Now or never : China

This is the best time for a multi pronged response, notwithstanding COVID, as probaly China is most vulnerable now, in a long time. The three major areas where “fronts” can be opened in Military, Diplomatic and Economic.

Economy.

China is currently very strong on the economic front. 15% of world debt and 3% of foreign exchange reseves of the Countries in the world is in Chinese Yuan (Renminbi), next only to the US$. Although this may not look too much in comparison, there is no other currency in the world which has any significant presence in these areas.

China which owns an estimated $1.1 trillion in U.S. Treasuries, is the number-two investor among foreign governments, according to the January 2020 figures released by the U.S. Treasury. This amounts to over 21% of the U.S. debt held overseas and about 7.2% of the United States’ total debt load. This may seem like a potential danger. Although the reason can get highly technical, in short, China buys Treasuries to help depress the value of its currency, the yuan. A cheaper yuan makes the country's exports less expensive for foreign buyers, thereby keeping the country’s export-based economy chugging along. Consequently, the Chinese economy would suffer as much, if not more than, that of the United States if China were to suddenly stop buying U.S. debt. Having said that, if driven to the wall China can use this as a bargaining chip, like it used it with Japan in 2012.

The People’s Bank of China is testing a state-backed digital currency, despite a recent ban on cryptocurrencies and ICOs. The aim is to get a pie of the international cash transactions. Today most cash transactions between countries, except within the EU, takes place in US$ trough a process via The SWIFT payment system which enables to securely send and receive information on financial transactions in a standardized way. This ultimately allows money to be sent from one bank to another, virtually anywhere in the world and in many different currencies. But this system is far from perfect. SWIFT does not actually send money, it simply sends messages between the banks – the currency calculations are in US$ depending on the exchange rate of that currency on the day of the transaction – meaning the currency of trade is always in US $. China wants to eat into this pie by introducing its own digital currency.

China is the established manufacturing base of the world. Most big Companies have established facilities for making products in China. Consequently, the supply chain for components that go into making these products are also in China. This, in short, means that if Apple moves out of China lock stock and barrel, all the MSMEs that make components which go into the making of Apple products will also have to move out of China. These MSMEs are typically not owned by Apple. Moving manufacturing units is not an overnight process – it takes time. When productivity is at its low because of the pandemic, it is anybody’s guess how many businesses will shift base immediately. At best t will be a long drawn out process. When it comes to choose between business and sentiments, the choice is very clear.

Lastly, over years, China has aggressively invested in most economies around the world, including in India.

Military

China has the second most powerful military power, next to only the US with which it has to contend in search of being a super power. As if to show case its military prowess, China often flexes its muscle in the South China sea and the Indian Ocean. Now and then it also threatens small countries like Taiwan and Japan with military actions. It has cultivated other small states in the region like, Pakistan and N Korea, to whom it has supplied nuclear and missile technologies and others like Sri Lanka, Nepal and Myanmar with economic aids.

The only other sizable military power it will have to actually face on a daily basis is on its Southern borders, India, with who it has a long-standing border dispute. The history of this dispute is well known to all of us .

This being the case the importance of India to the world as a strategic counterweight to China is evident.

Diplomacy

China is not known for its nuanced diplomacy. Recently it has unleashed its “wolf diplomats” on twitter. Firstly, it has a monolithic form of Government continually suppressing internal dissent of any kind. Secondly, being a very insulated Nation, the world is unaware of what exactly is happening within China. The recent spread of COVI-19 is a stark example.

In diplomacy, the world (and India) will do well to aggressively support Taiwan and Hongkong.

The present problem here is “Who will take up the leadership role of the world” against China. the US? Is it ready for the job? Will the EU come on board? Should India take over this vacancy of the CEO, of anti-China Company.

The situation is fluid. COVID-19 world over is on top and in China it seems to be receding (or is it really?) Either which way, for sure is it now or never occasion to attack China diplomatically. Especially for India. Else, China which already has the base economically and militarily, will pull away fast from the pack.

Tail piece: The biggest problem with Defence expenditure in our country is that almost all the spending except pension and salaries is for import of equipment. If you have noticed all major economies of the world (except Japan) have a robust domestic defence industry. A small and younger country, Israel, has a very big dfence industry which, besides catering to the IDF, also exports a lot – a major part of it to India. A domestic defence industry helps to increase the industrial output, creates jobs, improves self reliance, introduces new technologies to other industries, helps in maintaining favourable balance of payments, contributes to GDP and generally props up economy. It is never too late to start making in India.