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On 8^th January 2013, the VIF welcomed Mr. Gordon G. Chang, a China expert, lawyer and a renowned author from the US, to speak on “The Coming Collapse of China and What It Means for India”.

Beginning his talk with a succinct analysis of the economic situation in China, Mr. Gordon Chang argued, with fact and figures that the Chinese economy is faltering on account of structural impediments in its growth model. While assessing the Chinese claims of an economic growth rate of 7.4% in the 3^rd Quarter of 2012, Mr. Gordon stressed that the statistics had been artificially inflated to show higher growth rates. Using electricity generation as an indicator of actual growth, Mr. Gordon highlighted that the growth in electricity production in the quarter was at 2.4%. The GDP growth figure, which was always a few percentage points below the growth of electricity generation, therefore, could not be 7.4% as claimed, and was probably flat. Otherwise too, as Mr. Gordon Chang emphasized, it is unimaginable to have economic growth coupled with deflation.

It was pointed out that China maintained three decades of rapid growth for three major reasons: Firstly, the economic reforms that China went through in the late 1970s. Second was the end of the Cold War, with which many political barriers were removed and it led to a generation of vast export markets which China, with its economic reforms and high levels of FDI, could access. Third was the demographic profile of the country over the last three decades, but this too was now coming to an end on account of the one-child policy that was followed in China.

However, the situation has changed over the last decade. The export based model of economic growth is almost exhausted now with the American and the European markets undergoing financial crunches. Demographically too, China has its problems mounting. The work-force is already declining, and this trend will accelerate going forward. While the export based economic model started showing signs of slowing growth, the Chinese Government decided to support their economy by rapidly increasing the state investment. Underlining his argument, Mr. Gordon Chang said that over 50% of the goods and services were produced by the Chinese state-owned enterprises (SOEs) in the year 2012, while their profitability was declining. Therefore, this reliance on State-directed investment was not yielding the expected results. At the same time, consumption levels in China have remained low, at around 35%. The rapid urbanization being observed in China re-emphasizes the argument. While rapid urbanization is being carried out by the SOEs, it is only resulting in the formation of ghost towns and thus, not helping the economy.

Mr. Chang also emphasized that while China needs to go through a transformation in the consumption pattern it must be accompanied by reforms such as letting the Renminbi float freely, allowing formation of labor unions, and improving public securities like health care. These reforms, Mr. Gordon Chang argued, are not going to appear in China soon considering the members of the new standing committee of the CPC. Most of them are conservatives and by definition in China, they are strictly anti-reformers. Even if the top two leaders, Xi Jinping and Li Keqiang intend to introduce certain reforms, they will most likely be occupied in stabilizing their positions for atleast the next 5 years, until the 19th national congress of the CPC. Stressing that the fundamental economic reforms must be accompanied with the fundamental political reforms, Mr. Gordon Chang affirmed that with no likely transformations in their political system in the near future, the Chinese economy will continue on its downward path.
The problem, however, has worsened further as the Chinese leaders are panicking over their faltering economy. As Mr. Chang argued, an authoritarian can last until it either provides tremendous economic growth or resonate with the public using nationalism to whip up sentiment. However, both of these elements seem to have disappeared. Quoting Premier Wen Jiabao, Mr. Chang stressed that China might go through another cultural revolution.

Such a vulnerable situation is likely to generate highly destabilizing military actions being taken by Beijing. As it is happening now, the PLA will continue rapidly expanding and modernizing. The military might has increased so much that even young military officers are questioning the civilian leaders and diplomats; a situation similar to that of Japan in the 1930s. Mr. Gordon Chang argued that these officers of the military are increasingly becoming arrogant and thus, making China unstable. They are pushing neighboring nations and thereby losing friends. These actions taken by the Chinese military could well be the case of utilizing Chinese nationalism by adopting more aggressive postures and thus, stabilizing its control in Beijing internally.

Assessing the implications of these developments in China for India, Mr. Gordon Chang argued that, while it is perfectly in order to not choose sides for now, India will have to eventually join the US and other democracies as China will seek to expand territorially and occupy regions of India. The heavy military build up in Tibet by the PLA illustrates the argument precisely. However, the threat is not immediate since China is not likely to take on a nation as big as India. The immediate flash points are most likely to be Japan and Philippines.

The interaction session ended with some critically important comments made and questions raised by the VIF team. Mr. Ajit Doval, KC, Director of the VIF, concluded the session with final observations, indicating a desire to continue the dialogue in future as well. He added that the VIF was similar to that expressed by Mr. Chang, and we were convinced that there was a need for the countries in the Asia-Pacific Region, including the US, to keep up a regular and substantive dialogue in order to address the concerns that had been aired by both sides in the discussion.