China’s economic woes prompt shift in India border policy

INDia’s determination to not yield ground, the resilience of its armed forces and the perseverance of Indian officials, who persisted with negotiations, helped resolve the border issue with China peacefully. China’s economy was another important factor behind its recent willingness (on October 21) to agree to defuse tensions along the borders with India. It is, however, a tactical move on China’s part.

Sections of the Chinese Communist Party (CCP) leadership have been getting increasingly uncomfortable in the face of mounting international pressure and aggravated regional tensions caused by China’s aggressive foreign policy.

The leadership’s failure to check the seemingly inexorable decline of the country’s economy, along with the growing economic distress in China’s 31 provinces and the rising cost of living, has led to a widespread dissatisfaction among the Chinese people. The upper echelons of the CCP are extremely concerned about the possibility of economic distress sparking popular protests, which would open a third domestic front for them.

These developments have prompted some noticeable tactical changes in China’s foreign policy. Its leaders and the official media began highlighting China’s pivotal position in the global supply chain and asserting that it would encourage and facilitate investments by foreign financial entities and businesses.

Since last year, Beijing has also stepped up efforts to gain unfettered access to India’s large and as yet untapped market. This included mobilising Chinese diplomatic missions, business associations, pro-China lobbies and other interlocutors.

The efforts come amid the double-digit decline in China’s exports to the US and the EU and rising tension between the US and China. While China has not altered its aggressive policy towards Japan, the Philippines and Taiwan in particular, it adopted a seemingly more conciliatory tone towards the US and India. These changes are crucial for China, which is an export-dependent economy.

Implicitly acknowledging that the economy is in distress, Chinese President Xi Jinping finally approved a stimulus package. Chinese businesses and economists had been waiting since the CCP’s third plenum in July for some measures to boost the economy.

Earlier, to bolster the economy and offset the drop in exports, the CCP leadership had disregarded international trade norms and authorised over-production of items like solar panels, lithium carbonate and steel for export. Consequently, the price of lithium carbonate, for example, plummeted from above 120,000 yuan per tonne in June to below 70,000 yuan per tonne in August.

Finally, on September 24, Pan Gongsheng, Governor of the People’s Bank of China (PBoC), announced a stimulus package, which included a raft of monetary measures, property market support and capital market-strengthening measures, to boost the economy. He especially mentioned the real estate sector and said the new policy would further reduce the borrowers’ mortgage interest expenses and benefit 50 million households, or a population of 150 million.

The announcement promptly saw a rebound in the sales of cars and home appliances. The stock market registered an immediate 10 per cent rise, with the share prices of most registered companies going up.

Quite unusually, though, Chinese newspaper Economic Observer said the stimulus was inadequate, and it forecast that the share prices would crash by early 2025. It also pointed out that homebuyers in tier-1 cities like Beijing, Shanghai and Guangzhou were still saddled with high interest rates and urged that the interest rate of existing mortgage loans be lowered again. The newspaper said most of these buyers were in their 30s and 40s, starting families and raising children, and were the backbone of society and the main consumer group. Another stimulus is likely on November 8.

On September 27, a Chinese financial magazine, the Caixin Global, disclosed that China’s construction industry is reeling from defaults and financial turmoil, as delayed payments and rising bad debts cascade through the sector. Two of China’s largest real estate firms have already filed for bankruptcy. It highlighted that following the central ban on land sales, the provinces were struggling with reduced revenues and had slashed the wages of provincial government employees by at least 25 per cent and withdrawn bonuses.

The Caixin said government data revealed that more than half of China’s 31 provincial-level regions lagged in their annual fiscal revenue growth targets in the first seven months of the year, sending worrying signs about the local governments’ fiscal health. Last year, too, most provinces had failed to achieve their growth targets.

The central authorities have also taken direct remedial measures. On September 25, they announced a “one-time living allowance to extremely poor people, orphans and other needy people on the occasion of the 75th anniversary of the founding of New China.” Reuters reported that China would issue bonds to “provide a monthly allowance of about 800 yuan ($114) per child to all households with two or more children, excluding the 1st child.”

The slowing of economic growth, enforcement of stringent anti-corruption laws and political repression have additionally resulted in a drop in public confidence. The Wall Street Journal recently disclosed that nearly $254 billion might have left China illicitly till the end of June.

While the agreement as well as the recent meeting between Indian Prime Minister Narendra Modi and Chinese President Xi Jinping are signs of Beijing’s maturity, they are equally an indication that China needs to keep its southwestern border relatively quiet at this time of economic difficulty. The differences in the respective readouts and statements underscore that China’s larger agenda remains unchanged.

Till late last month, leaders of the Tibet Autonomous Region were visiting the border counties and exhorting troops to strengthen defences and residents of the ‘Xiaokang’ model border defence villages to ‘put down roots’ in the county.

The recent agreement on the border reached on the sidelines of BRICS must be viewed as tactical. The agreement holds no promise that Beijing will not revive its territorial claims.