The State of China’s Automobile Sector

Amidst the uncertainty regarding the trade war’s impact on Chinese industry, the automobile sector in China will remain profitable

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Bhavana Giri, Research Intern, Institute of Chinese Studies

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  Photo: Visual China

Automobile sector in China is the largest in the world when measured by the number of units produced. Apart from domestic production, people’s demands for all kinds of vehicles in China are met by Joint Ventures (JV). For a foreign company to establish a JV, it is required to enter into a 50-50 partnership with a Chinese company in order to start production in China; a similar arrangement is required for foreign companies to export automobiles to China.

Automobiles from the US are one of the most significant exports to China, ranking just behind aircraft and agricultural output. With a trade value of more than $10 billion, this sector is of great significance to the ongoing trade war. Currently, the automobile sector in China is witnessing a downfall in output growth when taken as whole which is driven by a drop in the production of gasoline based automobiles. However, in the long run, China’s drive to lead in global production of new energy vehicles (NEVs) is slated to offset this downturn, even if the trade war continues. Additionally, the upper hand China has in the automobile joint ventures will also help to recover from the downfall. In contrast, the resilience of China’s NEV sector will adversely impact the competitiveness of its American counterpart.

Demand side conditions are highly favourable and will continue to be so. Three decades ago bicycles were the most popular mode of transport in China and most cars needed to be imported. Today, however, Chinese car makers are producing more cars than any other country in absolute terms. As can be seen from the data, the production of automobile in China increased from 9 million units in 2007 to 23 million in 2018. To be sure, economic conditions are currently turbulent in China.

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Observers predict that China’s GDP will decelerate in the near future and its leaders have urged precaution in this regard. The automobile sector, however is poised to remain buoyant, despite macroeconomic woes. The Chinese government intends to prioritise the preservation of automobile demand and supply by providing subsidies and exempting consumers from purchase tax on electric vehicles. These subsidies will ensure that there will be no significant shock to the automobile sector.

China has become the biggest giant in the production of electric cars and bikes. With Domestic Value Addition (DVA) of more than 80 per cent, and a strong grip over the production of essential inputs such as batteries, the sector enjoys a substantially strong footing. Recent falls in automobile stock prices should not obscure this fact.

To the rest of the world, it may appear that China has struggled to make progress in automobile manufacturing. However, the situation has changed drastically with recent developments. China now possesses massive potential for substituting imported automobiles with electric vehicles. With trade talks in a state of disarray and the heightened possibility that China will reapply auto tariffs, it is also likely that automakers will be incentivised further to produce in China. With the exception of the luxury segment, which is less easily substituted, China’s automobile sector is likely to withstand the headwinds it currently faces. Moreover, with the Chinese government establishing stricter norms for controlling carbon emissions and attempting to reduce pollution in cities, the scope for domestic companies to defeat automobile giants such as Toyota, BMW, etc has escalated. The Chinese government is also granting special manufacturing permits to companies which are working to develop NEVs.

The electric vehicle world sales database shows that in 2018, 2.1 million units of electric vehicles were sold which is almost 64 per cent higher than that of 2017. China has advanced its position in this particular segment and has a share of almost 56 per cent of the total sales. Although companies like Tesla, Toyota, etc. are also developing electric vehicles they lack the cost advantage China has, and are, thus unable to capture the market. Several subsidies and tax cuts provided on purchases of electric vehicles further boost demand in the highly populated cities of China. This is illustrated by the fact that profits for BYD jumped 632 per cent jump in 2019. On the other hand Tesla, which is exporting to China in an increasingly hostile trade environment, lost nearly $700 million in the first quarter in 2019, despite robust demand.

Another factor that will support China’s automobile sector is technology transfer. Most automobile production in China happens by way of Joint Ventures (JV) between Chinese and foreign companies, which allows local companies to acquire know-how. The Chinese have also acquired automobile technology by heavily investing in foreign-based automobile companies. Therefore, China’s automobile sector is unlikely to reel in the long-run. Moreover, China is less dependent on foreign value addition than it used to be – its contribution to processing and non-processing value addition process in the production of automobiles is uninterruptedly increasing.

The optimism expressed above does not apply to the American automobile industry, however. To a large extent, US-based automobile companies are dependent on revenues from the Chinese market that their JVs enjoy and are, thus, highly vulnerable to disruptions in bilateral relationship between two nations. For example, automobile giant BMW, is not introducing a new model because of the environment of uncertainty created by the trade war. US automobile companies are experiencing sluggish production while on the other hand Chinese NEV start-ups and companies are scaling up their production.

Unlike others, the automobile sector in China will likely remain profitable irrespective of ongoing trade contestations and tensions, due to the Chinese government’s encouragement to develop NEVs.  China’s NEV companies are poised to emerge as leaders in markets all around the world, as they race ahead their counterparts from the US, Japan, and Germany.

China, Global Capitalism and the Future World Order

How reflections on Marxism, history and contemporary politics envision the future of the capitalist world order.

Vidushi R Singh, Research Intern, Institute of Chinese Studies

The reform and opening up of China in 1978 paved the way for the transformation of China from a planned to a socialist market economy. The decision to open up the economy was criticized by many leftist academics and economists. The reforms led to major disagreements between the government and the bourgeois elites.

Today, under Xi Jinping’s rule, the CPC is debating the direction of growth which China should continue pursuing. In light of the US-China trade war, the calls for China to become a true market economy have reached a crescendo. Despite that, the rest of the world is shifting away from free market operations towards protectionism, with the Nordic model[1] of state-market balancing gaining immense appreciation. At a time like this, Lin Chun’s book, China and Global Capitalism: Reflections on Marxism, History and Contemporary Politics,[2] provides a critical perspective on how one can interpret the changing global scenario while considering the domestic realities of China.

The main thesis of the book questions the sustainability and moral desirability of capitalism in China and the world with regard to the evolving world order. Lin Chun attempts to decipher the past and present of the global capitalist order and its interactions with China, with a continuous call for China to revert to the pre-reform era. She ends the book by predicting the eventual and inevitable transformation of the global order into a ‘moral socialist economy’ (p. 152) with China as the leader.

Chun divides the book into three sections – a history of China and the global capitalist ideology, the present interplay between the two, and her predictions regarding the future of the world socioeconomic order.

In the first section, she emphasizes the dynamic nature of China, claiming that this has resulted in a secular, independent and socialist state with a commitment to the centrality of the people (p. 8). Chun also goes on to vehemently refute the Marxist claim of Asian societies being passive and as awaiting capitalist integration, claiming that this idea creates a tendency to ignore all possibilities of progress via other non-capitalist socio-economic models.

In the next section, Lin Chun discusses China’s shift from being a socialist bastion to a capitalist economy, and how it has impacted the nation and its people. She claims that the changing face of Chinese socialism has undermined the improvements that the socialist revolution had brought about, with the new reforms being the key drivers of this ‘peaceful evolution’ towards capitalist integration (p. 56). The fading boons of socialism, in her perspective, have created financial and structural deficiencies in the Chinese state, and have led to China becoming a vital part of the global ‘race to the bottom’[3] (p. 61). Her commentaries on the revolution carry a strong rosy note that seems to ignore the bleaker sides of the revolution and only focus on the positives. She attributes the current welfare and labour issues in China to the monopolization of decision making power in the country. This ‘proletarianization’[4] of the population, she declares, is against the Chinese vision and creates a need for ‘regime legitimization’ by the government by returning to its social commitments as stated in the Chinese constitution (p. 66-69). Throughout her narrative, there is a call for China to return to the pre-reform era. However, the author’s call to undo reforms in China trivializes several important arguments she makes against capitalism by taking away focus from them and pinning it to an impossible aspiration. It is not only impractical for China to undo years’ worth of reforms but also undesirable – it is because of the reforms that China has been able to capture the global power it enjoys today, and for a country that is highly dependent on trade, closing borders would be unreasonable.

On the topic of the existence and the need for a ‘Chinese model’ (p. 81), Lin Chun claims that any model that the government chooses to adopt will serve Chinese interests if it fulfills four prerequisites: a robust socialist state, a resourceful public sector, a focus on collective growth and development, and voluntary social organization, participation and power. She advocates the adoption of a sustainable approach to progress where urbanization, modernization and privatization are not standardized measures of development and instead there is a focus on achieving Minsheng.[5] She ends this section by asserting that the Chinese goal is ‘capitalization without proletarianization’ (p. 156) and the only way to achieve that is by creating a balance between the industrial and agricultural resources in the country, and by focusing on the ‘local’ needs of the people.

The last section of the book delves into the future she envisions for China and the world order. She declares that growing global sensitivity to human rights and ecological sustainability will inevitably result in an anti-capitalist world order. She highlights the insufficiency of the current Eurocentric worldview as a measure of development and holds the ‘moral socialist economy’ as a likely end to the global fight over socioeconomic models of growth. She ends with a call for China to reclaim its place as the leader of the global economic order.

Overall, the book comes across as intensely deterministic and ignores several shortfalls of socialism and the Chinese state. It also overemphasizes the perceived negatives of capitalism. Lin Chun has written a book with a coloured understanding of the socioeconomic models it talks about, and there is a unique sense of Chinese exceptionalism throughout the book. The flow of the arguments highlight Chun’s own New Left ideology[6] and robs the readers of a chance to formulate their own opinions. The chapters appear to be individual essays, with little logical linkages.

However, one attractive characteristic of the book is its use of Marxism and the dependency theory to formulate arguments for socialism. The book follows a clear theme about the origin, cost and durability of the Chinese model of development. The author attempts to relate China’s growth with the long term global trends and pushes for the adoption of a perspective of social justice and political righteousness instead of generic economic indicators as measures of progress. So, while the book has a biased narrative, it does develop a new understanding about measuring progress and creating new modes of development by focusing on value creation over accumulation.

However, being written in 2013, Lin Chun’s predictions of an anti-capitalist world order appear to be far from realization today. While the world does seem to be shying away from the snowballing externalities of capitalism, it is no closer to demanding a socialist revolution than it was when the book first came out. In this respect, the author seems to have missed the mark, being overly embroiled in her ideological aspirations, to objectively analyze the possibility of a change in the world order. Despite its shortcomings, the book comes out as a commendable assessment of the logic and crises of capitalist integration and raises crucial questions about how the global economy will address them in the coming years.


End notes:

[1] ‘The Nordic model encompasses a mutually supportive interaction of risk sharing and globalization. It is marked by a large welfare state, a particular set of labour market institutions and a high rate of investment in human capital’ in Andersen, T., Vartiainen, J., Tson Söderström, H., Holmström, B., Honkapohja, S., & Korkman, S. (2007). The Nordic Model: Embracing Globalisation and Sharing Risks. Yliopistopaino, Helsinki: Taloustieto Oy.

[2] The book was published on December 2013 by Palgrave Macmillan. ISBN: 978-1-137-30125-3

[3] For the author, ‘race to the bottom’ signifies the socio-economic phenomenon of countries exploiting labour and capital to reduce costs as much as possible, in an attempt to retain competitiveness in an increasingly unified global market.

[4] A Dictionary of Sociology, 1998. “In Marxism, proletarianization is the social process through which individuals from the middle class become absorbed into the working class as wage labourers, and producers are separated from the means of production through coercive and persuasive means”.

[5] Ancient Chinese principle of popular wellbeing, and development as freedom (p. 99-104).

[6] This claim is based on Chun’s participation as a writer for New Left Review, and her book ‘The British New Left’.

SME Financing: The need for Concrete Reforms in China’s Financial Sector

“As China plans loan boost for small companies, technology firms could be the answer”  

Kuldeep Saini, Research Intern, Institute of Chinese Studies, Delhi

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Source: The Straits Times

The annual meeting of China’s legislative body, the National People’s Congress (NPC) came to an end on 15 March 2019 with Premier Li Keqiang expressing commitment towards several reforms in China’s banking and financial sector. Apropos the reforms, the large state-owned commercial banks have been instructed to increase their lending by 30 per cent to micro, small and medium enterprises (MSMEs). Economists, analysts and bankers remain sceptical however, owing to the vague character of the declarations. Detailed and clarified reforms are required in order to encourage truly productive lending.

At present, there are 38.82 million MSMEs in China. MSMEs in China are defined as firms with less than 300 employees, an average revenue of RMB 30 million and RMB 40 million in assets. Market liberalisation and reform policies in various sectors and industries have been beneficial for MSMEs. MSMEs have emerged as a crucial component of China’s economy as they account for 75 per cent of total jobs, alleviate poverty and facilitate rural development. However, vulnerabilities remain due to poor execution of reforms.

For example, reforms have been inadequate with respect to the property rights of the SMEs, leading to the discouragement of private investors. Investors face problems in administrative procedures like taxation due to vague definitions. In particular, firms find it difficult to predict the level of tax they will face owing to the ambiguity regarding whether they qualify as a state-owned or collective owned enterprise. Raising lending targets of banks without addressing this ambiguity, therefore, is not adequate to empower MSMEs.

While the Chinese government expects total loans made to MSMEs to increase by RMB 300 billion on account of the raised lending requirements, this may not materialise due to lack of clarity in the NPC report. Although it instructs banks to lend to “small companies,” it is uncertain whether this term is defined the same as MSMEs or whether it refers to a subset of these. These will exacerbate existing confusions – only 63.1 per cent of the total SMEs in China applied for loans from the institutions as of 2018. Moreover, the creation of too many administrative stages in lending procedures for Township and Village Enterprises (TVEs) has made the entire affair more time-consuming.

Nor has the recently expressed reform commitment adequately addressed shortcomings in the Credit Guarantee System (CGS) – an institutionalised service offered by specialised agencies that help SMEs obtain loans from non-banking financial institutions. The CGS is intended to solve the problem of high financing cost for SMEs, reducing the bank’s management and operational risks, while developing the credit rating agency market in the country. It suffers from notable shortfalls that are in need of resolution. Firstly, the seven thousand credit guarantee subsidiaries that currently exist are still not catering to the problem of asymmetric information between the banks and enterprises. Enterprises are not adequately aware of collateral management, ways of repaying previous loans and other finance related technical details (like credit score) that the banks can mentor to the SMEs.

Secondly, there are no specific changes in the collateral requirements by the government, which is of significant concern for the banks. Even though the CGS Policy is well defined in official papers, it is not very efficient at the grass root level as the bank managers are still reluctant to invest in SMEs. This is also owing to the rising non-performing loan ratio – banks are, thus, resorting to fulfilling their annual loan targets by lending largely to small State-owned enterprises (SOEs) on the grounds that the state guarantees repayment. For example, the famous InnoFund government program that supports R&D activities does not fund the MSMEs at opening stages as the preference is for state-backed companies.

The CGS system also suffers from problems like lack of proper supervision by China’s Ministry of Commerce (MOFCOM). Additionally, different SME sectors face varying conditionalities, like interest rates, while giving loans under the CGS. Private MSMEs have to meet stricter eligibility criteria (like, number of jobs created, clean environmental norms and valuation of the total assets) for funding, compared to their state-owned counterparts. Raising lending requirements by banks do not address these issues on their own and heighten the risks of inefficient lending practices.

As premier Li Keqiang emphasises “stability” in six fields – employment, finance, cross-border trade, foreign investment, general investment and expectation – MSMEs remain a direct source of assistance for each of these. The recent net profits of 26.29 per cent by the listed SMEs in the National Equities Exchange and Quotations system despite the slowing growth of the Chinese economy reflect their considerable potential. The current reforms introduced in the annual NPC meeting reflect the economic path of the Chinese bureaucrats, although whether their financial reforms will reflect in outcomes is incumbent on diligent execution of policies at the grass roots level.

Chinese Steel Industry: How Did the World’s Largest Steel Producer Protect Itself from Global Slowdown and a Trade War?

The US-China trade war and rising environmental concerns have led to a slowdown in global infrastructural projects in 2018. The objective of this short piece is to understand the impact of these global phenomena on the Chinese steel industry.

Vidushi R Singh, Research Intern, Institute of Chinese Studies

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How Did the World’s Largest Steel Producer Protect Itself from Global Slowdown and a Trade War?

China has been the world leader in steel production since 2008, with about half of the total world steel exports originating in China. The US-China trade war and rising environmental concerns have led to a slowdown in global infrastructural projects in 2018. The objective of this short piece is to understand the impact of these global phenomena on the Chinese steel industry.

Economic logic follows that excess supply and reduced demand, as have been observed in recent times, would lead to falling prices. The inelasticity of supply should have meant low prices for the Chinese steel market. As can be observed in the following graph, prices dipped following the first steel tariff announcement from the United States Trade Representative’s (USTR) office on 1 March 2018. However, while prices did fall, they also rebounded much sooner than initially predicted. This trend can also be observed in the graph, with prices rising back up April 2018 onwards. However, the prices crashed again in November 2018, due to falling demand in downstream sectors, such as infrastructure and manufacturing industries, as a speculative response to rising tariffs between the US and China. Chinese steel manufacturers also registered losses for the first time in the last three years, in November 2018. Despite this, the Chinese steel economy remained largely immune to economic shocks.

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Source: Trading Economics

The Chinese conduit to coming out unscathed lies in the supply side reforms, initiated by the government in 2015. The end of the Chinese construction boom in 2014 had instigated the government to carry out reforms to cut down on steel production. As the growth rate of the construction industry fell from 10% in 2014 to just 2% in 2015, steel production was reigned in, with the growth rate actually falling to a negative value in 2015 (National Bureau of Statistics of China). The government decided to intervene at this point so as to ensure the survival of the steel industry and avoid mass layoffs that would have resulted from a slowdown in the industry. The goal decided in 2015 was to reduce capacity by 45 million tonnes, a target that was attained by the latter half of 2017, much before the set deadline of 2020.

Thus, when the demand growth rate fell, the Chinese steel industry had already moved on to capacity optimization and did not face grave overutilization. This allowed for the industry to shift supply rapidly, and safeguard itself from future tariffs as well. This success of the Chinese steel industry is evident in the fact that since 1 January 2019, Chinese steel prices have increased consistently. The shift from high-grade iron ore to lower grades has also allowed manufacturers to increase margins by cutting costs.

One interesting factor in this situation is the ability of the Chinese steel manufacturers to divert inventory to Chinese infrastructural projects under the ‘Made in China 2025’ initiative and the Belt and Road initiative. While it is hard to ascertain the exact amount of steel inventory being fed into these initiatives, they do provide the steel industry with a reliable sink to use up inventory, while cutting down on any overutilization, thus stabilizing prices in the short run. The government’s plans to expand on infrastructure development in the coming years also provides support to investor speculations and have played a role in stabilizing the Chinese steel economy.

The 25 per cent tariffs imposed on steel imports by President Trump, thus, fall short of having a real impact on the Chinese steel industry, in part due to China’s relatively unimportant position in US steel imports (China is the 25th largest exporter of steel to the USA), and in part because of the foresight of the Chinese government.

So while the Chinese steel industry did face multiple shocks over the course of the 2018 trade war and global infrastructural slowdown, the government’s preemptive measures of securing a strategic sector allowed it to come out of the tussle relatively unharmed. While the opacity of government and industrial operations make it tough to analyze the situation in greater depth, one can say that the Chinese steel industry has been able to cope with the changing world geopolitical scenario with ease.

Hanoi Summit: Limitation of ‘All for None’ Approach

The Hanoi Summit between the leaders of the US and North Korea on 27 and 28
February 2019 ended without any deal or joint declaration.

Sandip Kumar Mishra, Associate Professor, Centre for East Asian Studies, School of International Studies, Jawaharlal Nehru University
Adjunct Fellow, Institute of Chinese Studies

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The Hanoi Summit between the leaders of the US and North Korea on 27 and 28 February 2019 ended without any deal or joint declaration. This is unfortunate given that the US President Donald Trump and the North Korean leader Kim Jong-un had managed to at least bring out a joint declaration during their Singapore summit in June 2018. Although Trump left Hanoi after making many positive statements about Kim Jong-un and North Korea, North Korean official statement, which was released on late night of 28 February was sharper.

While Donald Trump’s press conference that was held in the immediate aftermath of the summit, attempted to convey that everything is not lost and there is still hope, North Korean statement was more accusatory and uncompromising. According to Trump, the US wanted North Korea ‘to do more’ but North Korea ‘was unprepared to do that’. In his interpretation of the North Korean position, Trump shared that North Korea wanted full reversal of the sanctions, which the US considered premature. However, he was still ‘optimistic’ and added that the US and North Korean visions were ‘a lot closer than it was a year back’. He announced the two countries would keep their relationship and especially since Kim Jong-un had assured him that regardless of anything, North Korea would not have rocket and nuclear tests. For Trump, the time was not appropriate for signing a deal currently, though he expressed that signing of a ‘deal is a process and it’s moving along’.

North Korea’s initial statement said that it had asked for only partial lifting of sanctions (only five which were brought in 2016 and 2017 out of overall 11 sanctions), which contradicted with the US claim that North Korea asked for the removal of all sanctions. Actually, North Korea had demanded for a step-by-step approach given the limited trust between the two countries and for the same reason had not put out its full list of demands at the Hanoi summit. North Korea considers removal of all sanctions and non-aggression guarantee as encompassing its full set of demands to the US. Hence, it stated that that even if only partial concession would have been agreed by the US, it was ready to ‘permanently and completely dismantle all of the nuclear production facilities in the Yongbyon area… in the presence of US experts’. It further agreed to commit to ‘permanent halt of nuclear testing and long-range rocket launch testing’ in return for the partial lifting of sanctions.

The US Special Representative for North Korea Stephen Biegun had stated in a conference on 11 March 2019 that the US was ‘not going to do (North Korea’s) denuclearization incrementally’. According to him, North Korea offered to eliminate part of its nuclear programme and in exchange asked for the lifting of ‘basically all’ of the international sanctions and it was not possible for the US to accept such a deal. North Korean version says that when the US demanded to ‘take one more step beside(s) the dismantlement of nuclear facilities in Yongbyon, it realized that the ‘US was not ready to accept our (its) proposal’.

A careful reading of various statements of the US and North Korea suggests that both the parties were asking for more and ready to give less to each other. Moreover, the US considered that even partial lifting of the sanctions might dilute the pressure from North Korea and thus, until full denuclearization of North Korea is not on the table, the easing of sanctions could be a bad strategy. Thus, the US was ready to compensate North Korea’s Yongbyon plus alpha offer by establishing liaison offices in each other’s capitals and having a peace declaration but not to ease sanctions.

For North Korea, without lifting some sanctions, all other American officers are insignificant and useless at this point. North Korea felt that at ‘the existing level of trust between the US and North Korea, there could not be a better agreement proposal’ which is incremental in nature.

Overall, it seems that there is some serious gap between the US and North Korea’s approach towards the denuclearization issue and in the last two weeks, loose statements from both the sides may have widened the gap further. Both the countries need to review their approaches and modify them to accommodate each other’s concerns, otherwise, the prophecy of North Korea might become true in which it said that ‘opportunity like Hanoi Summit might be difficult to come again in future’.

 

What will China do if there is an India-Pakistan War?

In a hypothetical scenario of a new India-Pakistan war, what would China, the ‘deeper than deepest sea and sweeter than honey’ friend of Pakistan, do?

Muhammed Kunhi, Research Associate, Institute of Chinese Studies, Delhi

As a total shift from its conventional approach towards Pakistan sponsored terrorist attacks, days after Jaish-e-Muhammed (JeM) attack on Central Reserve Police Force (CRPF) convoy in Pulwama which killed over 40 paramilitary personnel, India responded with airstrikes on biggest terrorist camp in Balakot in the Khyber-Pakhtunkhwa province of Pakistan.

Indian media reports stated that the retaliatory action for Pulwama, carefully planned with credible intelligence, occurred in the early hours of 26 February and killed more than 350 terrorists by dropping 1000 kg Israeli Precision Guided Munitions (PGM). Some of them claimed that India destroyed at least six terrorist camps inside Pakistani territory and Pakistan Occupied Kashmir (PoK) by employing 12 Mirage 2000 jets, made by Dassault Aviation of France.

In an official statement, government of India declared that Pakistan’s persistent denial of existence of terrorist training camps inside its territory had forced India to take a “non-military preemptive action” against JeM camps in the light of a credible intelligence on JeM’s plan for conducting “another suicide terror attack in various parts of the country”.

Though Pakistan rejected India’s claim of heavy casualties as its “self-serving, reckless and fictitious claim” in the context of its upcoming general election, Pakistan accepted that the Indian military aircrafts violated the Line of Control (LoC) and dropped some amount of payload inside its territory. The director general of Pakistani Inter-Service Public Relations (ISPR), Major General Asif Ghafoor, tweeted that the “Indian aircrafts’ intrusion across LoC in Muzafarabad Sector was 3-4 miles. Under forced hasty withdrawal aircrafts released payload which had free fall in open area. No infrastructure got hit, no casualties.

India’s use of air power – unconventional

Whatever was the casualty and damage to Pakistani military, Indian Air Force’s breaching of LoC to attack a terrorist camp inside Pakistan is a total diversion from India’s conventional approach towards employing air power against terrorist threats from Pakistani territory. It is for the first time since 1971 war that the Indian Air Force has crossed the LoC to attack a target inside Pakistan. In the past, even during the Kargil War in 1999 and when Pakistan sponsored terrorists attacked Indian parliament in 2001, India exercised restraint in employing air power against Pakistan.

Many observers are arguing that India’s airstrike in Balakot will send a clear message to Pakistan that the continuation of proxy war against India would come at a price. Whether Pakistan is willing to learn that lesson is a major question. Definitely, Indian Air Force’s crossing of LoC is a declaration that there will be serious repercussions if Pakistan is planning to continue its proxy war against India.

Challenges dominant discourse

Interestingly, India’s new airstrike on Pakistan, which is theoretically a ‘military action’, though India claims it is a ‘non-military action’ as it is not carried out against any military. The latest developments directly challenge the dominant discourse that India and Pakistan must refrain from challenging each other militarily given the imminent threat of escalation and nuclear war.

Former Pakistan President Pervez Musharraf’s recent statement that “if we would attack India with one atomic bomb, then the neighboring country could finish us by attacking with 20 bombs” clearly shows that the nuclear-war against India is not a popular option within Pakistani strategic thinking as many in India assume. They (Pakistanis) are well aware of India’s military capability and, now, also its willingness to take any risky military action.

Setting aside the nuclear conundrum, the important question is what would a humiliated Pakistan respond? Assessing the current mood of the nation and approach of the present government, it can be said that if Pakistan chooses any retaliatory military action for Indian airstrike on Balakot it would escalate the situation in the subcontinent. At the same time, India will not consider nuclear war as an option until there is a survival threat to it. Hence, we need not expect more than a conventional war, or perhaps a limited border war.

What would China do?

In a hypothetical scenario of a new India-Pakistan war, what would China, the ‘deeper than deepest sea and sweeter than honey’ friend of Pakistan, do? Expressing concern over growing tension in the subcontinent, various countries, including China and the United States, urged both India and Pakistan to “exercise restraint”. In his regular press conference, responding to a question of Chinese response to Indian airstrike on Pakistan, Chinese Foreign Ministry spokesperson Lu Kang said “we hope the two sides will exercise restraint and take actions that will help stabilize situation in the region and improve bilateral relations instead of doing the opposite”. He added that “terrorism is a global challenge that calls for cooperation between countries so as to create enabling conditions and a favorable atmosphere for necessary international cooperation”.

Past experiences tell us that unless there is a credible challenge to its core interests, China will not militarily intervene in another country’s war. In the past, even in 1965, when the tension between India and China was at its maximum, China’s military involvement in India-Pakistan war was limited to creating some disturbances in India’s Himalayan frontier. This time, China has enormous economic and strategic interest in Pakistan, which includes multi-billion dollar China-Pakistan Economic Corridor and Gwadar Port. Additionally, in terms of numbers, China’s trade with India is many times larger than its trade with Pakistan. Since India is not a grave threat to China, it would not consider harming a well-developed trade relationship with India by getting embroiled in the Indian subcontinent’s conflicts.

Considering the depth of Sino-Pakistan friendship and its strategic value for China, it may be assumed that China will not totally abandon Pakistan if the new tension in the subcontinent leads to a war, especially when a growing proximity between the United States and India is quite evident. It will not be a direct military involvement either. The Chinese help to Pakistan will be in the form of weapon-supply and in various other forms of non-military assistance. China will use the opportunity to increase its arms exports to Pakistan without risking its trade relationship with India.

A Renewed push by Japan and Russia to resolve their bilateral dispute: Assessing the challenges

Dr. Shamshad A. Khan, Visiting Associate Fellow, Institute of Chinese Studies, Delhi

Japanese Prime Minister Shinzo Abe has given utmost priority to sign a peace treaty with Russia as well as gaining back the control of the Northern Islands (known as Kuril in Russia). There have been 24 rounds of one on one interaction between Prime Minister Shinzo Abe and Russian President Vladimir Putin, and the most recent was held on the sidelines of the G-20 Summit in Buenos Aires. During Abe-Putin meetings, signing a peace treaty and resolution of the territorial dispute, an issue lingering between the two countries ever since the end of World War II, has been on the agenda. Following their talks, they set up a consultative framework, termed as a “new framework” which is expected to speed up talks to resolve the issue as also consolidate bilateral ties.

The Japanese media reports suggest that Abe may settle for two islands instead of seeking the return of all four. If that be so, it could be interpreted as a departure from Japan’s long held stance which states that Peace Treaty with Russia will be signed “contingent on the resolution of the Northern Territories issues.” Continue reading “A Renewed push by Japan and Russia to resolve their bilateral dispute: Assessing the challenges”