US economy strengthens, sluggish China welcomes FDI as investments pour in

US President Joe Biden delivered his State of the Union address to the US Congress on 7th March. On the other side of the Pacific in China, the 21st People's Congress held its plenum.

Biden made a pitch for higher taxes and more social sector expenditure. These reflect traditional Democratic Party positions. But there was a strong partisan slant in an election year, which will ensure that American polity will remain polarized. On China, the President was cautious. He mentioned ‘We want competition with China, but not conflict.’ While the ‘work paper’ presented in the Chinese Communist Party Congress emphasized Taiwan and hiked up defense expenditure.

Biden Cautious on China

President Biden defined his position in contrast to Trump’s positions on a range of foreign and domestic policy issues. He mentioned ‘Putin of Russia is on the march, invading Ukraine and sowing chaos throughout Europe and beyond.’ He underlined his administration’s commitment to Ukraine and NATO. He contrasted this with his predecessor’s position, ‘a former Republican President’, who told Putin, ‘Do whatever the hell you want.’ On China, he struck a more cautious note. He said ‘our GDP is up’, and ‘our trade deficit with China is down to the lowest point in over a decade.’ He said that America ‘is standing up for peace and stability across the Taiwan Strait.’ He added that he has ensured ‘that the most advanced American technologies can’t be used in China’s weapons.’

President Biden reiterated traditional Democrat positions on abortion, gun control, and taxes, contrasting them with the Republican positions. He said that a $2 Trillion tax cut by the previous administration ‘overwhelmingly benefits the very wealthy and the biggest corporations and exploded the federal deficit.’ On his part, he suggested that the corporate minimum tax be raised from 15 percent to 21 percent. Whatever the merits of the positions of the two parties, this suggests that the American polity will remain deeply divided. The division already extends to Congress, where the Democrats control the Senate, while the Republicans control the House. The House decides the budget. Thus, President Biden will have little control over the budget process necessary to support his agenda. He will have to depend upon the monetary policy, which is controlled by the Federal Reserve and the Treasury. The administration will have to depend upon debt, rather than taxes, to finance social spending and economic programs.

China Addresses Economic Concern

The Chinese Premier did not address the customary press conference which used to give the outside world a peek in the closed world of the Middle Kingdom. The increase in defense expenditure (7.5 percent) outstrips the projected growth of Chinese GDP (5 percent). This is perhaps a more significant outcome than the downgrading of the prime minister’s office. It also has direct implications for India’s security. The reference to the Taiwan Strait issue in the working document omitted the caveat ‘peaceful resolution’.

The outcome focused on economic issues. At the same time, the role of the state in the economy would grow. China will support its companies in setting up e-commerce businesses abroad. This is a response to growing protectionism. China has also welcomed FDI. This is a signal to the US companies who have invested a great deal in China in the past. Wall Street, particularly the US financial sector, still regards China as a good bet. The Chinese would like to lure them to build up a hedge against Trump's win in the Presidential elections which might see a return to tariff wars.

The ‘work paper’ presented by the Chinese Government to the People’s Congress emphasized that renewable energy has exceeded coal in terms of capacity. This is a wordplay. There is a distinction between capacity and generation. Renewables due to intermittency and low PLF have relatively lower generation. In China's case, the renewables share in the generation is 24 percent according to IEA. However, coal still accounts for more than 60 percent of generation. This year alone, nearly 200 GW of new coal-based power plants have been sanctioned or are under construction. This is nearly 80 percent of India’s total installed capacity. The Chinese are highlighting the increase in renewables to disguise the much larger thermal power sector which China is expanding at a furious pace. The larger message is that China would like to capture more of the meager carbon space remaining before it ‘peaks’ its emission in 2030.

And Money Continues to Flow

The US economy is in strong shape, while the Chinese economy is slowing down. Yet the money is pouring into the Chinese economy. According to a Wall Street Journal report, Hang Seng and Shanghai Composite index both went down last year. MSCI World Index was up by 22 percent. This was a 33 percent difference over the MSCI China index, which went down by 11 percent. Yet global investors are investing more in China. They feel that recovery when it comes, will bring excellent returns over current Chinese stock valuations. Out of $ 18 billion that went into global equity funds, $ 12 billion went into Chinese equity. Out of the $ 20.8 billion investment that went into the Emerging Markets, $ 19.8 billion inflows went into Chinese stocks.

DP Srivastava is a former Ambassador and author of the book, Forgotten Kashmir: The Other Side of the Line of Control. Views are personal and do not represent the stand of this publication.

DP Srivastava is a Former Ambassador to Iran and author of Forgotten Kashmir: The Other Side of the Line of Control. Views are personal, and do not represent the stand of this publication.

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