When the Dragon Is Hurt

The joint statement from the Quad leaders issued from Washington DC on September 24th, 2021, in many ways is as significant as the formation of NATO in 1949. Like NATO, the Quad today has both economic and military components, though the military component is deliberately ambiguous, given the special economic relationships that each of the Quad partners have with China individually. Collectively, the Quad countries form a formidable bloc of countervailing economic power against China. The military devil is in the fine print. This is the second step taken by the US to isolate China. The first step was taken last year in May 2020 to deny China access to both finished high-end semiconductors as well as the machinery and technology to manufacture them.

China is hurting, and her current helmsman Xi Jinping is smarting. The events of last week have suddenly placed China and her two trusted rottweilers, Pakistan and North Korea, at the frontlines of confrontation with the Quad. The second line provides Iran as an also-ran in the Chinese camp followed by a somewhat reluctant Russia.

So, is China really ascending so rapidly to its long-cherished desire as the sole global hegemon that it has forced the US to cobble together a disparate alliance with Japan, Australia and India to confront it?

Or was the inevitability of a unipolar world dominated by a single hegemonistic China really a sophisticated confidence trick performed by generously funding hundreds of US universities, thinktanks and lobbyists to champion this big lie?

A new book by Hal Brands and Michael Beckley, Danger Zone: The Coming Conflict with China, argues that the most dangerous trajectory in world politics is a long rise followed by the prospect of a sharp decline. The data provided by DBS Bank reveal that in China today it takes three times as many inputs to produce a unit of growth as it did at the turn of this century. China’s internal resource pie has shrunk very rapidly. China’s official statistics state that her GDP growth fell from 14 per cent in 2007 to 6 per cent in 2019. Sceptics believe it is closer to 2 per cent. Even this growth is mainly from government spending. This in turn has led to the mushrooming of China’s debt to 300 per cent of GDP in 2020.

Private firms are starved of capital, which is increasingly being diverted to dodgy state enterprises. The Xi Jinping thought and the conformity it espouses is edging out innovation and Chinese jugaad from manufacturing and agriculture. Xi’s heavy-handed anti-corruption campaign has stymied entrepreneurship, and a wave of politically-driven regulations has erased more than $1 trillion from the market capitalisation of China’s leading tech firms. Ironically, all of this sounds very similar to what is happening across other BRICS countries.

To complicate matters is the Evergrande crisis. Evergrande is China’s biggest housing company. It has defaulted on its debt payments. Against its staggering debt of $300 billion, it has perceived assets of $310 billion. This equals 2 per cent of China’s GDP. Citibank’s analysis of Chinese banks’ loan exposure to high-risk developers suggests credit risk is highest for China Minsheng Banking Corp, Ping An Bank Co and China Everbright Bank Co. Intensifying the growing loss of confidence in China’s leadership amongst global investors and buyers of Chinese debt, Xi Jinping has sought to excise moral hazard from the Chinese financial system by withdrawing China’s guarantees. Home prices are likely to collapse forcing borrowers to increase their collaterals or pay higher rates. The entire property-owning urban middle class in China is facing an existential financial challenge.

From 2020 to 2050, China will lose 200 million male and female workers from its labour force as they rapidly transition to senior citizens. This will triple China’s spending on health and social security to an astounding 30 per cent of GDP from the 10 per cent figure it is today. Add to this specifically the senior citizens’ collective loss in savings from the falling home prices in the face of a collapsing housing market and tottering banks.

For reasons best known to him alone, Xi Jinping has abandoned Deng Xiaoping’s policies that rapidly brought China to the pinnacle of its current economic and political glory. By destroying collective rule and replacing it with the “Xi Jinping thought”, he has overcentralised power over prosperity.

Brands and Beckley argue that this domestic economic turmoil is set within the backdrop of an increasingly hostile external environment. The combination of Covid-19 and the aggressive terms of trade in China’s favour, and against that of the rest of the world has cemented a negative view of China in the consciousness of the global citizen. Worried about Chinese competition, many nations have erected thousands of new trade barriers on Chinese goods since 2008. More than a dozen nations have dropped out of Xi’s Belt and Road Initiative. The US has waged a highly successful global campaign against key state-favoured Chinese tech companies, namely Huawei. Xi’s regime today faces the same kind of strategic encirclement faced by Hitler and General Tojo that once precipitated World War II.

How will Xi deflect attention of the increasingly disgruntled and debt-weary Chinese citizens from his grand miscalculations? What will happen to his plan for world domination by displacing the US with his economic and strategic clout? After all, this dream of Xi’s was first dreamt around 700 BCE by the then Chinese ruling class during the Eastern Zhou Dynasty. Will that dream ever become a reality for Xi Jinping? What will his responses be to the gauntlet thrown before him by the Quad?

I will argue that Xi Jinping has no choice but to test the Quad and see if it can put its money where its mouth is. The weakest link in the Quad is India. I expect China to initiate well publicised intrusions in Arunachal Pradesh sooner rather than later. This will open up the entire Line of Actual Control (LAC), and as the Chinese expect, may lead to kneejerk reactions from India to further beef up its land defences at the expense of its maritime strength.

Secondly, Prime Minister Narendra Modi has spurned the overtures that Xi Jinping made to him over the 17 or so visits that Modi has made to China from the time he was chief minister of Gujarat. Modi’s joining the Quad is a personal slight to Xi and, therefore, he may go out of his way to hurt us.

I expect a devastating cyberattack on a key civilian target in India. This attack will have plausible deniability and will be structured to cause maximum economic disruption.

The other thing that Xi Jinping is likely to do is attack and destroy all 13 semiconductor factories of the Taiwan Semiconductor Company, which are situated in Taiwan.

Both of these situations, while short of traditional war, will still be warlike as they will seek to destroy national assets in both India and Taiwan. These actions will be designed to bait the Quad.

The prospect of war has shifted from being farfetched to possible. The Quad is the beginning of a comprehensive alliance not only to halt the Chinese bulldozer, but to starve it of oil as well. The window of peace is likely to shut if the north wind from China blows any harder. We need to protect ourselves for a roller coaster ride that is in the offing.

About The Author

Iqbal Chand Malhotra

Iqbal Malhotra is an award-winning TV producer and the author of Red Fear: The China Threat