fulcrum of global commerce, security and geopolitics. The Belt & Road Initiative (BRI) he launched in 2013 is nothing less than an attempt at re-ordering supply and transport chains in Eurasia such that Beijing becomes the hub. There may be some less than optimal (for Chinese interests) features of the BRI, such as the China-Pakistan Economic Corridor, which sacrifices the long-term interests of the PRC at the altar of the narrower objectives of the PLA, which have since 1959 remained almost entirely India-phobic where South Asia is concerned.
Apart from seeking to convert the PRC into the central logistics trade and transport hub of the globe, Xi Jinping also began a process of increasing gold stocks as well as silently moving towards a digitalised currency. This has largely happened among many sections of society and in multiple locations, with many hundreds of millions of citizens not having to see or exchange paper currency in their transactions. At the same time, potentially disruptive measures such as demonetisation, which could impact the reputation and stability of the currency, were avoided by the PRC, as it has been by the US.
While conservative minds anchored in the past (the name of the former CCP General Secretary Hua Guo-feng comes to mind) initially prevailed within the CCP and sought to avoid crypto currency and digitalisation, by now such voices have been stilled by the technocratic Xi, and China has become the first large economy to go in for Blockchain as the back end of its money supply and banking.
This would increase global trust in the Chinese currency Renminbi (RMB) in a situation where President Xi appears to be of the view that it is only a matter of time before the US dollar gets massively reset, and falls by 40% or more as a consequence. China is already at work switching from US dollar to RMB in as many trade transactions as possible, for example in oil purchases from Russia and Iran, and reportedly soon with Saudi Arabia. Switching from USD to RMB could save nearly 1 trillion USD for China in a situation where there is already a shortage of that currency in its coffers. First the petrodollar link and then the global reserve currency status of the US dollar seem from his moves to be prime objectives of the most consequential Chinese leader since Mao and Deng.
The Dollar Crisis
The problem facing the CCP is that the United States under Donald J. Trump (despite the cooing noises that he often makes in the direction of Xi) has itself gone into a state of currency and other economic war with China since 2017. In the past, sanctions and other measures constricted the economy of the USSR to such a level that the country imploded in 1992. The expectation within China hawks in Washington is that similar pressure would create a like situation within the PRC. Economic stasis would end up in popular unrest replacing CCP rule with that of a more benign regime that would no longer be a threat to US global pre-eminence.
Among the measures likely to be taken by the US to reduce the flow of dollars to China is the likely withdrawal of the privileges that Hong Kong is enjoying, once the HK security bill becomes law in the former British colony. More than 70% of the PRC’s US dollar supply comes from the Hong Kong window, and the shutting of that will worsen Beijing’s USD shortage considerably. Next to follow could be the sanctioning of PRC banks, including those in Hong Kong. This would further restrict dollar access. Steps already taken include the banning of pension funds investing in Chinese assets, a move likely to be followed by Canada and soon afterwards by other countries that are now very “soft” on China such as Germany, and even more so Italy.
The assumption that a President Joe Biden would be soft on China seems unrealistic. Acceptance of the postulate that China must not be allowed to elbow out the US as the lead technological and economic power has been mainstreamed within the policy community, whether Red or Blue. On whether the Chinese economy will collapse first or the US dollar head for a painful reset hinges a primary effect of the China-US struggle, which has over the past three years especially become an existential matter for both countries. Financial, manufacturing and service chains from countries across the world are de-linking from the PRC if dependent on the US, a trend that will only intensify in coming years. Separating from Chinese supply chains that have long generated huge returns for US and other corporations is a hard ask, but is becoming necessary under expanding security protocols.
Even Chinese students in US universities are coming under the radar, while across the board, the FBI and other elements of the robust Homeland Security system in the US are checking on transfer of intellectual property to China by visitors to either country from the other. Taiwan is on the way towards a complete reset of the “China Embrace” that was a mark of the earlier KMT period. Under President Tsai Ing-wen, Taiwan has from the start of her term been distancing itself from China. This policy has led to Taiwan escaping the fate of Italy, where linkages with the PRC have grown substantially during the past 15 years. Being tied to both the US and the PRC is becoming untenable, as a worried Australia is finding out. That country, unlike Italy or Germany, seems to have read the tea leaves and has begun the process of de-coupling from China. In contrast, India is still in the “non-aligned” box, maintaining a welter of conflicting relationships.
This may change after the Galwan massacre of Indian troops by PLA forces. Galwan has changed the public mood towards China in India in a manner that has been seen elsewhere as a consequence of the novel coronavirus pandemic. This change in public opinion has made it easier to overcome the objections and obstacles placed on a steady US or Japan-style de-coupling from China, including in telecom. Interestingly, while India overwhelmingly depends on Russia for defence, it does so in telecom for China, the same two countries which are close allies of each other. The Lutyens Zone and its not small number of holdovers inside the government are still loath to admit that Russia is now China’s closest security partner. The future of Russia under the brilliant strategist Vladimir Putin is firmly tied to that of a China led by the transformational Xi Jinping. Sino-Russian links are multiplying at speed, although the Lutyens Zone pretends otherwise.
The US-China trade war has sharply affected Chinese jobs and incomes in a situation where consumer prices are already high in the PRC and rising. The steady de-coupling of the US, Japan and other countries from China has led to price instability and job losses in the world’s second-largest economy. This has created a steep fall in factory prices. Given their narrow focus on personal profit with minimum effort, several businesspersons in India (assisted by accomplices within the bureaucracy, who take aim at competitors through misuse of regulations), India has become a reliable dumping ground for a miscellany of Chinese products, most crucially in technologies such as mobile telephony.
In a way, consumers in India have been subsidising both the Pakistan army as well as the PLA through the steadily rising trade deficit with China. Apart from the worries created by trade frictions, the Chinese economy is also being battered by the shrinking of demand for its products caused by the global economic collapse that is a consequence of the Great Lockdown Strategy of the WHO in fighting the novel coronavirus that spread in an uncontrolled manner from Wuhan as a consequence of the WHO’s failure to recommend the snapping of contact between affected locations and the rest of the world in time. Lowering economic growth in China is central to the strategy of those looking at ensuring a USSR-style meltdown in the PRC.
Massacre At Galwan
General Secretary Xi has understood the centrality of Artificial Intelligence (AI) in winning the war against the US, and has devoted considerable resources towards ensuring an edge in such technologies. At present, China is still ahead of the US in this crucial battleground, thanks to global champions such as Huawei, Tencent, Alibaba and others. India is as dependent on China in its telecom sector as the defence sector is dependent on Russia. In particular, Huawei and ZTE have a monopoly over the back end of mobile networks, while Chinese brands dominate the cellphone instrument market.
Chinese internet offerings generate vast amounts of meta data from India that go to feed its relentless drive to secure a comfortable lead over the US in Artificial Intelligence. Should networks in India begin a de-coupling of the Indian telecom sector from the PRC and its entities, that would be a very heavy cost to the latter, and would be another result of the manner in which the PLA has been following the GHQ Rawalpindi playbook on Kashmir. As indeed its approach to the entire border situation with India.
Despite multiple bilateral meetings between Prime Minister Narendra Modi and President Xi Jinping, there has not been any progress in Sino-Indian border talks even as the PLA moves further and further into the LAC since 2013. The May 2020 intrusions are only the latest in this saga, but the difference is that this time around, it is unlikely that the Lutyens Zone will any longer succeed in preventing the government from acting in a manner that recognises the fact that the Sino-Russian alliance is diverging from Indian security interests in a manner that makes it imperative for India to abandon the Lutyens Zone policy of playing the ostrich while the two superpowers—China and the US—battle to the finish the way that the US and the USSR did in the past.
Once India follows the military logic of the situation on the border and chooses its side rather than swing here and there, the odds that China will prevail over the US in the ongoing contest between the two sides will lessen considerably. In past wars, operations that at the time seemed of small consequence changed the final result.
The Galwan incident may prove to be a similar watershed moment in the existential battle between Beijing and Washington should India abandon its longstanding policy of neutrality, in large part out of consideration for Moscow, which is now firmly on the PRC side. The fierce courage of Indian soldiers at Galwan may ensure that the PRC’s many encroachments in other theatres may no longer go uncontested, the way its steady encroachment into the LAC has till recently been. In the South China Sea and in other locations, the possibility of kinetic conflict within a fairly short time span can no longer be ruled out.
What took place on land at Galwan may happen again, this time on the China Seas or in the air over the Taiwan straits. India sitting out rather than participating in such a confrontation between the Sino-Russian alliance and countries such as Japan, Australia, France and the UK is no longer as certain as was the case before 15 June 2020.
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