News Update

CBDT amends Rule 114DA to notify New Form No 49CMarriage trend plummets in China; Down by 20% in 2024Cus - Tata Motors is not required to pay Social Welfare Surcharge (SWS) when Basic Customs Duty (BCD) amount is nil: CESTATSteel Secy says No major impact of Trump’s tariffIndia to inaugurate EFTA Desk to enhance Trade and Investment under TEPAI-T - Re-assessment order is invalid where passed without considering assessee's objections to such proceedings: HCTrump trolls Taylor Swift; says MAGA is unforgivingMaha Kumbh: Special Scheme to provide Quality Ration to devotees2 killed & 23 hurt as bus rams into truck in UPI-T - Sec 149 which prescribes limitation period for initiating reassessment against assessee, is not enabling provision but rather prescription on AO's powers: HCDefence sector powering growth engine of Indian economy: RMKorean Air deemed world’s best airline for 2025CST - Transfer of liquor from Rajasthan to Bihar is an inter-state stock transfer and not a taxable inter-state sale, leading to cancellation of Central Sales Tax (CST) demand and a refund order: CESTATPersonal Income Tax - 'Secret' driver for future revenue growthPM Modi may discuss tariff-reprieve with TrumpBudget 2025 - Will the Nudge work?Trump vows to impose 25% tariffs on aluminium and steel imports from all nationsKey Customs Reforms in Budget - Effective implementation will bring all-round benefitsMacron embraces Deepfake videos to promote AI Summit + unfolds plan to invest 109 bn euroPradhan releases Hindi translation of The Saga of Kudopali: The Unsung Story of 1857Tirupati Laddu case - Heads of 3 Dairies arrestedCabinet okays renaming of Waltair as Vizag railway zoneCabinet nod for extension of tenure of National Commission for Safai KaramcharisUnion Cabinet okays Bill to table New Direct Tax Code in Parliament
 
Wilting China to face formidable trade pushbacks in 2025!

TIOL - COB( WEB) - 955
JANUARY 16, 2025

By Shailendra Kumar, Founder Editor

AS the world steps into a new year, the most daunting question being asked by most economists of repute and also 'battle-scarred' geopolitical analysts is - how good or bad is going to be 2025 for China? Of course, it hinges on how one critiques the vast canvas of multi-faceted indicators. If one reckons mega developments on stand-alone basis, the conclusion would be influenced differently. Anyway, let me usher in with some cheery news for Chinese President Xi Jinping, who was reduced to a bundle of quirky nerves by a series of geo-economic and geopolitical events in 2024. And this is related to the new age quantum technology. One Chinese startup in the eastern city of Hefei, recently, demonstrated its first quantum computer in the showroom. Interestingly, it was not open to be scrutinised by foreigners - height of alarmism! Quantum computers can compute in minutes what may take infinite years for whizzy supercomputers! Although its commercial applications are not yet much known but defence forces around the world take extraordinary interests in its rapid development. Google recently unwrapped a new quantum chip which can mend a series of errors produced by the computers. Though America has an edge in quantum computing but China runs neck and neck in quantum sensing which is used for detecting even minor changes in magnetic fields. In a nutshell, China is bridging the gulf with the US at a galloping pace, and it should brighten the stoical countenance of Mr Jinping! What may further add to the glow of his face is the fact that the number of EV brands has gone past 100, which manufacture 80% of the world's EV cars. They are rapidly cornering mega market shares in Europe, Latin America and Southeast Asia.

Let's now take a goose-step towards the Chinese economy which seems to have cratered and has been wilting fast since the COVID days. An erstwhile fire-spitting dragon has lost a major slice of its incendiarism on economy front! Although warning lights were blinking red throughout last year but Beijing's chutzpah did not let it be scared from its slumber! Finally, in December, when global media, based on independent studies done by some American think-tanks, reported less than 3% growth rate, a shudder of panic ran through the vertebrate of the Beijing establishment, which has been staying afloat with the help of massaged macro-economic data. Though China's growth was less than 5% in 2023 but its official data claimed that the target set by the CCP bosses was achieved. However, when the sinking of the 'vessel' was too visible to be missed by the world in 2024, the Communist Party Politburo, last December, demonstrated its solemn resolve to unfurl economic stimulus - more subsidies and reduction in interest rates. While addressing the gathering, Mr Jinping said, "The current economic operation faces some new situations, challenges from the uncertainty of the external environment and pressure of transformation from old drivers of growth into new ones, but these can be overcome though hard work."

And, around Christmas, China acted like Santa Claus, gifting a hefty pay-hike to close to 42 million public sector employees. It was a mega surprise gift for government employees who had got such benefits in 2015. This is projected to boost domestic consumption by about USD 25 billion. Its Central Bank has also announced a recast of its tool-kit and cuts in interest rates to perk up credit flows for consumers and businesses. Beijing recently stated that it would broaden its trade-in programme to cover 12 product categories, including microwaves and dishwashers. All these measures are to prop up the sinking or missing local consumption, resulting in deflation in the economy. Such drastic measures were last seen during the Asian financial strife when Beijing had unfolded USD 1.4 trillion programme for local government debt and more liquidity for the central bank to gin up the flagging stock market. Though China never admitted the slowdown in the economy but such hurried and generous packages are not unveiled by governments during normal growth phase! Western studies indicate that the Chinese economy has suffered a bout of thrombus, 'clotting' by close to 10% - about USD 1.7 trillion - since the COVID days.

After the collapse of its property sector in 2021, the wheel of investments has paused with 65% decline in new projects. Private investment continues to be terrifyingly drab and forlorn. Given the soaring trade tensions against the West, 2025 may not witness much fresh investments into the economy either from the West or its private players who see a glut of production. A large number of private firms have been reducing wages or freezing them or even laying workers off, to stay afloat during the tumultuous price war on the domestic turf but they are also under the radar of the CCP which senses palpable signs of social upheavals. Though China provides trade-in subsidy scheme for consumer durables, renewable energies, digital gadgets and EVs, household consumption continues to confront serious headwinds. Local governments have been trying to ramp up debt programmes and social services spending to buoy up household consumption. By doing so, they think that households do not need to do savings and pour their wages into the consumption bowl! But overcautious consumers, after being scarred by the property crisis and also no hike in wages and employment opportunities, are doubly careful about binging on cheap goods.

China has also decided to go for a headline fiscal deficit of 4% from 3% so that it could pump in more funds into the economy. However, its tepid revenue growth may pose serious challenges in 2025. A major swathe of China's revenue - about 60%, comes from corporate tax and VAT. Since industrial production is caught in throes of a glut, its revenue collection efforts suffered a decline of 3.3% in 2024. A similar trend is likely to be witnessed in 2025. What may wallop all its projections is the large threat of 'MAGA-nomics' looming large over Mr Jinping. The Trump government is barely a few hours away, and none knows how earth-shaking is going to be his first day in the Oval Office - he wants to issue 100 Executive Orders on his first day in office! If he does what has reiterated several times - 60% tariff on Chinese goods, it would suck close to 1.5% of China's GDP in 2025. If Beijing thinks that it can expand its exports market to offset the loss of the American market, then, its train of thoughts is heading in wrong direction. A large number of the Global South countries are not keen to provide unbridled access to their markets. They are willing to risk their trade relations with Beijing for the sake of their own local industries. A large number of protectionist measures initiated by them in 2024 are actually geared to wall off cheap Chinese exports. Mexico, which made tangible gains out of the nearshoring trend, is seen as a trojan horse for Chinese mercantilism by Mr Trump. And it is now paying the price for welcoming Chinese investments. Although it has imposed higher tariffs on Chinese steel and aluminium, the US is not happy with the fact that Chinese manufacturers setting up factories there and making profit out of the trade treaty with America.

Another formidable example is the ASEAN. All the members of this trade association have recorded grim experiences of inviting Chinese FDI into greenfield projects. What has hurt them most is their popular practice of not hiring local labour and also not sourcing raw materials from local suppliers. They import workforce from China. Secondly, they also do not transfer technology and skills with their adopted countries. In fact, Beijing, last December, resorted to the blunderbuss of regulations and prescribed a licence for export of technology. If it is core technology, it is simply not permitted. Beijing reluctantly wants even 'screw-driver' tech to be transferred. Thirdly, these companies have been competing out local industries which are downing their shutters in droves. Thailand reported over 2000 industrial closures - up by 40% from 2023. ASEAN has reported over USD 144 bn trade deficits against China in first 10 months of 2024, and it has been re-drafting a new trade agreement to make transfer of technology mandatory - a morsel of consolation, perhaps! ASEAN is indeed a bit late to take steps to deal with the economic snafus. Against these unsavoury ground realities, it is going to be tougher for Chinese companies to relocate production overseas and keep growing. Chinese companies have invested about USD 177 bn FDI in 2024. To top it all, the US has been coming down hard on exports from 'connecting countries' in China's networks. Such countries are those from which Chinese companies have been exporting goods to the US to avoid higher tariffs imposed during the Trump's first term. In view of such grim silhouette, it would be audacious for China to expect mopping up more revenue from its industrial sector in 2025.

What also portends ill for China in 2025 is the flight of foreign capital in view of its exacerbating trade relations. Leave aside the US, even EU sees no kosher reasons to deepen its trade relations with China as Beijing inches closer to Russia - a nemesis for the EU. China's biggest trading partner in Europe, Germany, has slumped into recession and its automobile companies are struggling to survive in China against the subsidised onslaughts by the local EV industry. A large number of British companies have also begun folding up their tents in China. South Korea and Taiwan have been doing so for the past four years. Japan has many reasons to show cravenness to further deepen economic relations with Beijing - a hostile geopolitical equation besides their regular sparring in the East China Sea. Philippines and Indonesia also do not see much future in their trade relations with China. The geopolitical currents have turned turtle for Beijing and it would predictably spell tormenting times ahead for China.

As I have been seeing the trend in the past four years, Mr Jinping may keep himself happy by flexing his military muscles on the borders of his neighbours and the South China Sea but he is soon going to face a high tide of social tensions on the domestic turf if the recent incidents of knifings and car-crashing in the crowds are emblematic of the much-feared pestilence by the CCP! Holy urobors! A case of dragon eating its own tail! If the vessel of Chinese economy keeps sinking at the extant pace, Mr Jinping's oft-repeated dream of flying on time's winged chariot and unifying Taiwan may go up in smoke! Time for China to take a death-defying leap if the economy and the reign of CCP's grip on power are to be preserved! Or, Jinping is simply contemplating of embracing unpolished 'degrowth' philosophy! Holy Dragon!


POST YOUR COMMENTS
   



TIOL Tube Latest

Former Prime Minister, Dr Manmohan Singh, delivering his Award Acceptance Speech after receiving TIOL Fiscal Heritage Award 2022 on Nov 8 at Taj Palace, New Delhi



Technical Session I - Ease of Doing Business: GST on Digital Economy