Indian Council of World Affairs

Teshu Singh: It is my pleasure to welcome you all for a panel discussion on An Assessment of the Chinese Economy, chaired by Ambassador Ashok Kantha, a distinguished fellow at Vivekananda International Foundation and former Ambassador of India to China. 

To begin with, may I request Madam Nutan Kapoor Mahawar, Acting Director General and Additional Secretary, Indian Council of World Affairs, to kindly make her welcome remarks. 

Nutan Kapoor Mahawar: Thank you, Teshu. Ambassador Kantha, distinguished experts, a very warm welcome to the ICWA panel discussion on an Assessment of the Chinese Economy. We are all well aware of the Chinese economic rise. China is an economy which has achieved growth at unprecedented rates. Yet China is not a country that any other country wishes to emulate, least of all India, either politically or economically. An economic growth achieved at high social costs can neither be sustainable in the long run, nor is it desirable or worthy of emulation. 

We at ICWA think that China needs to rethink its economic-social balance, and of course China can do so given the political clout that it enjoys regionally and globally. That the West has consistently voiced concerns about the human rights aspects of China's growth, primarily premised on their ideological and strategic competition, does not discount the importance of the social costs of China's economic growth. 

That said, the “overheated” nature of the Chinese economy when it was experiencing high growth is now slowing down. The magnetic attraction of China as a hub of manufacturing is eroding as efforts are on the rise globally to reconfigure supply chains. Overproduction has gone down, though dumping abroad hasn't, and it needs to too. Countries like the US, India and also the EU continue to impose anti-dumping duties on Chinese goods to protect local industries and unfair competition owing to excessive Chinese government subsidies, as we are all aware, and an excessively export-oriented outlook. 

China's economic growth is occurring at the expense of the economies of other countries, which are fast losing their production capabilities and are being reduced to consumption economies dependent on mass-produced Chinese imports, for instance, Vietnam, Laos, Myanmar. Any economic system needs to have a production and consumption balance. This is getting severely impacted the world over due to few economies, which are doing the bulk of production. The applicability of the theory of comparative advantage or competitive advantage has its limits. It cannot be permitted to allow overproduction somewhere at the expense of economic ruin elsewhere. 

Moreover, glorifying cheap labor and labor-intensive models at the cost of “quality of life” does not make for good sense, either in theory or in practice. Also, I am not sure if we want to be in a situation where all the goods available all over the world are, quote-unquote, “uniform”, with no local innovation, no local design, no local touch, which, for instance, would be the case if Chinese goods were allowed to flood all the world's markets. A world economy based on ‘uniformity’ is contrary to the very fundamentals of being human, of a human's urge to express himself through his own creations and seek acceptance and appreciation. 

So what is the data that supports what I have just said? The Chinese economy grew at nearly 10% in the 1980s, 90s, and 2000s. In 2010s, it grew at around 7.7%, and now in 2020s, the growth rate is around 5%. So the “overheated” Chinese economy is “slowing down”, with the growth rates being reduced by half from the 1980s. In fact, the growth rates are now similar to the pre-Deng's economic reforms period. These are official figures. There are also independent analyses that suggest actual current growth may be lower, in the range of 2.4% to 2.8% in 2024. And what are the social costs that I am talking about? 

We are all aware the “one-child” policy, which coincided with the period since economic reforms till 2015, continues to shape demographics and family structure in China. One-child policy means growing up with no kin. It also means forced abortions and sterilizations. China's fertility rate position in this is one of the worst in the world. Second, China is now transforming into a shrinking and aging worker population, which should give rise to concerns about enhancing social safety nets rather than about eroding competitiveness. 

Third, the introduction of economic reforms in 1979 coincided with increasing outflows of migrants from China as well as rising study abroad trends for students and scholars and the emigration of super-rich elite. Low fertility rates, aging population, rising emigration, lagging social safety net make for unstable social indicators. And unstable social indicators make for an unstable polity. 

I'm sure some of the issues that our panel discussion today will dwell on. And I look forward to thought-provoking discussions. And I wish all the panelists all the very best. Thank you. 

Teshu Singh: Thank you, ma'am. May I now request Ambassador Ashok Kantha to kindly give his remarks and conduct the proceedings. 

Ashok Kantha: Thank you, Teshu. Thank you, Nutan, for putting together this panel discussion. And in a way, setting the stage for our discussion, it's very good to have candid comments. Because anodyne discussions on issues that are extremely important not only for China, the second largest economy in the world, but the global economy and for Indian economy serves no purpose. I'm happy that you raised certain critical issues that need honest exploration, both within China and outside. 

I've taken permission to spend a little more than five minutes allotted to me, because issues cannot really be addressed in five minutes. Yesterday, Kristalina Georgieva, managing director of IMF, held a press conference on Article 4 consultation with China. And she made certain remarks, which in a way dovetail into what Nutan had to say. On growth numbers, essentially, she, as IMF does, followed Chinese projections by and large. IMF has raised, upgraded growth in current year to 5%, 2025, and 4.5% next year. Though there are doubts, as Nutan mentioned, about authenticity of this data. But there are three other points she made, which we should be discussing today.

One, that domestic demand in China remains stubbornly weak, in part because the property sector is shaky footing, as she put it, rather politely. This has depressed consumer confidence, and it's leading to weak consumption and deflationary pressure. That's one. Second point, and she put it across, actually, quite strongly, is that as the second, and I'm quoting, as the second largest economy in the world, China is simply too big to generate much growth from exports, and continue to depend on export-led growth risks furthering global trade tensions. And she observed that China has an excessive reliance on exports, and worsening external balances.

She referred to what was decided at the fourth plenum of the 20th Central Committee of Communist Party of China on principles behind the 15th Five-Year Plan. And she mentioned that Chinese authorities prioritize increasing consumption as a driver of growth, and recognize the importance of reorienting economy away from goods to services, and most importantly, prioritizing consumption-led growth as the overarching policy priority for China. What are the actual signals coming out from China, both in terms of policy pronouncements and some of the recent developments we have seen there?

At the fourth plenum, which concluded on 23rd October, to me, the primary message was that Xi Jinping is doubling down on the emphasis on real economy, as distinct from financial or virtual economy, advanced manufacturing, and innovation-led growth, with a very clear push for technological self-reliance and supply chain insulation. At a time when concerns are being raised about how China is hogging the entire manufacturing space with manufacturing value added, being somewhere around one-third of global manufacturing, you need to be projecting it will go up to 45% by 2030.

Yesterday, I came across a report in Qiushi, which is the party journal, a very important party journal. This essay by a Shanghai official argues that actually we are losing ground in manufacturing. We need to do more in manufacturing because this is stepping stone to our great power, destiny. And Xi Jinping, when he keeps hammering away a real economy and giving manufacturing appropriate status in economy, that's what he means.

The data which just came out a couple of days ago, about the first 11 months of 2025, China's trade surplus exceeded $1 trillion. It's the first time any country has recorded that kind of trade surplus, notwithstanding Trump tariffs, notwithstanding the fact that China's exports to USA declined by almost 20%. So it's moving its exports relentlessly to other countries. There is a strong acknowledgment by Chinese authorities, Xi Jinping himself leading charge, about involution, which is distortions in Chinese economy because of excessive competition, excess capacity, though they never use the term excess capacity.

But in terms of roadmap, in terms of actions taken, one doesn't see any evidence of a credible level. Our panelists will discuss. Sorry, I'm taking a little more time, but I wanted to flag these issues. Our panelists will look into it. Is there any roadmap for getting out of involution, which is a very serious challenge for China. It's acknowledged personally by Xi Jinping. They're taking some measures to boost domestic demand, but so far they haven't worked. For the last 37 months, producer price index has been in negative territory, which essentially means that they are in near deflation conditions.

So this issue of a $19 trillion economy trying to export its way out of its economic predicament is hurting the rest of the world. And today, if there is a serious talk of China shock 2.0, China shock 1.0 happened at the turn of the century, especially soon after China joined the WTO in 2001. Now, this will be far more serious, because China is not vacating space from any of the areas it is occupying, but it's relentlessly seeking to dominate technology-led, innovation-led advanced manufacturing. And it's doing so successfully. Colleagues will discuss that further. And this is not just something hurting developed economies, equally it's hurting developing economies like India, because in a way it's sucking oxygen out of the global economy.

Now, a related issue is global tech rivalry, superpower rivalry, its increasingly focus is shifting to geo-economics rather than geo-politics. If you look at national security strategy of USA, which came out on 4th December, economic competition with China is the primary focus, no longer it's a strategic competition. Because China is also maintaining its policy of ensuring self-reliance of cutting down its dependencies on others, while encouraging others to become more dependent, and also utilizing weaponizing dependencies, strategic use of upstream choke points, as we saw vis-a-vis India and vis-a-vis other countries on rare earth magnets, for instance.

So where do we go from here? So we have a really difficult mix in terms of directions, China's economy and global economy for that matter. China is not alone to weaponize, I don't call it interdependence, it's really weaponized dependency. But let me conclude here my initial remarks on a positive note by saying that I don't at all buy into this theory that China is peaking. China is not peaking. There is enough growth momentum left in China. Innovation led growth will not be adequate substitute for drivers of growth like real estate. But they are looking, they are really working hard to find new engines of growth. And given China's track record, they may succeed, but at what cost, how it will impact others.

So I'll conclude there. Let me now request Professor Biswajit Dhar, a very eminent economist, who has been there studying China and regional global economy for a long time, for his comments.

Biswajit Dhar: Thank you very much, Ambassador Kantha. I must thank ICWA for inviting me to this very interesting discussion. I think it is also extremely timely. A lot will be said after the Article 4 consultation, the report actually comes out. We still do not have the report. We just had the press conference yesterday and we will actually watch this report closely, as we did for India, it came out last month.

Now, as you said, I will just pick on your final comments and your point about China is going to maintain its economic momentum. My point is that the kind of things that we are seeing, there could also be a certain amount of momentum because some of the numbers that IMF has put out in terms of the growth until the end of the decade, does not suggest that China is going to be in serious trouble.

But other point, I also wanted to remind you that when Xi Jinping brought the whole making China strategy, the objective was that China is going to be a manufacturing powerhouse by 2049. So that was the target. And when we looked at this thing from 10 years back, we were wondering what is going on. And now we can understand a bit of what was planned then and I think it is going to be motoring along and the new vistas that have actually been opened up by the leadership will take China to completely new areas.

For instance, currently, all these discussions are going on and I also watching it this closely that the two major sectors on which China is investing heavily in technology, of course, AI is one. The other, very interestingly, is pharma. And on pharma, China is actually investing heavily into the complex molecules and biologicals. And this is an area where the Americans and the Europeans had a huge advantage. They were acres ahead of China. But now the speculation in the Western media also is that how soon are we going to see a pharma giant coming out of China?

Now that also hurts our interest because in terms of our foreign exchange earnings, pharmaceuticals is the second largest foreign exchange earner for India. So your point about the fact that it will be hurting us, and we're already hugely dependent on the active pharmaceutical ingredients from China, or pharma industries, and we're using our PLI scheme, trying to move away from the dependence. But if the Chinese are investing that much in the biologicals, then it seems very difficult for Indian industry, and we all pride ourselves by saying that India's industry is the pharmacy of the world. So that's a major challenge for us.

Now, of course, China has such a huge footprint on the global economy. Way back in 2014, it became the largest economy in PPP terms. And of course, it's maintained this thing. And in nominal terms, currently China is about 63% of the size of the US economy. It went up to 70% around the turn of the decade, and then it came down. And IMF expects that it will be about 72% of the US economy by 2030. So in the relative expansion, China seems to be winning there.

And this number, the contribution of China to global growth has remained static at 30%. And yesterday, the IMF Managing Director also mentioned this, that China actually contributes about 30% to global growth. So it's huge. And whatever happens in China would have its serious ramifications either way on the global economy. Now, of course, as you also mentioned, the growth has been sluggish since the COVID recovery. And it's also likely to remain around 5% or below also mentioned this, until the end of the decade.

And of course IMF has upgraded growth projections like you said, but I think that is what I am interested in seeing, on what basis has IMF upgraded, even if it is just about 0.2%, on what is the basis for IMF to take decision and that will be known a few days later. Of course, growth has, and again on the back of the fact that domestic demand is so weak, now IMF talks about it and we have been hearing it for quite a while, so again this is something that is a bit of a mystery, that on the back of very weak domestic demand, how did IMF actually upgrade?

I was actually expecting that growth projections will be lowered, but just the opposite has happened. And of course property sector, again we mentioned that it still faces uncertainties and this is actually depressed consumer confidence leading to weak consumption and deflationary pressures. Now both the consumer price index and producer price index are in the negative territory. So this is a classic case of deflation. So this is actually a deflationary situation that China has got into and this is the entire year, the 2025, if you look at the inflation in 2025, it is up to November, this has actually happened as compared to last year's levels, are in the negative territory.

So something needs to be done and again something that you mentioned, that IMF Managing Director mentioned that it is very important what she said that pivoting to consumption led growth is the overarching policy priority for China. So if China does not slow down, because manufacturing growth is still about 5%, then we are seeing a situation that China is going to use the international market.

Now in early November China actually used a stimulus package of CNY 10 trillion, which is $1.5 trillion and the fiscal package aimed at stabilizing the common debt and accelerating the infrastructure spending. This is a five-year package that they announced. So it is still being rolled out, so we have to see how it goes. Now they are actually planning to actively use the available deficit space, because China is also running a very large fiscal deficit, which they are going to be using to stimulate the economy.

Now, of course, China has -- the question is that does China have enough headroom to provide the stimulus? That is the question that all of us are asking. Now first as I mentioned that it is running a fiscal deficit and this year it is 8.6% of GDP, way beyond what IMF would recommend as a safe limit. And this is slightly lower than that registered during 2020, during the COVID year. The second major problem is ballooning public debt, which is now almost 90% of GDP, and in the last three years by almost 37%, four years since the pandemic. And of course, this is lower than that in the US, but still is massive compared to other big countries.

There are monetary policy constraints, at least on two counts. First is a very weak yuan, which leaves room for the People's Bank of China to ease monetary policy, and secondly, Chinese banks are already suffering from poor profitability, so lowering interest rates and stimulating the economy, that is really not an option. And then, of course, there is a real estate problem, overinvestment at the cost of increasingly low returns.

The other problem that I think could be a constraint in China going too far in stimulating the economy is the fear of inflation. I am sure they are looking at the Biden experience, the Biden administration post-COVID had massively pumped in a huge stimulus package, and that resulted in a kind of inflation that was very difficult for the US to actually handle, and it actually managed for a few years.

Now China, of course, would not like that to happen, because China which is using the international market for its expansion, it has got so used to that, is still going to use the international market for its growth momentum, and it would not like to lose competitiveness because of high inflation. Now the deflationary tendencies have actually had an advantage for China because this resulted in significant real exchange depreciation and has helped in their pushing exports forward. What you just said that the trade surplus in first 11 months exceeding $1 trillion is partly due to the fact that they are benefiting from deflation and that is quite an important thing to recognize. And this is a record high for any single year, which is more than about $992 billion surplus in 2024.

Now the overall exports from China were about 6% higher than last year in dollar terms and in November, there was an expansion as compared to a contraction in October. Morgan Stanley actually predicts that China's market share in global exports will reach 16.5% by 2030 and currently it is less than 15%, about 14%. And this is going to be fueled by advanced manufacturing and high growth sectors like electric vehicles, robotics and batteries.

Now China, of course, has diversified away from the US market and significantly so in the past few years since Biden's first term and these numbers that I have suggest how big this is. In 2017, when Trump first came and started targeting China, about 22% of US imports were originated from China. Today it is down to 9%. And in 2017, 19% of China's exports went to the US. In the first nine months of 2025, it was down to 10.4%. So if you look at the November numbers, we don't have the detailed numbers yet from China Customs, it is going to be even lower, that is what I expect.

So China is now banking on its ability to easily diversify its export markets into other markets. So this is a temptation for China. So why should China look at its domestic market, why should it fuel its domestic consumption when it can easily move into other markets and like for India, again it has moved into India in a major way and our trade deficit vis-a-vis China is actually really escalated.

So we are in quite a serious situation. There is no sign that China is going to do what it is being told and it has been told since 2008. That was the first time Americans recognized that they had such a large trade deficit. They talked about decoupling, asked the Chinese to decouple from the global economy. From 2008 to 2025, there is no real sign of decoupling and it is very difficult to see how this is going to happen going forward, the kind of things that the leadership is planning.

So I will end on a rather pessimistic note that I do not see much light at the end of the tunnel. Despite the fact that China seems to be in doldrums, the global economy is not going to get any respite. Thank you very much.

Ashok Kantha: Thank you, Biswajit, for that very insightful and clear assessment of not only where the Chinese economy stands today but what is going to happen. Unfortunately, what you have projected is not very optimistic, but it is realistic that that is what is likely to happen. We now turn to Santosh.

Santosh Kumar: Thank you, Ambassador. Thank you to ICWA for having me here. I will dwell upon a couple of things. One is, I think, as Ambassador already alluded, the significance and the role of technology in today's economy in China. Then I will also touch upon how supply chains from the industry perspective have reacted and how these reactions have reflected in trade and investment flows.

Let me start with technology. When China says technology is important and gives it central place in its policy making, I think there are many angles to it. If you unpack it, you will end up with at least five or six distinct reasons. So I think it is worth dwelling upon these five or six reasons or motivations to make technology such a strong pillar of the economy, especially in the last, say, 10 years or so. So the first reason really is to reduce dependency on foreign technology. I think this was evident even 10 years ago and it has only increased. The imperative has increased. And this applies regardless, but especially in core technologies, I think this is something China sees as critical.

And all these reasons are overlapping by design. So forgive me if I sound repetitive, but it's coming really from a different perspective. And when I think the speeches we talk about high-quality development, I think what China emphasizes is technology acting as a factor of production. So earlier, when it was low-cost labor, which was driving productivity, now it is looking at technology as a factor of production. So that's one more perspective.

The third one is frontier industries and new productive forces, again, which is mentioned in many, many policies, speeches, and documents. And when they talk about new productive forces, it's really about occupying the frontier areas of the industries of the future, so to speak. And the fourth, I think, angle of technology is as pure national security. Talk of military modernization, cyber security, and so on.

And the fifth one is more about using technology as a vehicle for global influence. You see that in the imposition of standards, China seeking a larger role. So there again, technology comes to the center. And the last one is, of course, the domestic goals that China has, the Chinese dream of national rejuvenation and many others, which are important from a domestic political perspective. Technology, again, has a bearing on all those. So these are some of the reasons why technology has increasingly become critical to policymaking in China.

Now, how does one sitting outside China, in a country like India, look at this and measure it? 10 years ago, when a policy was announced by the State Council called Made in China 2025, it caused a lot of excitement because it was a clear articulation of ambition in a number of industries. And after a couple of years, due to backlash from some of the Western powers and so on, the geopolitical, it was not convenient to pursue that. So the references to this policy have dissipated over the last few years from Chinese policy documents.

But if you still go back to that roadmap, there were 10 sectors which were specified as being critical to the Chinese economy in 2015. And interestingly, 2025 was set as a first phase to achieve some of those targets. Last month, the US-China Economic and Security Commission put out a report, which really examines the 10-year journey, which I would strongly encourage all of you to read, because it looks at not just industry sector but component-level capabilities that China has built. It's a very detailed evaluation of this program. So I am just going to spend maybe one minute summarizing what they found.

They found that in about three sectors, China has failed to achieve goals, which are semiconductors, CNC machines and aviation. So in these sectors, they have not achieved their targets of localization, modernization and so on. But the other sectors, they have met with significant success. In fact, the conclusion of the report is that by and large, Made in China has been successful. Some of the targets have been achieved even earlier than expected.

New materials is one more sector where China is still lagging. But sectors such as robotics, agricultural machinery and railway, they have met with partial success. And it also lists out electric vehicles, electric equipment as major successes. And then there are some wild cards, like the biopharma sector that you mentioned. So interestingly, last year at BioEurope, which is one of the world's largest conferences, the stage was occupied by a playbook where the big pharma American companies were explaining how they have gone on an acquisition spree in China.

So if you look at the rankings, all the plus $1 billion acquisitions in the last two, three years have been in China by US pharma because of that reason. So maybe that was not foreseen 10 years ago, but that has come up now due to various reasons. I think clinical trials are much easier and so on. So there are many reasons for that. So now how did this come about, this 10-year journey in the technology space?

There are some well-known reasons, well-studied reasons, which is subsidies, policies. But also more nuanced play of vertical integration, there has been a lot of coordination between the state sector and the private sector to ensure the vertical integration of industries. There are, of course, domestic procurement rules favoring Chinese firms. But selectively in sectors they have also incentivized foreign investors to bring technology to China in exchange for market access. So the playbook actually is at the sectoral level rather than a global sort of formula. Again, it is very interesting to read some of these sort of case studies.

Now I'll move on the next part of my comments, which are on supply chains. For countries around the world and companies, last five years have been a very volatile situation in terms of making future investments, decision making where should we deploy manufacturing facility, because it has been a very volatile environment, both from the policy-making side and also from the demand side. So supply chains have started moving from China, they are partially moving, it is not evenly spread across sectors, but broadly if one were to take a sort of one line conclusion you would say it is more of diversification rather than supply chains moving lock stock and barrel overnight from China, so they have started diversification.

Now what are some of these directions? I think the diversification is driven by tariffs, that is the reality today, geopolitical risk, labour and cost pressures in certain industries, very limited because China is not letting go of these industries, which was earlier an expectation and also to build resilience. So some examples, I think most of you have seen these stories, South East Asia, Vietnam, Indonesia, Thailand have been chosen in electronics, textiles, light manufacturing and so on.

India has also won in electronic sectors because we have managed to grow at least two to three players in the contract manufacturing space, which means they aggregate orders and rather than depending on one key customer, they are able to aggregate orders from multiple customers, so that has been a success story. Mexico has seen a lot of near shoring for the US market, it is essentially a logistics play because it is easier to manufacture in Mexico and ship to America. There are also some new pockets that have emerged, which is the Middle East and Eastern Europe, which have also seen some amount of diversification.

Now how is this translated into investment trends? I think ODI far surpassed FDI in China I think almost ten years ago. So we are now after COVID seeing a new trend of ODI further expanding because FDI is dipping further in the last two years in fact there has been negative growth. And this has led in I think ODI now creating a net FDI deficit on an annual basis of about $50 billion to $60 billion. So now we are seeing this, China has emerged as commentators say solidly as a net exporter of capital. So in the diversification that we just spoke about, China is actually a big player in moving capital because it is the supply chain that has to move from China and Chinese companies are doing that.

On the trade, again, I think we just mentioned that the exports from China originating in China to the US have declined, no doubt, but there still remains a big question on whether the net value addition from China to the US has reduced. It is still a question mark because if you see ASEAN countries, the trade with China has now elevated ASEAN to number one, which earlier used to be occupied by the US, and EU was stable at number two, but US has now gone down to three. But a lot of these exports from China to ASEAN are intermediate products, not for consumption in ASEAN.

So the question remains, by value addition, how much is China still a driver of demand for Chinese exports? I do not know the answer to it, I am just leaving that open. So maybe I will end by maybe giving a flavor of what Indian industry interface has been with China, I think in the last few months Indian industry has faced export controls in magnets and so on. The automobile sector has actually lobbied hard for relaxation and when our Prime Minister went, this was at the top of the agenda. And now with relaxation in visas and direct flights, Chinese companies are again coming to India to prospect for investments. How much they will materialize, how much of stability will it give India-China economic ties is still an open question. So I will just end here. Thank you.

Ashok Kantha: Thank you very much, Santosh, actually it sort of dovetailed very well with the earlier presentation. Now over to you, Arvind.

Arvind Subramanian: Thank you, sir, and thank you ICWA for having me over here. In 10 minutes I am going to cover about the local economy in China because as we are speaking about the 15 five-year plan, as we are talking about the overall size of the economy and performance of the economy, what is most important and fundamental in Chinese economy is the role of the provinces, so what we call the local economy. Because since China opened up, the provinces and the local economy has played quite an important role to drive the overall growth.

Every province, every region has its own metabolism and reason to contribute towards Chinese economy. And that is the reason, when Xi Jinping talks about 15 five-year plan leading to 2035. And then next two five-year plans leading to 2049. What is most important are the other variables plus the physical variables. That is what we call the subnational forces or the local economy. You might have seen there is the Hainan province where Xi Jinping has visited the most six times so far. And there is some logic and there is some concern behind that. There are other provinces Xi Jinping has been talking quite consistently and focusing, driving them towards the growth.

If you could relate these dots, you would note that the entire Chinese economy and then the central dispensation is not focusing on the coastal provinces anymore. And that's a reality. Because if you look at the present growth rate, you look at top 14, 15 performers or the local economies which are performing in China. In numbers, yes, Guangdong is number one. And in numbers, Jiangsu is number two. But when you just compare the growth, they are not performing in terms of growth rate. They're not really performing as such.

And why so? Because there is a rising pressure on the local economy as far as revenue is concerned and meeting the targets. So when you relate these two things and interpret it broadly, you will understand that this is going to create a problem for the central government. Because largely, the local governments account for more than 80% of total government expenditures in China, 80%. And if you say that, if the local governments are not performing, are under stress to perform and not able to come up with their own budget, that means that it is going to have a phenomenal effect on the growth trajectories, be it 15th five-year plan or 16th five-year plan.

And if you just relate that with the interesting phenomenon which is taking place in China, you would understand that the two-tier provinces where you have the province called Hubei, Sichuan, and Anhui, are performing. Their growth rate is better than Guangdong province, better than Jiangsu and Sichuan province. So how would you interpret it? There are two ways of interpreting it, that there is an excess land sales by these three provinces which are at number two compared to number one, because the inflated price range in Guangdong, Jiangsu, and Sichuan provinces are unable to perform in the market.

And if you try to do that in other ways, you will see that the growth rate which Guangdong records, or maybe, for example, you take Shanghai, year-on-year growth rate of Shanghai is just 1%. Now, these are just numbers. Now, when you talk about the responses, you will see that in terms of responses, it has been evident that the local government has been traditionally restricted from borrowing directly in traditional way.

So as a result of it, many provinces under stress because there are restrictions over land sales revenues because they have collapsed. The local government financial makers are already having high debts. And then the COVID data has also created negative scenarios as far as fiscal gaps are concerned. Pertaining to that, the local government have been asking central government to infuse some funds. And that is going to have a direct impact. So you have these goals to meet in 15th five-year plan. You have new sectors, new targets. Technology is there. Bio pharma is there, as Santosh said and Sir said. But now the major problem is that the central government has to step up.

So that means that the problem is not only, the bug is not only stopping at central government. They want provinces to perform. And provinces cannot perform because the traditional rate of growth has saturated. So there has to be new growth cycles or valves you can talk about. So the central government has increasingly stepped into shoring up the local finances in recent years. And if you see, in the past year, in year 2024, the fiscal transfer to local government under the general public budget has reached record highs, equivalent to 7.4% of GDP. So the provinces which were the drivers of the growth are not performing.

Within that, the provinces which were at the front are not performing. So Tier 2 provinces are performing. To help the tier 1 provinces, the central government has to step up and come up with the bonds. The political interpretation of that is now, it's very interesting. If the top provinces are not performing, where the provincial secretaries are influential, have access to the inner circles, are under stress. What does it mean? That means that there is a domino effect on the local economies. And there is a domino effect on local political socialization structures and assimilations.

If you try to see, there have been bonds which the central government has been showing. And mind it, these are not general-purpose bonds. These are earmarked bonds. And these are earmarked bonds the central government is raising for the provinces. That is Tier 2, not Tier 1, focusing on infrastructure, disaster relief, and restructuring the local government debts, public services, social stability spending, and then the tech. So if you want to really interpreted what does it mean that bringing in another aspect over here, the local governments as they had some level of autonomy earlier, are losing that autonomy because they have become increasingly dependent on the central government.

And as a result of it, there is a rising control over provinces by the center, because as the strings have been extended to the provinces, the center wants the provinces to perform at certain level. This is going to have a major problem if not coordinated well, with regard to the performance goals, which have been laid down in front of the central government. So the central government is issuing large amount of treasury bonds and that is helping the provinces to raise the funds. But the important question is that there is an imbalance as far as the revenue is concerned for the provinces.

If there is only way to balance between these things, provinces has to perform and only way to perform is to raise the revenues. There are four fundamental problems as far as raising the revenue for the provinces are concerned. Now you can relate that with the 15 five-year plan or relation between the center and provinces. Number one, as you see that there is a tax structure in China which is largely imbalanced because the structure mainly depends on, you have the value added taxes, corporate income tax and personal income taxes. And if you see, the provinces have not been happy with their own performances because there has been rising pressure as there is a decline in real estate and land-related taxes. That's number one.

Second, as Professor Dhar talked about, the continuous decline in PPI and that is having a direct colossal impact on the earnings of the provinces. What's more complicated is that the tax relief measures implemented by the states or the provinces and then the state enterprises. That is having the next problem. And in the end, the household investments within the provinces are not actually attracted to invest in the provinces. They're looking for overseas bonds, they're looking for the other financial products to invest in. So, the trust in the domestic, the provincial financial products is decreasing.

Now, if you relate this thing, it emerges that the situation is going to get a bit serious, if there is no proper coordination between what the provinces are looking for. And actually, the provinces are underplaying their roles, where I read it. There was a case in other provinces who put high targets for political incentivization. But now, the provinces are not actually taking it up. They want to have a sublime rule. And that's where I want to stop. That's the local economic situation and scenario in China right now. Thank you.

Ashok Kantha: Well, we just had three excellent presentations by people who understand the subject, who have been monitoring the Chinese economy and politics for quite some time. So I'll seek Nutan's permission to borrow some extra time for Q&A. So the floor is open. So please, go ahead. Yeah, Okay. Sanjeev, yeah.

Unidentified Participant: Thank you, sir. I have two very short questions to Professor Dhar. First is whether this tit-for-tat strategy of China, especially in the field of trade and tariff for USA, has worked or not? And the second is, how serious do you consider the real estate crisis in China?

Ravi: Thanks to all the speakers for their excellent presentations. I want to address this question. Really, the question was posed by our chairman by saying that, is there a breakout strategy to counter involution was your question. And my question is actually to Santosh to carry forward the five aspects you mentioned of technology and the technological upgrading of manufacturing, which is the main key thrust of what we hear of the 15th year plan, that is it not the case that, through technology, manufacturing processes can be upgraded and manufacturing can go to the next higher value-added levels?

And thereby, what happens, to be very brief, is that enables manufacturing to generate higher profits, as well as lead to higher employment, as well as lead to higher wages, and as well as lead to higher taxes or some combination of these four elements. Why? Because as a result productivity has gone up and therefore, you can do these things without increasing debt. This is the important point. Therefore, from what little I have read on this area and so on, what seems to be the thrust is to stimulate consumption, etc., as the Chairman was saying, through this means, without falling into the trap of fiscal deficit or greater debt.

Now, this is a gamble. Will it work? Will the upgradation generate the sort of value? Can it do it? In theory, economic theory, it could, mathematically. But will it? This is the question and I would appreciate your views on this.

Ashok Kantha: Just to supplement that question, Ravi has asked a very, very important question. Doubts are being raised and I don't have competence to really understand that, though China's achievements in field of innovation, technology is very impressive, but two follow-up developments are not taking place. One, productivity remains sluggish. Productivity is not going up. And two, innovation-led growth is nowhere close to substituting traditional drivers of growth, particularly real estate. How do you look at it? Maybe we'll take one more question.

Sigandhi J.: Good evening, everyone. I am Sugandhi, research analyst at the Council. My question is to Mr. Santosh. Sir, as we know that China dominates the critical mineral supply chains and as you mentioned that it has tightened export controls also. So, to what extent do you think China is creating a problem in the critical mineral supply chains? Thank you.

Unidentified Participant: Thank you, sir. My question is to Santosh, sir. AI is a very real part of technology and economy today. So, advanced models like DeepSeek that China has created at low cost, how does that impact India's economy and what lessons can we learn? And the second related question is that you said that China is using technology as a factor of production, especially because of the shrinking workforce. So, India has a demographic advantage, but will it be a disadvantage for India if China continues to do so? Thank you.

Biswajit Dhar: I'm sorry. The Chinese are already winning this battle. And the way President Trump has been postponing the imposition of heavier tariffs on China, that could be one indication. Now, I'd also like to address this issue of what Santosh had said about the value addition part of it. But the point is that, look, if the exports come down from something about 19% to 10%, then this is a serious problem. I'll give you one example. I've actually been trying to do some detailed number crunching. I was looking at it from our perspective, what's happening in the mobile phone sector. Because what has happened is that whatever China has vacated, and China has vacated quite a bit, that space we had actually occupied.

And now it's our turn to move away from the US. And we are now getting into other markets, like, for instance, United Arab Emirates and other markets we're getting into. So there is a serious possibility of shortages appearing in the US. It hasn't still shown up. I don't know, because I think the statisticians in the US are mortally afraid of calling out. And they might lose their jobs. So I think the led is being put on that. So tit for tat is not working both ways. Trump is backing off, and this. So let's see what happens in the new year.

You had a second question, I forgot. Real estate crisis, of course. Real estate crisis, I think this is here to stay. And the kind of resources that are required to bail the real estate thing out, I don't see the central government garnering those resources. Because they have a huge cake. And if they have to invest in technology, if you have to do all the things that they are talking about in the 15th five-year plan, and then they have to actually bail out the sick person out, that is going to be a constant sort of a millstone around China's neck. I don't know how they are going to be escaping that.

There is one thing, I was just tempted to say this because we talked about technology, because the Chinese are now worried whether they are actually, and this is your point that you made, that whether they are actually getting the right stuff. I remember about 10 years back, the Chinese patent office emerged as the largest patent office in the world. And the Americans were completely stunned when the numbers of applications reached the millions. And now, in the last few years, if you see the literature, there is a pushback. How?

Pushback is, Chinese commentators are saying numbers are not good enough, you have to look at the quality. Now, that is ringing a huge bell as to what is happening in terms of the technology development. I think so we need to really study what is going on in the technology sphere.

Santosh Kumar: Thank you, Professor. I will first address Ravi's question on the upgradation and profitably part. I agree, I don't think all these technological deployment has resulted in profitability because the Chinese industry is really in a bad state. Private state, local, global, domestic, pure play, all kinds of companies. Profitability is at an all-time low. They are really facing the challenge on profitability.

Now, on the debt part of it, if you look at the capital market trend, in the last three years after COVID when stock markets opened, Hong Kong, Shenzhen and Shanghai listings are showing a clear bias towards certain industries, which are all in this MIC 2025 list, medical devices and biopharma and all of these. So, my inference as a non-economist is that the dependency on debt is far less when deploying technology because of precisely what you said, it is directly not resulting in profitability. So, it is more the capital markets, equity capital which is being tapped for some of this technology upgradation.

So, it is a hedge. Banks are not automatically lending to that extent to bankroll the whole economy whole thing. They may give a little bit of lending to juice up the story and they go for IPO and raise the capital. This is my reading. And I think again what Ambassador also said, it is not substituting because technology rollout firstly is not across the board. It is very selective because it's only few companies in certain sectors, which are deploying that kind of capital to buy these machines because most SMEs in China for them it is easier still to deploy labour rather than upgrade just because a robot is available. I don't think that it has trickled down to that extent yet. I think that will just be a drip factor because of various reasons. So I think that is my take on those.

Critical minerals, what problem is it causing? I think it is increasingly causing bottlenecks in supply chains. Inventory levels are going up. So everyone who depends on these imports from China is expanding inventory because it is uncertain. And the export control mechanism, I think the real threat of that is not just for critical minerals but in the future what it can be deployed for because the bureaucracy that is backing the export control orders is quite comprehensive. They are mapping out the factories, they are mapping out the countries, the end use of those manufacturing sites.

So it is extraterritorial application. If it is used in other products that is a bigger concern. Critical minerals as such, I think a lot of countries, including India are subsidizing production and so on but it is a very polluting process. To bleach hillsides and generate critical minerals is very polluting. So there will be some natural limitation, but I think people are reducing their dependency.

I like the last question, AI. In fact, Kai Fung Lee who is in many ways known as father of AI wrote a column in the Financial Times yesterday saying that China has adopted the Android strategy, which means they want to capture 70% of market share with open source AI much like the Android phones captured 70% market share in the mobile phone industry whereas Apple is stuck with a smaller share because they have closed ecosystem.

So I think if you go by that logic, the lesson for India, I think that was your question, is that because we are a big market, we have to make our choices sooner or later because the western AI models are not open source. They don't lend themselves to too much of modification and tinkering and so on but the Chinese source is very tempting to adopt. DeepSeek is functioning very well. So the real choice for India is can we develop our own model which can be open source but can be secure.

It's also independent of DeepSeek. Because it's very tempting today if you're an innovator sitting in India, saying because DeepSeek is open, to take those algorithms and develop it using our own data. It's very tempting. So that's the real challenge. I think the battle lines in AI have been now more or less drawn, that it's going to shape in this way. But India is yet to make a choice, so to speak.

PTC, finally, I think Professor Dhar made a very good point. I will add another aspect to the PTC argument, that China itself today refuses to accept only China-based filing as a valid recognition of innovation. It is encouraging both Chinese companies and foreign companies operating in China to register their patents outside China to prove that they actually have some intellectual property that can be valued. So I think that's a well-researched area now, that looking at quality of patents is much more important than looking at the numbers. Thank you.

Arvind Subramanian: Thank you, Chair. Quickly, things have not drastically changed since Tsurongchi's inversion of financial division since 1994-'95. What has fundamentally changed? The way there is an intervention made by central government and its agencies, where I talk about the enterprises also. Interestingly, what has happened is rich provinces, which were worst affected with the inversion of the financial division since 1994-'95, did not fight with the center because they were kept on growing. So there was no problem.

The problem was understood or realized when these provinces started facing a headwind. And that's where they realized that there is a problem. So like Santosh talked about the Android model, so there is a new model of which the central governments are doing it. They call it conditional bailing out. They would not come out completely to bail out a company or a province here. They cannot do it. Yes, provinces are running out of cash, but they are having these bonds. They're having these enterprises to invest more.

And importantly, what happens is that apart from lowering the interest rates, those provinces, which are aligning with the plans, five-year plans or the projects, have an access to ease the pressure. So it is up to the provinces to have an access or way or method to ease that financial stress. But structurally, there is no change. The change is only happening by central government giving a provision, making a provision for local government where they can swap the loans or debts with the central government bonds. I mean, that is a very unique way the central government is helping and extending.

Ashok Kantha: I wish we could have taken another round of questions. Unfortunately, we have really run out of time. So my apologies to others who wanted to ask questions. I will not try to summarize, but only say that we had very rich discussions, which has thrown up so many issues and questions to which we don't have answers. In fact, no one has answered. And Mr. Xi Jinping doesn't have answers to those questions. But these are trends that are going to affect us very seriously.

I think that's why Nutan took a good initiative by organizing. Maybe we need to have more follow-up discussions, where we can have a half-a-day workshop, in fact, on the Chinese economy, because there's so much to discuss, questions that have been raised. For instance, technology, what has come good, what hasn't come good, what is falling short. So we'll continue this dialogue. That's all I can say. Thank you.

Teshu Singh: Thank you, sir. After this discussion, we are all certainly much better informed about the developments of Chinese economy and its broader implications. With this, we conclude the panel discussion. I thank all the speakers and participants for the panel discussion. I also thank the acting director general of ICWA, director research, the IT team, the research faculty, and the entire staff of ICWA for their support. To learn more about ICWA's research, events, and outreach program, visit our website and social media channel. May I now invite everyone to join us for high tea. Thank you, once again.

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