Dual Circulation: Be it the three deadly Covid Waves or the Ukraine War, the Indian financial market has effectively dealt with all these once-in-a-century crises. At a time when stable and large economies like the US are crumbling due to stagflation, India becomes a unique case study of successful management. The nation not only manages to cater to about its 130-crore population but also sustains a GDP growth rate of 7%. Moreover, in the totally chaotic and economically collapsed world, Indian exports numbers are touching new heights daily.
On the other hand, when we look at the Chinese economy and the associated problems thereof, China looks to be at a very critical juncture. Covid Pandemic and Ukraine war have created so much chaos that investors are reluctant to invest, industrial output is negligible and economic activities are at a standstill. Still fighting to curb Covid, China is facing a huge shortfall of cash and is struggling to maintain the Dual Circulation economic model it adopted recently.
Up till Covid pandemic, China followed a ‘great international circulation’ strategy of economic growth. As prescribed by the Chinese leader Deng Xiaoping, China took a huge advantage of the export-oriented business model. Due to the cheap input cost, they made Chinese products very competitive in international market and successfully captured a huge market base. With its slave population, they lowered the labour cost and with nationalisation of public utilities, they substantially decreased the input cost of any product.
In this scenario, Chinese products became very competitive in the international market and helped them enhance their global footprint. But Covid induced lockdown and Ukraine crisis completely altered this situation. Due to the withholding of essential goods in the critical pandemic situation, other nations realised they needed to diversify their supply chains in order to counter China’s aggressive behaviour. Due to the constant international rebuttal of Chinese goods, the demand for their products significantly declined and they were forced to alter their economic strategy. But, no measure of economic revival seems to be helping the Chinese.
Dual Circulation: A Chinese version of Aatmnirbhar Bharat
Similar to the Aatmirbhar Bharat Initiative of India, China adopted a new ‘Dual Circulation’ strategy of economic development. As international demand for Chinese products fell, they decided to increase domestic production and adopted a dual circulation model.
On 14 May 2020, the Chinese Communist Party Politburo proposed to create a new development program of mutual benefit through domestic-international dual circulation. Talking on the model, Chinese President Xi Jinping said that the new economic model takes the domestic market as the mainstay while letting internal and external markets complement each other.
The dual circulation economic model is the extension of earlier great international circulation with domestic consumption. Like the Aatmnirbhar Bharat initiative, the model focuses on creating a domestic market of locally produce products and expanding the economic base. Aatmnirbhar Bharat Initiative aims to make the country and its citizens independent and self-reliant in all senses. The Chinese Dual Circulation is based on similar principles.
Considering the global shortfall in the demand of Chinese products, they want to create a domestic consumption market for the same. The idea is to create a trickle-down economy recovery from local consumption. But, like other Chinese products, XI Jinping’s Chinese version of “Aatmnirbhar Bharat” is also failing.
According to the latest report, the cost of shipping goods from China has slumped to the lowest level. As the world economy is moving towards recession, the demand for container carriers is also decreasing.
According to Drewry, the UK based global maritime research firm, a 40-foot shipping container from the world’s largest port of Shanghai to Los Angeles only cost USD 3,779. The shipping cost is significantly lower than 2 years ago as during the intense lockdown in September 2020, the spot price was below the USD 4,000.
This slowdown has been attributed to the massive reduction in Chinese exports. Reports suggest that Shanghai’s port processed 8.4% less cargo in August than the last financial year. 117 out of 744 shipping were cancelled over the next month on major trade lanes, and about 68% of those blanked voyages were scheduled to make transpacific eastbound trips. The decrease in shipping has not only been reported from mainland China but also from Taiwan. In August 2022, Taiwan reported the slowest pace of export growth in the last two financial years.
Other than reduction in shipping business, the banking system is also going through a very difficult situation in China. Considering the growing escalation of tension between China and the US over Taiwan, International financial firms are reassessing the risk of doing business in mainland China, Hong Kong, Macau, and Taiwan. As they are still dealing with the multi-billion-dollar losses in Russia, they are now fearful to invest in Greater China.
Mark Williams, a professor at Boston University, speaking about lenders’ reluctance to do business in China said, “A sanctions war would significantly increase the cost of doing business and push US banks to rethink their China strategy.”
The global financiers like Societe Generale SA, JPMorgan Chase & Co. and UBS Group AG have asked their staff to review contingency plans in the past few months to manage exposures. It is said that in case of US sanctions on China, the capital flow would be restricted and that would create a huge financial burden on lenders.
Reports suggest that US congressmen have increased pressure on banks to answer on whether they would withdraw from China in case of invasion of Taiwan. As Wall Street lender firms, from Goldman Sachs Group to Morgan Stanley, have invested heavily in China, it would be a total financial disaster in case of any armed conflict.
These financial lenders are assessing the contingency plans considering the recent loss they have suffered in Russia. Due to heavy sanctions, they were forced out of the country and attracted heavy losses. That is why international financial giants are reluctant to invest in Greater China and are withholding their plans for the near future. The lack of investment and financial exposure from these lenders would further aggravate Chinese economy. This reluctance is expected to completely bury the Chinese economy, as lending helps in multiplying the market and provide extra support to an economy in a cash crunch.
The present time is very critical for the Chinese economy. Reports suggest that the unending Covid spread and lockdown thereof have strangulated the Chinese economy. According to a report, 54.4% of the national GDP and half of the population were negatively impacted by the harsh lockdown and the latest outbreak of the Chinese Virus. The country has seen a GDP expansion of a mere 0.4% in the first quarter of 2022.
The default of EMI payments and lower property buyout have created a huge liquidity crisis in the real estate sector. Mortgages are also not making it an easy job for the developers, as home buyers have refused to pay mortgages and are organising a social boycott of EMI payments. The looming real estate sector, which accounts for 29% of China’s GDP, has brought the country to the verge of Bankruptcy.
The lockdown has stopped production, trimming away at the massive source of income for the country. In this case, the export sector, which accounts for 18% of China’s GDP, is also sliding.
As the numbers suggest, the dual circulation economic model copied from India’s Aatmnirbhar Bharat scheme seems to be failing. They are neither able to bring a surge in local demand nor increase domestic consumption. People don’t have money to spend. Industries don’t have demand for production. International markets like India have shunned Chinese products and have found alternatives in domestic markets.
Further, in the scenario, when numbers are suggesting significant downfall in shipping from China, the reduction in lending patterns would throw China 20 years behind in terms of growth. Xi Jinping’s dream to revive the glory of ancient China seems to be fading quite quickly. The imperialist behaviour towards India cost them the world’s second biggest consumer market. Aggression towards Taiwan will dry them of American dollars and China would be left floating in the international business coalition.
As like-minded countries are moving towards finding alternative groupings like Indo-Pacific Economic Framework and the Quad, China would soon be devoid of a global market. China’s economy heavily depends on exports unlike India, which can easily sustain itself with internal trade and will face limited impact in case of global overhaul. The withdrawal of international financial lenders would prove to be the final nail in the coffin of China’s economic obliteration.
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