China Drought, Decline and Dangerous Posturing

China: Drought, Decline and Dangerous Posturing

Droughts and floods have been endemic to China from time immemorial. Many Chinese dynasties have collapsed due to drought, famines and floods. The current drought is more extensive and severe.

The Communist Party’s legitimacy to rule China in perpetuity is premised on providing a flourishing economy and life comforts to the Chinese people. Xi’s aim of doubling GDP, and the per capita income, by 2035 are the goalposts of this promise. These lofty ambitions are under severe threat as an ailing China has entered a declining phase. The ailments of decline include Xi Jinping’s ideology, a rapid demographic decline, the uncontrollable Wuhan Virus, its debt-fuelled growth model and over-militarisation.

If all this was not enough, China is going through the most severe drought in its modern history. This drought whether due to climate change or weather variability, will have far-reaching consequences for China. The global extent of the drought reinforces the spectre of climate change. The attendant uncertainty and implications will reinforce and hasten the decline. All this is going to compound China’s future as it traverses the declining phase. In this context, it is necessary to understand the drought and then evaluate its larger implications.

Droughts and floods have been endemic to China from time immemorial. Many Chinese dynasties have collapsed due to drought, famines and floods. The Chinese are mortally scared of famine and hunger. Reports even suggest that some famines were so severe that people had even to resort to cannibalism. The CCP and Xi Jinping are acutely aware of this. Hence the whole country is paranoid about ensuring food security, grain technology and agricultural production. It also explains the massive amounts of food that China stores. Earlier, in Aug 2006, a drought hit Chongqing. It was then classified as the worst in 50 years wherein 2/3rds of local rivers and lakes dried up and more than 200 reservoirs became stagnant. China coped with it and continued to grow. What is new now?

The current drought is more extensive and severe. In Aug 2020, rainfall and water inflow into Three Gorges Dam was so heavy that it threatened to breach the dam walls. Two years later, in Aug 2022, the same Three Gorges Dam is in the midst of a drought and at dead water levels. The contrast is stark and frightening.

The first indicators of drought in Southern China actually surfaced in July this year. By the first week of Aug, these indications were confirmed. The drought is in full force now even though temperatures have started receding and rainfall is likely in September. The temperature maps of China indicate that Southern China has been red-hot and dry for nearly two months.

Half of China’s total area, has been in the grip of extreme high temperatures. It is its worst heat wave and drought in six decades. The complete Yangtze basin has been affected. Its major reservoirs - Poyang Lake in Jiangxi and Dongting Lake in Hunan have virtually dried up. Parts of the Yangtze River are at their lowest water levels since records began to be kept. The heat has also sparked wildfires. The unprecedented drought has affected hydropower generation, inland shipping, industrial production and agriculture extensively.

All this has led to China declaring its first drought emergency. There is no doubt that the Chinese economy will be hit badly. However, the larger implications are that it will push all its ailments to a different level to hasten the decline. That needs to be understood. Any undermining of an already declining economy has serious repercussions.

As against previous eras, massive industrialisation and economic growth has increased China’s overall requirement for water. Traditionally the North is water deficient. In 2003, China launched the $60 billion South-to-North Water Transfer Project. It transfers water from the Yangtze River basin to replenish the dry North. The aim is to attain an annual transfer capacity of 21 billion cubic meters by 2030 and ultimately transfer twice that volume. Even this massive water would not have met China’s insatiable thirst. Hence additional plans were afoot like a massive canal and the Yinjiangbuhan tunnel from the Three Gorges Dam to Beijing.

Other expansive plans include shifting water from the Tibetan Plateau or Lake Baikal in Russia. Here is the cinch. The area from where China wants to transfer water is now suffering from the biggest drought! The current drought is also the harbinger of impending climate change. It puts all fancy Chinese infrastructure plans in limbo. These are also the plans that China is banking upon to revive its flagging economy!

All these plans apart from being geologically difficult, prohibitively costly, and politically difficult, are now virtually infeasible. It means that North China Plain agricultural produce (60% wheat, 45% corn, 35%cotton, and 64% peanuts) is hereafter at perpetual risk. A drought like this will also curtail rice yields in Southern China. This event is being underscored by heavy pollution and groundwater contamination already prevalent in China but kept under wraps by the Communist Party. It will now come into public view. The macro instability of water inadequacy, food insecurity and collapsing infrastructural plans has suddenly surfaced. It will permanently cap the Chinese growth story.

The drought has occurred in an area where dependence on hydro water energy is high and has failed. China will take recourse to enhance thermal power through coal as per indications already on the table. However, all forms of energy production – hydro, coal based or nuclear power needs plenty of water; which is not available in China today. It will not be available tomorrow also.

Further, the Yangtze Basin, East of Sichuan to the coastal area is home to more than a billion people. The industrial might of China is in this area. For any further growth it needs simply more water. In the past 15 years this area has been increasingly experiencing reduction in water availability. To expand economic capacities when there is already water shortage and especially in view of the possible outcomes of the current drought is fraught with a huge risk. It places severe constraints on overall growth in China. As someone said ‘China can print money, but it cannot print water.’

However, China is not the only country suffering from drought. Severe droughts across the Northern Hemisphere have hit the world’s richest economies. They extend from California to Europe. The drought in Europe is affecting Germany, Spain, Portugal, France and Italy and is likely to be the worst in 500 years with most waterways now rendered not navigable. Electricity generation, agriculture, manufacturing and tourism are going to be hit. It will also compound supply-chain disruptions due to the pandemic. Inflationary trends in energy and food prices from the Ukraine war will also weigh in. The buying power of the rich West is taking a hit.

As major world economies recover from their economies stressed by the Ukraine War and heightened by their respective droughts, their consumption pattern will reduce drastically. It will further hit Chinese factories that are exporting less as it is. The Chinese people who are already consuming less will consume even less after this drought. Large sections of Chinese industry have shut down or have produced below par due to a lack of energy. There are two rate cuts in quick succession to shore up the economy.

China’s major firms are delisting from the New York Stock Exchange. The indicators in July and August seem to be worse than in the April-June quarter. Panic! The multiplier effect of the drought on the ailments of China will now become telling. QED of this drought is that any recovery story of China is suspect and the story will be more about stagnation and decline hereafter.

The drought conditions even if transient, have long term economic fallouts. Hence, they will in no way help to alleviate the demographic decline. In fact, the opposite is more likely. There is no let up on the Zero Covid Policy, drought or no drought. In fact, both will reinforce each other’s negativity. However, the major effect will be on the debt fuelled infrastructure model. China is being forced to now consider writing off loans to many African countries, who have seemingly conveyed their inability to return loans or service them. This is the tip of the collapse of the BRI debt financing model whose burden has fallen now on China’s big banks. The big banks in turn are unwilling to bear the government’s financial burden. This unwillingness also extends to bail out the frothy housing and real estate bubble.

Let there be no doubt that China is in a state of severe financial stress. However, the recovery plan so far outlined, again revolves around two debt fuelled mega infrastructure projects– massive water ways from South to North and construction of additional High-Speed Railways. Both these are extremely high-risk propositions, with a high likelihood of failure. This drought has exposed this vulnerability and injected uncertainty. Hence China needs an alternate model which is politically acceptable. Incidentally, there is nothing on the horizon. If you do not believe this article one has to read between the lines of what the founder of Huawei says when he warns of the painful next decade.

During this time Xi’s power politics is at full throttle. It is inconceivable to think that Xi Jinping and his cohorts did not know of the severity of the drought when Nancy Pelosi visited Taiwan early in Aug. The response and the nationalistic build up when seen in hindsight inform us that the huff and puff around Taiwan was a pure diversionary ‘externalisation’ tactic to focus away from the drought. Immediately after the Bedaihe meet he went to Liaoning, to the place where Mao commenced his long March. Very symbolic.

On the other hand, Li Keqiang went to Shenzen to praise Deng. Political differences to the fore. Some influential nationalistic bloggers who have been targeting private tech firms, entrepreneurs and capital markets to push a socialist agenda in the name of patriotism have also been side-lined the moment their shoots of conscience have sprung. An open power play is on which leaves the drought on the sidelines till Nov. It will continue to be so unless Xi uses it to spike nationalism and implement communist methods to reinforce his hard leftist ideology.

At this stage, when China is economically and politically inflecting inwards, it is splurging on its military and pursuing costly warlike technologies. It is now my considered opinion, that this drought was well known to the Americans also. The entire trip of Nancy Pelosi could have been timed and staged by the USA to provoke China into a long-term military reaction fully knowing that a drought is on the cards.

When headlines like ‘Destroyer photos offer clues about Chinese navy’s growing fleet’ and ‘China’s heat-seeking radar with 300km range boosts anti-stealth tech, say defence scientists’ appear in leading Chinese dailies, the US seems to have achieved its goal of ensuring that China stays on the course of wasteful military expenditure to stress its economy further. The long-term cost of over militarisation could be very heavy on China. USA used a similar ploy of military overextension to break USSR successfully. Now it is being tried out on China.

These are interesting times when we are seeing a wannabe superpower fall short of its ambitions. However, these are also dangerous times. Whenever China has faced internal problems, it has externalised. In 1962, Mao invaded India when China was going through a major famine.

In 2022, Xi Jinping is unleashing military fury, on Taiwan despite the worst drought China has faced since 1951. In future, as internal problems mount in China, its economy degrades and it continues over-militarisation, one will have to watch out in India. There is imminence of conflict on the horizon and we must prepare accordingly.

PS: Historically, in China, droughts have been followed by floods in direct proportion. This drought has been the most severe one since 1951....so...the floods??????

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Image source: Hindustan Times

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LT GEN P R SHANKAR (Retd)

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