by Madhav Nalapat

Those prophesying imminent doom for the PRC base much of this forecast on an expected meltdown of the Chinese financial system. They point to debt exceeding 320% of GDP this year. The reality is that the finances of the PRC remain viable as long as the CCP itself is viable, given that the communist state directly or in effect owns the entire territory it administers as the Peoples Republic of China.

New Delhi: The ongoing currency war between China and the United States has become impossible for those rejecting the coming into force of a new Cold War to ignore. The increasingly overt expression in the US of a conflict of fundamental interests between Washington and Beijing comes despite efforts by multiple interests wary of their wealth and incomes getting reduced as a consequence of the steps that need to follow such an acknowledgment. President Donald Trump’s trade war with China (begun in 2017) was the first macro-indication that reality had penetrated a US establishment prone to accepting as gospel its self-created myths and postulates. The Sino-US Trade War was in 2017 merely an acknowledgement of the reality that the two superpowers are engaged in a comprehensive global contest every bit as consequential as that which took place between the USSR and the US from the time the Korean War began in 1950. In such a context, given the force multiplier impact on US global power of the US dollar (USD) being the reserve currency of the world, it was inevitable that strategic planners advising the higher rungs of the Chinese Communist Party (CCP) would turn their sights on displacing the world’s premier currency. General Secretary Xi Jinping cannot be accused of a lack of transparency. From the start of his takeover of the CCP in 2012, the leader of the world’s other superpower has not hidden his resolve to replace Washington with Beijing as the centre of gravity of global commerce and strategy. Displacing the USD has been a priority. Xi’s brainchild, the Belt & Road Initiative (BRI) has served as a vehicle for making the PRC by far the largest creditor nation in the world, with outstanding debt claims on the rest of the world having risen from $874 billion in 2004 to $5.4 trillion by 2019, the year before the Covid-19 pandemic and the adoption of WHO-mandated countermeasures had an unprecedented (in peacetime) impact on the economies of the NATO member states, India and Japan. These actual and potential competitors of the PRC are each in a much more precarious condition in terms of their economies vis-a-vis China than was the case a year ago. BRI projects have extended to 109 countries out of the 193 members of the United Nations General Assembly, and are estimated to have generated $715 billion in construction contracts for Chinese companies thus far. While some of the money has gone into sinkholes such as the China-Pakistan Economic Corridor (the impetus for which seems to have been based on sentiment rather than logic), much of the rest has ensured (a) sharp upward movement of the geopolitical influence of the PRC, (b) most likely permanent additions to the Chinese diaspora across Eurasia, and (c) increased reliance on China as the primary driver of local economies, displacing the US and any other country. While the overwhelming share of the investment by the PRC in BRI projects is denominated in RMB at the source of materiel, services and labour used, they have mostly been denominated in USD terms where repayment of loans are concerned. Given the scale of investment and the commercial terms on which financial accommodation has been made, defaults are inevitable, and many have resulted in a transfer of ownership of assets to PRC-controlled entities in key locations across the world.

PRC VIABILITY DEPENDENT ON CCP

Those prophesying imminent doom for the PRC base much of this forecast on an expected meltdown of the Chinese financial system. They point to debt exceeding 320% of GDP this year. The reality is that the finances of the PRC remain viable as long as the CCP itself is viable, given that the communist state directly or in effect owns the entire territory it administers as the Peoples Republic of China. There is no difference between government and country in China in the way there is in other countries. The party is the government, which is the country. Hence the emphasis by Xi on continuance of the system of governance instituted by Mao Zedong. This was refined by Deng Xiaoping and further developed by the third foundational head of the country, current CCP General Secretary Xi Jinping. Given the entrepreneurial spirits that are present in ethnic Chinese, the private sector will need to play an increasing role in further transforming the PRC economy. Xi understands this. However, the General Secretary of the CCP is in the process of replacing what may be termed “Globaliser Capitalists” among its citizens with what may be termed as a cadre of “Patriotic Capitalists”. Or in other words, replacing the Jiang-era globalist tycoons with a new cadre of nationalist capitalist trailblazers who not merely accept in their operations but believe in the objective of the CCP core. Similarly, the Chinese diaspora across the world is expected to facilitate this transformation of the international order rather than merely be indifferent or worse, assist the US and its allies to overcome the PRC challenge. In Xi Thought, it is the duty of all Chinese (no matter where they live or what they do) to push forward the attempted repositioning of Beijing as the geopolitical nerve centre of the globe. Younger Soviets lost faith in the CPSU and the USSR itself. In contrast, the young in China are becoming less “globalist” and more “nationalist”, and more visibly and volubly in the Xi era, are identifying the CCP-controlled governance system in China as the vehicle that will carry China to the peak of the global pyramid. Not surprisingly, the CCP higher cadres believe that continued dominance by the party is an essential condition for achieving this goal. Backers of the General Secretary are clear that Xi’s continuance in office is necessary for the overriding objective of global primacy to be achieved. Those elsewhere who believe in the possibility of another Gorbachev emerging to take over the CCP, or a morphing of the CCP’s Mao-Deng-Xi Thought into the doctrines inspired by Sidney Webb (which were adopted together with a mix of Soviet economic praxis by Nehru), can dream on and many still do. It remains to be seen how significant the influence of such “dreamers” is within the incoming Biden administration that will soon preside over the world’s leading superpower. More than a few, judging by past (and some present) writings and commentaries.

From the viewpoint of those within the CCP leadership who are forecasting (and working towards) a reset of the US dollar to a much lower level than presently, the present “dollar shortage” in China is not the setback it has been made out to be by conventional thinkers. They claim that in fact, policies are being calibrated so as to ensure that Beijing is in an advantageous position when the anticipated reset of the dollar takes place. In their view, this could happen even during the first term of the 46th President of the US, Joseph R. Biden Jr. Those managing the financial system in the PRC believe that despite recent headwinds, they have expanded the supply of USD available to them through (1) selling assets that are denominated in RMB but for which payment is asked for in dollars, (2) pledging of US assets such as Treasury bonds in exchange for dollar loans, and (3) currency swaps with Eurodollar banks that have the effect of adding to dollar stocks not created by the US Federal Reserve but by foreign banks. Proof of the efficacy of such methods is the stability of the extent of foreign reserves reported by Beijing. This is despite the effect of Covid-19 as well as the ongoing trade war with the US, not to mention the global economic slowdown caused by several countries following to the letter and beyond the growth-killing measures for handling the pandemic that have been mandated by the WHO and “fellow traveller” institutions in the US, Europe and Asia. These have made wholly inaccurate estimates of casualties in previous pandemics, yet their thus far wildly inflated claims of Covid-19 fatalities is still being taken as gospel by governments in framing policies that will set back growth in much of the world for years. To augment its dollar stock, Beijing is taking advantage of the US Federal Reserve Board’s system of Quantitative Easing to infinity (which is completely the opposite of RBI policy for India, which more accurately resembles that of the Federal Reserve in the 1930s). Where the frequently mentioned “dollar shortage” in China is concerned, added to the mix of palliatives is the present Federal Reserve policy of interest rates that are almost zero, together with the Chinese side taking advantage of multiple Eurodollar sources to increase the supply of USD available to them in their activities.

Presently, the BRI mechanism devised by the experts surrounding Xi Jinping have no problem with individual debt defaults, partly caused by (what they expect to be a temporary) rise in the value of the dollar. Once the commercial terms that are enforced for BRI projects in numerous countries gets enforced, PRC-controlled entities move in to take control of collateral-assets that are of value not merely in financial but in strategic terms. The more such assets that get owned by PRC entities in place of dollars, once the USD moves into the Reset Zone and rapidly begins losing value, the “dollar starved” PRC financial system would reap a windfall. The 1971 system of international exchange that institutionalised the dollar as its keystone is already showing strain, and more and more countries are looking to exchange USD for other currencies or assets. The windfall created for China by BRI defaults would be similar to those in India who give loans against pledging of gold by individuals in a market where the price of the precious metal moves in an upward direction. The more defaults take place of such loans, the more (higher and higher value) gold becomes the property of the lender. The only fear is the “Nuclear Option”. This is that a significant group of debtor nations will (under the presumably covert prodding and protection of the US) go in for what may be termed a synchronized quasi-sovereign debt rescheduling of BRI loans. This would involve governments in countries where a coordinated series of defaults take place, passing protective and enabling laws and regulations. These would protect commercial and other entities which join such a serial debt rescheduling under protection of sovereign governments acting informally in concert with Great Power backing. Under such a plan, countries having a high debt load to China would decide to legislate measures that give domestic entities the right to repay BRI loans that are due after an extended grace period of 15 years. Payments would be staggered across 15 more years. This would result in loans that are due prior to such rescheduling getting repaid by 2049, a year that represents a significant milestone for the Peoples Republic of China. The interest rate on the BRI loans repaid would be that mandated by the US Federal Reserve Board for itself, which is close to zero. Authorities in Beijing would have the option of either accepting the new conditions for repayment and continuing with projects in accordance with the changes, or breaking off relations in whole or in part with the countries (or entities) that adopt the 15:15 repayment rule rather than make payments as per the schedule agreed on in existing BRI contracts. Withdrawal would immediately deprive the PRC of the use of the hard assets created under the BRI, while even if Beijing decides to continue with BRI activities, such a plan would keep a country’s assets outside Chinese ownership. The BRI as presently operated has had a beneficial effect on the Chinese economy, including in protecting jobs for millions of citizens of China. A chain lengthening and easing of the BRI loan repayment schedule if followed by a PRC withdrawal from countries going in for the rescheduling option could lead to deflation in the PRC and a consequent weakening of the RMB. This would happen just when the Chinese leadership is calling for an expansion of domestic consumption to make up for likely declines in export revenue caused by the ravages of repeated WHO-mandated lockdowns on key economies.

AFFECTING CONFIDENCE IN THE PRC ECONOMY

Global primacy hinges significantly on confidence in the currency of the country seeking it. Synchronized action on debt to China of multiple countries that have accumulated as a consequence of loans given under the BRI carries the potential to severely reduce confidence in the Chinese economy and therefore system of governance. Confidence both internally and externally in the economy and in the CCP governance structure is essential for monetary stability and a strengthening geopolitical footprint. From a policy of often unstated but effective offensives across diverse fronts against geopolitical rivals, the PRC would be thrown into a defensive mode. Continuing emphasis on the Indo-Pacific strategy and increasing coordination between by the US and India is already causing concern in Beijing. This would increase should the incoming US President build on rather than reduce the levels of trust and cooperation that has developed between Delhi and Washington during the final two years of the Obama administration and the four years of the Trump White House. Both the Obama and Trump administrations have done much heavy lifting to take forward the US-India partnership. Whimsical decisions of the 45th US President such as denying a fair pension to former FBI Deputy Director Andrew McCabe, dropping Mark Esper or pushing the Kurds under the bus, all this and more gives a perhaps not wholly deserved impression of vindictiveness and instability on the part of the world’s greatest showman since P.T. Barnum. Should Secretary of State-designate Antony Blinken succeed in getting major players in the EU as well as the UK on board with the adoption of synchronized debt rescheduling of BRI projects by several countries acting in sequence and in concert, that would be a heavy blow to the PRC. Such a move may reverse the strategic gains made by the BRI, which may turn into a millstone around the neck of the Chinese economy rather than an economic and strategic plus. Thus far, the thinking (and not just in Beijing) is that Joe Biden, who as Vice-President opposed the taking out of Osama Bin Laden, will not be the US President who can carry out a strategy of coordinated rescheduling by select countries of BRI debt through use of the power. Some who know the chosen 46th President of the US differ and say that he will take hard decisions should they be deemed necessary to safeguard the global primacy of the US that was established after the war between the Allies and the Axis in the previous century. Meanwhile, the race for primacy between Washington and Beijing continues, with the many aftershocks generated by the Covid-19 pandemic serving to bring closer rather than push further away Beijing’s timetable for occupying the summit of global leadership in place of Washington.