China de-coded

A random observation triggered this piece. A factory I visited in India located in an export zone recently caught my attention. It was in the business of manufacturing cookware. It was set up at a cost of over INR 200 crores, was totally automated and one learnt that millions of units could be manufactured by just 26 operators or so.  But I also understood that this unit, large as it was, still paled in comparison to China, which I gather almost had an entire town manufacturing cookware that was still advantageously placed on pricing. 

How was this possible? How did China manage to become the world’s factory over the past 2 decades in everything and how is it that whatever anyone else does, in any part of the world, China continues its scale and price domination in any type of manufactured goods?  

To understand this, one must go back a bit. Everybody knows or vaguely knows China under Mao. It was inward looking and insecure. China under Mao was brought to its knees. China’s main source of employment then, agriculture, was unremunerative and discontent was brewing in the villages. Smuggling of Agri products and profiting from the black market was rampant. Deng Xiaoping, credited with ushering in the market economy that we know today, had no option but to issue loans through party offices in the villages with no intention of recovering them. Over time, local banks became bankrupt and had to issue IOUs against Agri produce that had to be sold to the state in lieu of money. Inflation soared to 50%. The inability to obviously honour IOUs coupled with no money in the villages, led to the revolt that came to be known as the Tiananmen square uprising in 1989. It was less a student uprising for democracy as is commonly understood and more a grassroots movement against bankruptcy. The world at the time watched the CCP crush the revolt. And this brings me to state the foundation of the ‘China Model’ we have come to know so well. Communism and the Supremacy of the CCP is paramount and permeates ALL aspects of Chinese life.  

The foundation of modern China, built 13 years after Mao’s passing in 1976, was triggered by the West desiring to bring 1.3 billion people under the WTO ‘market’ and the CCPs need to prevent another Tiananmen square uprising.  The first 10 years after Mao’s passing saw Western governments argue that introducing WTO would lead to a rules-based business orientation in China and lead to the foundation of a democracy. During the next decade, China, seeing the impact of the collapse of the Soviet Union started to open its economy leading to it joining the WTO in 2001, coinciding with the NATO bombing of the Chinese embassy in Belgrade in 1999. China used the NATO bombing of its embassy as leverage and got the USA to capitulate on the terms of the WTO. It is interesting to note that from 1999 to 2001, the CCP made many statements for internal consumption, for its rationale to join the WTO, missed completely by the West (and even India), that set out their approach.

-       It would absorb the technology of the West to its advantage 

-       It would retain control of all resources and regulate capital, which meant that economic power would be retained by the state

-       Its economic power will be translated to building its military strength and geopolitical position 

Their imminent inclusion to the WTO saw them build capacity on a scale that had not been seen before. Unlike communist societies that were plagued by scarcity like the USSR, the China model was to build an abundance of capacity for export. Today, China dominates over 75% of the world’s production share in as many as 40 distinct industries – from solar panels, to toys, to rare earth. In a free market, investments, scale etc are determined by market forces and by private entities and based on demand and supply. Not here! Everything that is done in China is to achieve what the CCP has set out to achieve by what one would call ‘gaming the system’ using what is termed as the ‘China Model’. This reflects in the way they manage the ownership of wealth, manage their finances, make investments, control their currency, control capital markets and manage human capital and IP. 

GDP

China’s economy is estimated at USD 18.74 trillion, and its PCI is consequently USD 13,303 about 5 times India’s. It has 823 billionaires, compared to India’s 284. What is not commonly known is that 95% of the top 500 companies in China are owned by CCP functionaries, financed by the state-owned banks and indirectly controlled by the CCP. So, how do their billionaires compare with their counterparts in the US or India? As was seen by the very public downgrade of Jack Ma, his wealth was really the CCPs. They are labelled billionaires as they own shares in the enterprises they set up, these enterprises are listed, privately managed and their staff are allowed to earn and spend money on lifestyle etc. But their wealth was created on the back of land, labor and capital that is controlled by the state.  This is what I’d call ‘Last Mile Capitalism’. Estimates indicate that rural per capita income of China even today is roughly around USD 3300, or just about the average PCI of India (3 times rural India’s), and even that is driven by enforced migration of labor to the cities. Much of that PCI is owned by and deployed by the state which makes it simplistic and flawed to divide the GDP by its population because of their dual system. China’s duality can be compared to a rich country in the ME, say Qatar and its labor hinterland in Peshawar in Pakistan and Rampur in UP. Two vastly different worlds and PCI’s but linked to the same economy.  Wealth lies with the rulers though the population participates in wealth creation.  

 Currency 

Much has been talked about of late, of the need for a new reserve currency led by China & BRICS. There are serious concerns, no doubt, about the USD and its use as a political tool.  Even today, the USD, the Euro, the Pound and the Yen, accounts for 93% of the currencies held by central banks around the world. A new entrant, the Renminbi (RMB), overtook the Euro as the most traded currency after the USD but only accounts for 2% of the world reserve currency and is largely held by some Asian and African countries given the extent of China’s trade with those countries. CIPS, China’s alternative to SWIFT has about 1500 participants accounting for 15% of all transfers, 85% of whom are from China, Hongkong, Taiwan, Macau besides Africa and South America. There is a reason why numbers are as low as they are for the World’s second largest economy despite the failings of the USD and SWIFT. At the foundation are transparency and intent.  

Being the world’s factory, akin to Japan, South Korea earlier. allowed it to run a trade surplus of USD 8 trillion between 2015-2025. When surpluses are generated to that extent, you trade back or buy into the deficit currency, allowing currencies to find their levels. Sustained surpluses over time demonstrate 1 way traffic of trade is tantamount to hoarding another’s currency to serve the state’s agenda to restrict the supply of the USD by keeping it high and thereby artificially keeping the RMB low to keep its excessive capacities running by keeping its exports cheap. Japan had these same surpluses decades ago (and still do) trading with the West. The market was allowed to determine the value of the Yen (and still does) and was importantly seen as nonthreatening, unlike China.   One can take the view that China has, over 2 decades, artificially kept inflation across the world down with its capacities accounting for 30% of world production and supported the USD. 

IP

On the matter of IP, how did China acquire know-how from the West, through its joint ventures and then very quickly internalize everything from an electric car to an airplane to become the factory to the world? Why was no nation able to do it – From the ME to the Far East?  

Under the WTO western companies could access this market provided they transferred their technology by manufacturing their products in China. China would, in turn, offer unfettered resources (land, finance and labour) to retain prices.  

The CCP had a systematic plan from the early pronouncements made in 1999 to send its youth to the US, acquire knowledge and bring it back to China initially backed by the state to support this process. The number of Chinese university students in the US rose from about 98,200 in 2009 to a record high of 369,500 in 2019.  India too has been a leading source of students to the US competing neck to neck with China since 2009. But here is the difference - In 2020 nearly 85% of Chinese students returned home after studying abroad, including the US. It rose from about 5% in 1987 to 30.6% in 2007, and further to over 80% since 2012. 85% of students who travel abroad for education from India stay back in contrast.   

Then, when it comes to the management of companies, JVs were and continue to be structured to be stacked, albeit subtly, against the foreign partners who come with both capital and IP.  Professional management has the legal authority to run the company. But in Chinese JVs, the managing or representative director and the general manager wield much more power over day-to-day operations than the board itself. China corporate law puts a lot of power in the representative director which can always be traced back albeit tenuously to the CCP. This structure makes it easy for institutional transference and management of knowhow, many times at the cost of the foreign partner. There is no direct correlation of data, but it is interesting to note that over 20000 IP cases were filed by JV partners in 2015 in China leading to a 50% drop in JVs in China over a 10-year period and a 15% drop in FDI. The horse, though, has bolted. 

Debt

7 of the top 15 banks in the world ranked by assets are from China, totaling assets of USD 27 trillion. The US, which is the largest economy in the world and 40% larger than China, has 4 on that list with assets totaling just USD 11 trillion and its largest bank ranks 5^th on that list. The first 4 are Chinese banks. The European Union which has a combined economy bigger than China’s has just 2 banks holding assets of just USD 4 trillion. And it is obvious that the US and Europe do not have significant business and assets with Chinese banks. So, why is this? The CCP finances its economy based on the policy it determines. As stated earlier, this was prevalent even in the 70’s, albeit for very different reasons in China. India can be seen doing this of late, financing the likes of Adani to corner strategic assets like Cement, Minerals and Mining, Airports and Ports. When you have unfettered access to capital at 1.5-3.5 % (1 year and LT) interest rates compared to say India which is between 8.5-9.5 % you are automatically advantaged, just as Adani is compared to his competitors. Nowhere is this more demonstrated than in the rare earth industry. China took a call a decade ago to invest in rare earth minerals and the renewable/electric industry and vehicles. They wished for global dominance and saw themselves as a world alternative to fossil fueled economies. Rare earths, as it is made out to be, are not so rare and are available around the world. In fact, the US has higher deposits of rare earths than China which currently dominates the world market with a 95% market share thanks to this focus. But for the quantities required, the ecosystem is expensive, and returns don’t work out for a commercial operation. The CCP subsidized this for leverage and their own long-term plans to pursue electric mobility and clean energy.  It is the same with electric mobility.  Why did the world’s largest automakers including GM, Renault, VW which manufactured EVs in the 90s lose out to Tesla and BYD 30 years later? When the decision was taken by the CCP to focus on clean energy vehicles in 2005, focused policy enabled unfettered finance or subsidies to start 500 EV companies in China. This was later consolidated to 33 companies 2 years ago to achieve scale. BYD alone sells 4.3 million EVs today, about 3 times what Tesla or VW sell. In any other economy, the setting up of and the merger or closure of 467 EV companies thereafter would have collapsed the economy besides being an investment banking nightmare. Another anecdotal example is the case of the HNA group. 2 CCP party officials rode the aviation boom in China and received from banks and the public approximately USD 200 million against a promoter investment of USD 1 million to start their company. This was in a sector where the Chinese Government allowed 33 airlines to start operations. In many instances state owned banks lent against the assets bought by these companies but here is where it turns ingenious. Some banks let the assets remain free of hypothecation, allowing some companies including HNA to seek further lines against the same assets. Other companies were allowed to seek debt against future revenue lines if the assets were hypothecated in a highly competitive industry. Today 33 airlines have been consolidated into 3. In many ways the CCP replicated the shadow currency adopted by the Nazi’s to fuel the German war machine. Debt lies in multiple entities that his hidden from the Central Bank and therefore not on any published record.  

Capital Markets

The Chinese don’t keep their monies in FD’s or invest their surpluses in the stock markets. 45% of the investing Chinese place their savings in real estate and just 12% in stock markets. The SSE 300 has seen 0 return for the past 5 years from 2020 to 2025. Any wealth manager in India will opine that the Indian market has delivered a 12% annualized return over a 5-year period that reflects, at the very least, inflation at 6% and GDP growth at 6%. This does not happen in China for obvious reasons as data is garbled. A joint study by Wharton School and Shanghai Jiao Tong University found that “The correlation between market returns and GDP growth for China is statistically insignificant. It is interesting to note that Chinese companies have an ingenious way of tapping US investments and markets, making use of a dual system called VIE that mirrors the P&L of Chinese companies via an offshore entity. US investors do not own shares of the Chinese Company in China but simply participate in the share price reflected in the offshore mirror. If the company fares poorly, the US ‘shareholder’ cannot vote or take over the company and try and turn it around. The dual system satiated western greed and China’s hunger for easy money and was a perversity of capital markets. As of 2025, there were 286 Chinese companies listed on these U.S. exchanges with a total market capitalization of $1.1 trillion.  No US company can list on the SSE in contrast even via the DR route. Surprising for the world’s second largest economy.  

The US is in the news every other day with alarm being expressed over interest costs touching USD 1 trillion with the debt burgeoning to USD 37 trillion against a GDP of USD 30 trillion. The policy makers in the US are buzzing like an overturned beehive due to this. China, in comparison, is supposedly fiscally prudent and officially has a debt to GDP of 89% or USD 17 trillion, nowhere near the debt to GDP of 123% carried by the US.  

But most economists who are familiar with China and obliquely referred to by Xuan Changneng, the deputy governor of the PBC believe that the debt to GDP is about 300% or USD 60 trillion, with much of the debt sitting with local governments to support local economies including real estate, the principal investment avenue of the people. By a similar yardstick, public and private debt in the US is around USD 100 trillion for an economy that is more than 40% bigger. The arithmetic seems right. If America has 14 misguided wars during the past 2 decades as the largest cause for its debt besides tax reduction, China has its share of unremunerative investments domestically and in B&R exposures in 3^rd world economies – Sri Lanka, Ethiopia, Pakistan and Kenya to name a few. The difference is that going forward, America can tighten its belt, stay out of trouble(involvement) and recover while China must depend on its ‘bets’ coming good to manage its debt in the long term. With push back on both its bets by most of the world, China, and not the US, will be the cause of the world recession that, from all indications of the short-term debt cycle, will take place in 2026. It will not be structural, as in 2008, but a correction of China’s debt besides trade and currency between 2 large economies.  

The purpose of this paper is not to vilify China. They’ve done extremely well for themselves by keeping their interests foremost and creditably moved 600 million out of poverty. To its credit, for those alarmed with China’s expansionist intentions, they need to know that the US has 750 military bases across 80 countries compared to China’s 8, 4 of them in China’s immediate vicinity. China it would seem are just focused on keeping the CCP intact and trying to re-claim territory - what it thinks it lost after WW2. Their efforts in Panama and the South China sea is to secure their trade routes, the key to keeping their people on the treadmill of manufacturing’ they are on now.

But from India’s point of view, there are 2 take-aways.  

One. No opaque system, run by an authoritarian regime, that has continually gamed the world with 2 sets of rules, with the West’s blessings of course, can replace a moderately transparent world order that is currently in force. Intent is everything and China’s intent is Communism, with Capitalism being its enemy – with the West or with India. Even if it develops say 7G platforms, who will accept anything when credibility of the deep state and intent is questioned, irrespective of the quality of the platform? It will be a case of Tik-Tok on steroids. India must err on the side of the free market and free thought and both de-couple and de-risk from China and the ‘China Model’. No point competing with or joining a rigged system. 

Two, India is not going to get the once in a lifetime (or maybe two) chance that China got to become the world’s manufacturing hub as the West pursued its avarice. The world has become wiser. China + 1 or ‘Make in India’ are merely reactionary programs to China. And it’s a mugs game. India’s efforts to adopt this model by ‘cutting cheques’ to the Adani group to acquire critical assets, both in India and overseas, is half backed, with the rest of the system placed at an unfair advantage and a recipe for disaster with its debt being greater than the Tata’s and Ambani’s combined. 

The choice left is to look internally and to put money in the hands of Indians so that say, the 46 districts in UP which earns a PCI of less than USD 960 dollars have something to look forward too. That is the real pride and real nationalism – better education, better health and the ability to put food on the table and live with dignity. USD 4 trillion GDP is meaningless without this. And we must invest in our security. A focused shadow banking system to create this is the solution. Besides, the ‘China Model’ is not in our DNA, nor is it sustainable or credible today. The record of the West is there to compare – South Korea, Singapore, Japan, Qatar, UAE, KSA, Europe, Eastern Europe, even Philippines and Mexico– all ravaged by war 80 years ago, Imperialism or Communism. ‘Strategic Autonomy and Strategic Restraint’ are mere words. It means nothing. There are no easy solutions, but understanding this reality could be a good starting point. QE is a risk worth taking today. The recent moves on IT and GST by Modi have been a good start.