Rise of China as Techno-Industrial Power & its impact on Global Order

The Rise of China

After the fall of the soviet union, if there has been a single epoch defining moment it has been the rise of China as Technological and Industrial power which Soviet Union never was as a challenge to America during the Cold War. The Chinese learnt the lessons that socialism with soviet characteristics will not work and that China should pursue the policy of technological and economic progress to restore its own glory of Han civilization. The Chinese foreign policy is presciently aimed at reviving the Han civilization while avenging the century of shame where the Anglo-Saxon powers humiliated the Chinese empire and imposed servility, trade terms that ruined the Qing dynasty hailing from Manchuria. The Chinese ever since Kissinger-Nixon detente with Mao forged a strategic yet opportunistic understanding aiming to align with west but with its own characteristics.

The Western lead global order embraced China with the World Bank and Wall Street funding the blue print for China’s rise. In our book “The New Global Order”(2016), we have extensively documented the same. In May 1980, China regained entry in the World Bank and moved away from the Soviet-style economic policies to a more western model of state capitalism under Deng Xiaoping. China sent various teams of economists to understand the workings of the World Bank and Western economic models to see how it could catch up to the US levels of development in the 21st century. Subsequently, in 1983, the World Bank Governor met with the Chinese President and in 1985, The World Bank Country Study Report titled “China-Economic Structure in International Perspective”, promoted a model of state capitalism in China under the Communist Party contrary to the core capitalist values of a free market promoted by it.

The World Bank also made several recommendations to China such as changing its export model to high-volume manufacturing especially for high-tech products, allowing FDI in advance technologies and joint ventures with foreign companies for SEZ’s and establishing foreign arms of state-owned enterprises (SOE’s). China’s Central Bank head Zhou Xiaochuan worked together with Peter Harrold, (a World Bank economist who worked on the 1985 report) in implementing the reforms suggested in transforming the Chinese SOE’s while dumping the idea of privatization

The partnership between World Bank and China does not end here; the current Chinese Premier Li Keqiang has also co-authored “The China 2030” report with World Bank to chart its future policies. The World Bank not only cast aside its capitalist principles to abet the rise of China, but the US, through WTO under the Clinton administration, also supported the creation of the Beijing Consensus by admitting China in the trade body in 2001, even when it failed to meet the conditions for free and fair trade.

The American enablement of China did not just end with blueprints for China’s economic transformation but also providing critical technologies to China while overlooking its human rights record, oppression at home and state controlled freedoms. The United States did not care about so called human rights in China till its rise became a threat to the American hegemony and unipolar order. A declassified document dated the 22nd September 1981 by the Reagan Administration titled “National Security Decision (Directive Number 11)” conducted a policy review of munitions supply and technology transfer to China. The document outlined that the US was willing to consider the transfer of weapons, components, technical assistance and weapons technology to help China’s conventional defence capabilities but would/should not augment China’s submarines, intelligence and nuclear technology as that presented a risk to the US.

The declassified document dated 21st April, 1984 titled National Security Decision (Directive 140) regarding The President’s visit to PRC stated as its objectives, “To promote a China that remains independent of the Soviet orbit, to encourage China’s efforts to modify and liberalize its totalitarian system, introduce incentives and market forces in its economy, and continue expanding its ties with the major industrialized democracies, to help China modernize, on the grounds that a strong, secure and stable China can be an increasing force for peace, both in Asia and in the world… to seek ways of expanding and perhaps institutionalizing regular US-Chinese consultations and coordination on issues where our interests are similar or parallel (e.g., the USSR, Korea, Afghanistan, Kampuchea)”

In 1998, General Motor’s Hughes Electronics and Loral Space and Communication were investigated by the US Justice Department over the failed US Satellite launch by China. Loral Space was accused of transferring sensitive US satellite technology to China with express Presidential permission. President Clinton denied the same and stated that he was merely continuing the legacy of his predecessor President Reagan and the deal to launch US satellites on rockets owned by other nations was correct and based on what I thought was in the national interest and supportive of our national security

Interestingly, in 1999, President Clinton further allowed the transfer of technology on satellite fuel and explosive bolts to China which would hasten up China’s development of Intercontinental Ballistic Missiles (ICBM’s). In 2003, the US State Department charged the Hughes Corporation and Boeing Satellite Systems with illegally transferring sensitive US space technology to China, which was settled by the payment of $32 million in fines. The companies stated that they express regret for not having obtained licenses that should have been obtained and acknowledge the nature and seriousness of the offenses charged by the Department of State, including the harm such offenses could cause to the security and foreign policy interests of the United States.

China knew that the US would not transfer its latest state of the art technology, and it would have to resort to other means to obtain the same. The Chinese spies stole designs of the US nuclear weapons, Predator Drones, F-35, F-22 stealth jets, etc. In 1985, Jonathan Pollard, an Israeli spy was caught supplying classified US data on critical technologies to China. In the mid-1990’s, CIA Director R James Woolsey stated that Israel had been supplying critical technologies in jet fighters, air-to-air missiles and tanks to China for over a decade worth billions of dollars416. The US allies like France and Britain have also exported arms worth over $4 billion to China till 2012.

The Military Wing under the PLA set up subsidiaries in the US; and after 1998 restrictions were imposed to obtain capital, technologies and gather intelligence by the Chinese President. A Congressional Research Service Report for the same year published a list of PLA companies doing business in the US. Prominent examples were GSD’s Poly Technologies, GPD’s Kaili Corporation, GED’s Xinshidai and GLD’s Xinxing Corporation. These companies had exported defence products, specialized technology, military vehicles, telecommunications and radar equipment, special purpose instruments and machinery, and chemical industrial machinery to China. The report stated that 20-30 PLA companies and almost 800 small PRC companies were operating in the US seeking technology and intelligence. In 1996, the FBI ended a sting operation targeting the smuggling of 2,000 fully automatic AK-47 weapons through the port of Oakland by two companies. The two PRC companies were Poly Technologies and NORINCO

China’s Techno-Industrial Progress

As we have read above the Chinese from Deng’s time in 1980s stealthily continued to build capacities, bid their time and a build a techno-economic empire which can restore the glory of the Ming dynasty of the Han civilization challenging the current Pax Americana global order. From collaborating with the world bank to stealing intellectual property from the America, China has catapulted itself into such a situation that the Americans cannot disconnect itself from China without causing significant rupture to global supply chains that would indirectly impact American economy too.

China’s Dominance in the Rare Earth’s Elements/Minerals

In our earlier piece on “Chips War: The Fight for Global Dominance” we had discussed the rise of China’s tech power and how critical rare earth minerals and lithographic technology played an important role in this tug of war between China & USA. To quote some paras of the same as follows:

“Out of the 35 critical minerals and metals as identified by the US geological survey, China ranked as the number one producer of 16 elements with a monopoly in global production of Yttrium with 99% share, gallium with 94%, magnesium metal with 87% share, tungsten with 82% share, bismuth with 80% share, antimony with 72% share and REE with 80% global production share. China also produces roughly 60% or more of the world’s graphite, germanium, tellurium, indium, antimony, vanadium, and fluorspar. The US is a leading producer of only two out of the list of 35 critical minerals, namely beryllium and helium, with no primary production of 22 minerals and five mineral by-products on the critical minerals list.

Every advanced weapon in the US arsenal today, from tomahawk cruise missiles to the F-35 fighter jets, Aegis-equipped destroyers, precision-guided weapons to stealthy drones, and everything in between, is reliant on components made using REE and materials which are almost exclusively made in China. Each F-35 aircraft jointly produced by 14 allied nations contains 920 pounds of Chinese-origin rare earth elements.

In October 2018, US President Donald Trump's administration had cut off Chinese chipmaker Fujian Jinhua Integrated Circuit from its US suppliers after the US Justice Department indicted the state-backed firm for stealing trade secrets. The Trump administration had since 2018 launched an extensive campaign to block the sale of Dutch chip manufacturing technology to China. This resulted in ASML being unable to sell its most advanced lithography machine to a Chinese customer. In 2020, the US began restricting sales of American technology to companies like Semiconductor Manufacturing International Corp. and Hangzhou Hikvision Digital Technology Co., successfully containing their growth.

In December 2020, US added China's top chipmaker SMIC and dozens of other Chinese firms to a trade blacklist and said it would presumptively deny licenses to prevent SMIC from acquiring technology to produce semiconductors at advanced technology levels of 10 nanometres or below.

In July 2022, US pressurized Dutch chip equipment make ASML from selling older deep ultraviolet (DUV) lithography machinery to China (the equipment can be used to make chips as advanced as 5 nm). The US also pressured Japan to stop shipping lithography equipment to China. Dutch company ASML is the only business in the world that owns the technology and manufactures the machinery used to create physical chips from silicon wafers. Without ASML’s EUV technology, chipmakers such as TSMC, NVIDIA, and Intel will be unable to produce the processors they do.”

Though American state department has sanctioned China from procuring EUV lithographic machines, Chinese companies like SMIC and Huawei have made breakthrough’s in the semiconductor sector in recent years. It's well known fact that even with the best-in-class DUV tools, Chinese fab SMIC will be unable to match TSMC's process technologies cost-effectively. This is because Chinese companies cannot access leading-edge EUV lithography tools. It took nearly two decades to transform ASML fully operational 0.25NA EU lithography tool called the alpha one demo that utilised fully integrated components (Sn plasma source, high precision reflective mirrors, nm resolution reticule stage) into a machine capable of high-volume manufacturing represented by the EXE:3400C. In contrast, there has been no demonstration of a functional EUV system by China yet but no one can predict the future where the Chinese may get access to this technology as well.

Even when looked at from a perspective focusing purely on individual components (micro-lithographic lens, and reflective mirrors), China is nowhere near reaching the accuracy and specifications thresholds needed for a functioning system. Recently Christophe Fouquet, the ASML CEO said that by banning the export of EUV, China will lag 10 to 15 years behind the West. As a result, SMIC has been producing chips for Huawei using its 1st-generation and 2nd-generation 7nm-class process technology for years now. This has certainly helped the Chinese high-tech giants weather U.S. government sanctions but is no where near the ASML’s EUV Technology.

The Chinese are now in a tech war with United States, the recent launch of Deep Seek Artificial Intelligence platform and its ambitious €37 billion semiconductor initiative signals a dramatic escalation in its technological rivalry with the West. The primary target of this is breaking ASML’s monopoly on extreme ultraviolet (EUV) lithography, the crucial technology for producing cutting-edge chips. However by the time the Chinese semiconductor industry develops Low-NA EUV tools, the Western chip industry will have High-NA EUV lithography and even Hyper-NA EUV equipment. Taiwan’s TSMC has become the second chip-making company after Intel to receive the semiconductor industry’s most advanced lithography tool as the race to 1-nanometer chips gathers pace.

While China may be years away from the advanced technology on Semiconductor Chip making it has however developed technical industrial giants which overlap each other in various sectors. In lithium battery sector China has battery makers like CATL & BYD are transforming the EV space and developing lithium batteries. In addition Chinese company like Xiaomi pioneers in smartphone and smart appliances space are also foraying into the EV space. Further to expand China’s manufacturing prowess it is the world largest steel, aluminum, petro chemicals producer which can even augment the EV system. China domestic companies provide AC motor control units, lidar, radar, cameras, and other sensors as well as sensor fusion systems to integrate and process all this data that enable Chinese EVs to have advanced driver-assistance systems (ADAS) competing on par with Tesla.

China’s rise in Bio-Technology & Pharmaceuticals

China is a leading global supplier of Active Pharmaceutical Ingredients (APIs), critical components in drug manufacturing. It dominates the production of APIs for generic drugs, including antibiotics and vitamins, with estimates suggesting it supplies over 90% of certain critical APIs like those for penicillin and ibuprofen globally. For the U.S., China accounts for about 17% of API imports directly, though indirect imports (via countries like India) increase its influence. The U.S. pharmaceutical trade with China has grown significantly, contributing to a notable trade deficit. In 2022, U.S. imports from China reached $10.3 billion, while exports to China were $9.3 billion, reflecting a relatively balanced trade in value terms. However, the broader U.S. pharmaceutical trade deficit (across all countries) was $139.5 billion in 2024, up from $102.3 billion in 2023, with China playing a key role due to its API and generic drug exports.

India is a major supplier of generic pharmaceuticals to the U.S., providing around 40% of the generic drugs consumed there, which account for 90% of U.S. prescriptions. In fiscal year 2022-23, India exported $8.7 billion worth of pharmaceutical products to the U.S., reinforcing its nickname as the "pharmacy of the world." India relies heavily on China for APIs, importing approximately 65-70% of its requirements. This dependency stems from China's cost-efficient production and infrastructure, with essential antibiotics like azithromycin and cephalosporins seeing over 90% of their APIs sourced from China. Thus it is US’s interests that instead of tariffing Indian pharmaceuticals it works with Indian pharma to de-risk the API supply chains from China. Generic Pharma is not a threat to US national security as data shows that 90 percent of 131 million daily prescriptions by Americans are for generics but these make up only 16% of the total revenue. In contrast 10% innovated discoveries in drugs American pharma generate 80% of US companies revenues.

Thus US companies are primarily involved new drug development, R&D in Pharma while Generic low cost pharma is left to India & China. Thus Indian pharma if integrated with US pharma supply chains can play critical role in de-risking API’s supply chains from China. On the other hand China has become a powerhouse in CRISPR gene-editing technology, leveraging it for advancements in agriculture (e.g., editing rice), animal research (e.g., pig organs for human transplants), and medicine (e.g., cancer trials). The country’s progress was spotlighted by the 2018 controversy involving He Jiankui, who used CRISPR to edit human embryos, drawing global criticism. The core CRISPR-Cas9 technology originated from U.S. and European scientists, notably Jennifer Doudna and Emmanuelle Charpentier, whose 2012 breakthrough was openly published. Ralph Baric, a prominent U.S. virologist at the University of North Carolina expertise in coronaviruses and his collaborations with Chinese researchers, like Zhengli Shi of the Wuhan Institute of Virology (WIV) is known. The reverse genetics by Dr Baric was used by WIV in creating chimeric viruses in Lab using gene editing technology.

The Chinese Bubble

While China has grown at a significant pace industrially and technologically over last three decades, its growth story has significantly slowed down specially after the Covid pandemic. There has been heated debate in academic circles that Chinese economy has been struggling ever since zero covid lockdowns. China has been constantly trying to stimulate its economy to keep the consumption story going. However recent data of December 2024 shows a different story of a persistent trend towards deflation. The consumer price index (CPI) rose by only 0.1% year-on-year marking the lowest increase since March, while the producer price index (PPI) fell by 2.3% year on year continuing a 27 month streak of factory gate deflation. Despite government interventions to stimulate the economy, consumer inflation has decelerated for four consecutive months intensifying concerns about deflationary pressures. The core CPI which excludes volatile food and fuel prices showed a slight increase, providing some relief.

This economic scenario has lead to discussions about potential further monetary easing, though skepticism remains regarding the effectiveness of these measures in significantly boosting economic growth. The Chinese GDP numbers also came around 5 % on target for what Chinese government had hoped for, post inducing large stimulus in October 2024 which shows that the efforts to stimulate the Chinese may be working. But the bigger question is can this growth really sustain to find this answer we will have to look deeper into the macro numbers. The weakening of the Chinese yuan to its lowest level in 16 months against the US Dollar reflects these deflationary trends. While the current data coming from China is worrying sign yet the problems in Chinese economic model are of legacy of the debt fueled growth and exports based on manufacturing without turning to domestic consumption.

China's corporate Debt to GDP is 164%, Govt debt to GDP ratio is 44% & household debt to GDP ratio is 44%. China’s total debt to GDP ratio has crossed 250%. Owing to 2008 Financial Crash in US, China injected a stimulus of 800 bn$ to spur demand & growth to avoid a domino effect. The stimulus amounted to 13% of China's GDP in 2008 & higher than other top 2 economies i.e. US with 152 bn$ & Japan with 100 bn$. China’s Debt to GDP ratio is at 290% in 2024 up from 257% in 2019. China did large scale spending on domestic infrastructure & real estate to save its economy from GFC Crisis of 2008-09. The Chinese credit boom also lead firms in China to produce more than market demand leading to over capacity which was mired by the fall in corporate profits margins by 3%. Resultantly efficiency of firms have fallen generating less value added output.

In aftermath of 2008 crisis, Beijing deployed instruments like SOEs whereby banks were directed to lend to State Owned Enterprises which in turn financed building of new factories & equipment’s despite weak market demand. SOEs contributed half of corporate debt & 22% of total China GDP. In China lending usually comes from state controlled banks but gradually lending of less transparent high risk loans has increased through local & provincial banks adding to the debt woes of China. This is also known as Shadow Banking sector. China’s shadow banking sector grew in size from $523 billion RMB ($80 billion USD) in 2006 to almost $25 trillion RMB ($3.8 trillion USD) in 2016. According to World Bank, China's non performing loans amount to 1.6% gross loans similar to US (1.5%) lower than India's i.e. 5.9%. The Chinese government to manage the debt issue in 2015 in 13th 5 Year Plan called for reforms like cutting down capacities in Coal & Steel industries by 10-15% with a 100bn RMB restructuring fund to absorb welfare cost of 1.8 million displaced workers.

China also faces another big problem of zombie firms, SOEs which due to high level of debt & over capacity were propped by Govt subsidy are now going bankrupt. There's been 54% spike in insolvency rates between 2015 & 2016 with 345 more zombie expected to shut down in next few years. China has undertaken various financial measures like strict supervision of local governments in 2014, 2015 Bond Swap programme where local government could swap liabilities for municipal bonds. As of May 2016, China accumulated total of 240bn $ in loan for bond swaps. In 2016, China introduced even greater restrictions to control Debt. In Nov 2016, State Council cracked down on debt finance by limiting overseas investments of the SOEs specially all real estate purchases. This also explains extensive domestic crackdown on shadow economy & oligarchy back home.

Middle Income Trap - The Chinese Slowdown

According to the World Bank, China is now an upper-income-middle country. The middle-income trap refers to a situation where a developing country’s economic growth slows down after reaching a certain size at around a per capita GDP of $10,000 to $12,000, which stays at that level. Countries that fall into this trap lose the competitiveness of their exports due to rising wages and cannot create high-value-added markets and developed economies.

China's GDP in April-June 2023 grew by 0.8 percent compared to 2.2 percent in January-March 2023, and it's not due to a slow post-COVID pandemic recovery, but rather it is an accelerated collapse of a real estate bubble that was formed over the past two decades. Real estate accounts for about 30 percent of China's GDP. Latest official data reveal that new home sales by China’s 100 biggest developers dropped by 33 percent in July from a year ago, despite Beijing’s various real estate incentives. China’s real estate giant Evergrande lost $81 billion in the past two years during the country’s real estate crisis. Evergrande has reportedly filed for Bankruptcy and is under liquidation. Country Garden, the largest privately owned developer in China once hailed as a role model for property developers defaulted on 11 billion offshore bonds in October 2023.

A recent report found that 2,892 local government financing vehicles entities were established by local governments to raise funds for infrastructure projects and other development initiatives hold over 59 trillion yuan (about $8.15 trillion) in interest-paying debt and payables, an amount equivalent to about 50 percent of China's GDP. The unemployment among workers aged 16 to 24 hit a record 21.3 percent in June 2023 but if the 16 million-plus people who choose not to work and live with their parents are all counted as unemployed, the real youth unemployment rate in March was as high as 46.5 percent in China. Japan's economic bubble only burst after it became a developed country. As a middle-income country, if China's economic growth stagnates for an extended period, its path to becoming a developed country will be cut off.

Countries that have followed the high savings, investment led growth model that China adopted in the 1990s and Japan in the 1970s and 1980s experience three distinct phases. The first, characterized by heavy investment in badly needed infrastructure, delivered years of rapid but unbalanced growth. Debt grows in line with the economy because, with such high returns from investment, GDP expands faster than debt. Second, as an economy seeks to rebalance away from the infrastructure and export-led model, it resorts to a burgeoning non-productive debt-fuelled property sector. China today is clearly in the second stage. Between 1980 and 2010, China’s GDP rose four times, but debt levels were low and rose slowly. However, between 2010 and 2020, when GDP doubled again, it tripled its debt burden to officially stand at over $43 trillion, or 280% of GDP. With the economy now stagnating, it stands at a terrifying 360% of GDP.

Finally, in the third stage, the country rebalances its economy towards more sophisticated manufacturing and services, thereby increasing its productivity. This way, the economy moves away from investment and towards consumption and it is able to grow past the “middle-income trap” and become a fully fledged developed market. Only a handful of countries, notably Japan and South Korea, have successfully managed to achieve this. Beijing has long proposed shifting from domestic demand to Consumeristic economy that would require that the household income share of GDP rise from 50% to 70%, with wages rising commensurately. But a slowing economy & moderating growth with the debt bubble unwinding it looks difficult China would be able to escape "Middle Income Trap".

China needs to enter the higher end of industrial production otherwise it will not be able to become a developed country. Furthermore, with the shrinking labor force, China would need to shift from its reliance on a labor-intensive manufacturing model to a capital-intensive industry. The CCP would have to prioritize technological innovation to engage in research and development, and China would have to protect intellectual property rights. If Beijing is unable to boost the technical abilities of its local industries, China will never successfully industrialize. A closer look reveals that China is in fact falling into what is known as the 'middle income trap.

In 2012 World Bank report drafted with CDRC - "China 2030" stressed that China should prioritize completing its transition to a market economy and allow private companies to participate freely in sectors monopolized by state-owned enterprises. In addition, it advised Beijing to work on eliminating corruption and maintaining a transparent system with the rule of law. But China ignored the World Bank's warning and instead of fixing the domestic economy it went exporting its debt fueled appetite to colonise the world in the form of BRI hoping to turn the tide with predatory economics in Tributary States.

In addition the slowing global economy & American sanctions on access to China's hi-tech Chip industries is only going to further slow down the growth. The trade tariffs & De-Risking of supply chains will slow down the advance of China into hi-tech & advanced manufacturing industrial economies. Japan was able to transition the middle income trap but for China it looks difficult so Japanification of Chinese economy will happen but albeit with different characteristics as Middle Income economy & not high tech advanced economy. Just to add China also has a debt problem three times larger than Evergrande i.e. massive high speed rail network being the biggest debt accumulator of 850 billion dollar.

In September 2020, China’s High Speed Rail quantum of debt rose to RMB 5.57 trillion (US $850 billion) – up from RMB 5.28 trillion as of September 2019, catapulting its debt-to-asset ratio to 65.8 percent. Many of China's HSR (Bullet Trains) are unable to generate revenues on unprofitable routes built in a haphazard manner. China has recently induced record 3 Trillion yuan ($411B) bond issuance in its Economy for 2025 signals aggressive fiscal stimulus to counter deflation, weak demand, and looming US tariffs. A bold move to boost consumption, advanced industries, and bank stability but at the cost of soaring debt.

Chinese Slowdown - Impact on the Global Economy

The recent Bloomberg Article titled “Markets Sound Alarm Over Deflationary Spiral in China” detail’s the conundrum Chinese policy makers are in bid to escape the middle income trap and deflationary slowdown. The article quotes that investors are worried China is sliding towards an era of deflationary environment in its economy mirroring what Japan went through in 1990s after the bust in mid 80s. “Yields on Chinese sovereign bonds maturing in 10 years have tumbled in recent weeks to all-time lows, creating an unprecedented 300-basis-point gap with US peers, despite a slew of economic stimulus measures announced by President Xi Jinping’s government. The plunge, which has dragged Chinese yields far below levels reached during the 2008 global financial crisis and the Covid pandemic, underscores growing concern that policymakers will fail to stop China from sliding into an economic malaise that could last decades”, the article quoted.

The deflationary trend in Chinese economy despite the stimulus induced by President Xi Jinping will add new strains to the global economy that could potentially impact social cohesion and stability of the Chinese regime. Goldman Sachs this week said that China should learn from mistakes Japan made in 1980s which lead two lost decades for Japanese economy. Both the economies are facing a similar playbook real estate crash, massive debt, weak private investment, very low consumption domestically and an ageing work force. Recently Chief Economist at Normura Research Institute said that the Bond market is already signaling that China is in a balance sheet recession. As per him this happens when firms and household’s reduce debts, increase savings leading to decline in economic activity. The Chinese regime has induced stimulus to boost the growth but the consumer sentiment is not good with deflationary trend on the rise.

While the Chinese growth story looks good from outside but as they say all that glitters is not gold. China's bubble economy & debt crisis exposes how hollow Chinese economic growth story is. Now China is outsourcing the same debt through geo strategic projects like OBOR or BRI in offering mass scale infra projects with loans from Chinese SOEs who in turn get lucrative resources like rare earth minerals & commodities trade in exchange. With escalating domestic debt crisis, China needs BRI or OBOR even more with Tributary states by giving them trading privellge’s. India is the biggest hurdle for China as it has constantly exposed Chinese debt trade model despite the fact India itself has a huge trade deficit with China that has ballooned almost 2.5X from 40 billion $ in 2014 to 100 billion $ in 2024.

In a matter of few decades, China has made great economic progress. Few made huge money & now when the economy has slowed down they have left the country for the greener pastures outside. Majority Chinese are poor, middle class invested heavily in real estate where the future in uncertain. Huge infrastructure was created that is hardly used. America’s Treasury Secretary under Trump 2.0 Scott Bessent stated before the senate confirmation hearing that “China is in severe Recession/Depression and it is trying to export its way out of trouble”. He defended his plans to impose 10% tariffs on China and the rest of the world which will mean that a currency devaluation of Yuan is coming and a flight of capital to preserve the purchasing power.

The Chinese likely will devalue Yuan to maintain its export competitiveness with US while not buying up US treasuries and unless US capital is soaked of what China dumps, the bond prices will go low and the interest rates will go high. That would create a trouble for housing loans credit. China’s share of US treasuries has fallen from 1.4 trillion $ in 2013 to 760 billion $ in 2024 and add to that China has an option to trade with rest of the world from Russia to the countries in Belt & Road initiative. This also explains China’s detente with India on Ladakh expecting India to open up its up market for Chinese firms with some concessions and access to Chinese capital markets for Indian firms in return. China’s detente with India is a calculated move to make sure that India does go into the American camp under Trump 2.0, cutting access and raising trade barriers to Chinese firms who will be faced with Trump tariffs and probably more sanctions on access to technology.

China is classically falling into Middle Economy trap much like Japan fell in mid 80s. At least the Japanese never had that percentage of poor as China & India have. China is desperate to get out of it muscling through it with its tech prowess and that is where America holds the aces to styme & delay its rise as a great power. China exploited it's poor to export & made huge profit, expanded it's infrastructure & military. If the exports go down it's economy does not have the capacity to consume as most are poor or at subsistence level in the countryside. India & Rest of the world might up trade barriers against dumping by China. Chinese miracle is in its twilight zone with an ageing population and a domestic consumption story at its weakest in Asian economies.

As the global supply chain reset takes effect and USA invokes tariffs and trade barriers the Chinese companies will come under pressure and be forced to seek greater government support. This could put further pressure on the banking system as China looks at maintaining its hold in critical sectors. China will be forced to dump its goods in more countries as the US led supply chains limits trade with China. This is likely to create a counter backlash. Further in extreme situation if push comes to shove and China’s access to critical technology is denied it could very well deploy its lethal card of restricting gallium, germanium and rare earth minerals supplies to US. Thus the rise of China as technological industrial power with access to cutting access technology along with Russia as a commodity power house provide a potent challenger to hegemony of the Anglo-American establishment in the Pax Americana global order. It is the formidable challenge the American empire has faced in last eight decades in the postwar era.

However the geopolitical impact of Chinese economy slowing down will be reverberating as a slump in Chinese domestic consumption will be negative for the commodities while trade frictions with Trump administration will add more pressure on China’s largely export dependent economy. The launch of IMEEC & Asian Quadrilateral in Indo-Pacific, Indo-Japan freedom corridor establishing a working relationship with US in Africa can collectively give China a nightmare with regard to OBOR/BRI given its bubble economy. Whilst G2 Dynamics and with American abetment, China would continue to wield power in the world and we are now moving towards an era of Multi-Polarity in Bi-Polarity where there will be restructuring of supply chains. On one side you will see America lead bloc with democracies and other side you will se China lead bloc backed by Russia. This churn in global economy will present opportunities as well as challenges for India from Trade related to managing border disputes with China. The roller coaster ride has just begun !

Notes:

1. Markets Sound Alarm Over Deflationary Spiral in China - Bloomberg - 8th January 2025 - https://www.bloomberg.com/news/articles/2025-01-07/china-investors-sound-alarm-over-japan-style-deflation-as-yields-hit-record-low

2. ASML CEO says China is 10 to 15 years behind in chipmaking capabilities - 25th December 2024 - https://www.tomshardware.com/tech-industry/asml-ceo-says-china-is-10-to-15-years-behind-in-chipmaking-capabilities

3. China boxed out of high-NA lithography race to 1nm chips - 4th November 2024 - https://asiatimes.com/2024/11/china-boxed-out-of-high-na-lithography-race-to-1nm-chips/

4. CHIPS WAR: The Fight for Global Dominance - 04th July 2023 - Niti Shastra

5. The New Global Order (2016) - Asian Warrior

6. The Great Reset (2022) - Navroop Singh