Author: Paweł Paszak
Between October 26 and 29, 2020, the fifth plenary session of the 19th Central Committee of the Communist Party of China took place in Beijing. The Central Committee is one of the key constitutional bodies in the People’s Republic of China (PRC), responsible for setting directions for the country’s development policy. At the meeting, Chinese officials submitted proposals to both the latest five-year blueprint and National Economic and Social Development and the Long-Range Objectives Through the Year 2035. Unlike in the past years, no specific growth rate target for the coming five years was outlined, although in his November 3 speech, Xi Jinping said it is “completely possible” for China to double the size of its economy over the next fifteen years. Putting his ambitions into practice would mean overtaking the United States in terms of its nominal gross domestic product – a symbolic turning point in world politics and the success of China’s propaganda machine. But the doubling the size of the economy remains somewhat an economic reverie as it would require an average growth of 4.7% per year. With current challenges having ther origin in the growing debt, social inequalities, or demographic crisis, it will be extremely difficult to achieve this result.
Beijing hopes to achieve its bold albeit little realistic plan through the high-quality development scheme, paving its way for both satisfying aspirations of the Chinese society and claiming victory in the country’s systemic competition with the United States. Behind these efforts – as their conceptual framework – is China’s “dual circulation” strategy signalling Beijing’s tilt towards further increasing the role of consumption and that of its domestic market while relying less on imports and goods critical for the country’s security. Trade and investment cooperation with the outside should serve as a complementary “circuit.” The idea behind this brings an ambition to forge ties with other countries to benefit from mutual partnership while not excessively restricting the decision-making hub. If Chinese officials manage to put these plans into practice, Western and Asian democracies will find themselves under mounting pressure – economic, political, and military – resulting in progressive erosion of the liberal order worldwide. Xi Jinping and the Party’s top leadership will seek to create a “new state system” (新型 举国体制) to harness the growing potential of the private sector to achieve party goals.
Main development directions
The key for ensured growth is “development through innovation,” with domains like digital technologies, artificial intelligence, integrated circuits, robotics, and high-tech playing a major role. The move continues the shift in China’s development policy that occurred at the end of the first decade of the 21st century and consisted in creating domestic potential in both sciences and technology – as opposed to earlier strategy focused on bringing tech solutions from the outside. What underscores the pivotal role of the sectors as mentioned in the introduction are various initiatives undertaken under Xi Jinping and Li Keqiang. These include such schemes as Made in China 2025, New Generation Artificial Intelligence Development Plan (新一代人工智能的发展计划), China Standard 2035 (中国标准2035) or Guidelines to Promote National Integrated Circuit Industry Development (国家 集成电路 产业 发展 推进 纲). Furthermore, September 2020 saw the announcement of a blueprint laying out China’s priorities for the development of strategic emerging industries. In the document, the emphasis was placed on major industrial hubs, poised to become “growth poles.”
In line with these guidelines, Beijing has been consistent in boosting its R&D (research and development) spending over the past decades. It now stands at over $300 billion. However, the rise in figures did not always go hand in hand with a quality change – in many cases, funds were either spend ineffectively or even massively embezzled by local party officials. The priority for the coming years is to improve this state of affairs and spend the funds more wisely so that the loans and subsidies flow to businesses capable of bringing real value to China’s tech advancement. Without this, a huge mobilization of resources will not facilitate genuine progress in the field of technological innovation.
Washington’s more assertive policy over technology transfers to China has been a major strategic factor to step up efforts to achieve self-sufficiency. On August 17, 2020, the U.S. Bureau of Industry and Security (BIS) in the Department of Commerce further restricted access by Huawei and its affiliates to items produced domestically and abroad from U.S. technology and software. Foreign chip manufacturers were banned from selling those developed or produced using U.S. technology to Huawei without a special license. The Shenzhen-based company might thus encounter serious obstacles to build processing units for its cutting-edge devices as all plants rely on U.S. tech solutions. This pushed both Huawei’s management staff and the Chinese authorities towards even greater efforts to develop own software and critical electronic components.
Chips/semiconductors are tech branches exerting decisive influence on the ability to exploit the potential of 5G and 6G networks, artificial intelligence, or quantum computers. In 2019, Chinese companies purchased $304 billion worth of foreign-made semiconductors, while, according to the world’s leading consulting businesses, the global market will witnesss dynamic growth in the coming years, reaching the value of $600 billion by 2022. On August 4, 2020, China’s State Council responded to these trends with its paper titled Several Policies for Expediting High- quality Growth of the Integrated Circuit Sector and Software Sector in a New Era (新时期促进集成电路产业和软件产业高质量发展的若干政策). It offers new tax incentives for 28nm chip manufacturers being on the market for more than 15 years. It serves as an example of far better targeted state aid intended to strengthen “national champions.” Perhaps the blueprint – due to its economic and strategic importance – alongside the ambitious plan to form an independent chip industry – will become one of the pillars of the latest five-year plan.
Besides the emphasis on the bigger fund-spending efficiency, infrastructure projects will occupy their traditional major role in China’s economic policy. However, unlike in past decades, more money will be earmarked for what is referred to as “new infrastructure” (新型基础). At its May meeting, the National People’s Congress agreed to push $1.4 trillion worth of financial package to sustain seven selected areas by 2035. According to the government-run think tank CCID, an institution under the Ministry of Science and Industry, between 2020 and 2025, spending may stand at between 10 and 17.5 trillion yuan ($1.43–2.51 trillion). The scheme includes 5G wireless network, industrial Internet, modern transport, data centers, artificial intelligence, high voltage transmission infrastructure, and electric vehicle charging stations. Both how much China is intending to spend and on what domains indicates that Beijing is developing an actual framework of a digital economy to serve its 1.4 billion people. The rollout of 5G base stations will allow broad implementation of smart city and e-commerce solutions and robotize production facilities while increasing the reach of the Internet of Things and creating a huge database to develop artificial intelligence. For their part, electric vehicle charging stations might facilitate the spread of the world’s biggest electric vehicle market.
China’s blueprint for tech expansion by 2035 includes the Beijing-devised vision of a “green deal” that allows the country to hit peak emissions before 2035 and carbon neutrality by 2060, according to President Xi Jinping. China’s energy transition is expected to both enhance environmental conditions and the state’s image worldwide, as well as to create a cutting-edge sector of renewable and nuclear energy and that of electric vehicles. Taking advantage of their gigantic market potential adds an opportunity to strengthen Beijing’s development dynamics while curbing tech domination of Western nations. Environment-friendly technologies may turn into a critical part of export and investment schemes under the Belt and Road Initiative (BRI). Energy projects often come as the core of economic cooperation with emerging economies in Latin America, Africa, and Southeastern Asia. According to data from the Global Development Policy Center (GDCP), between 2000 and 2018, Chinese companies and banks invested funds to construct or modernize 777 power plants with a total capacity of 186.5 GW in 83 countries across the globe.
Efforts to improve the quality of air, soil, and water are a nod towards the Chinese middle class, for whom environmental degradation has become an increasingly burning issue in recent decades. Incorporating eco-related demands is all the more critical that the Chinese middle class is the basis for legitimizing steps by the Communist Party of China. Maintaining the support of this ever-growing group, the number of which may exceed 500 million people by 2035, thus becomes the must for the Party. For these reasons, the building of an “ecological civilization” in recent years has become a permanent element of Xi Jinping’s speeches and official messages from state institutions and the media. The scale of the challenge is massive as China remains responsible for around 30% of global greenhouse gas emissions while the proportion of coal in its energy mix stands at 57.5%. By 2020, China will have 1,100 GW of coal-fired power plants – far more than other same-type energy plants combined worldwide. However, Beijing plans to curb its proportion of coal in the energy mix to 40% by 2040, notably by putting much money into renewable and nuclear energy.
One should thus take seriously Chinese declarations on climate neutrality. The progress achieved so far while implementing the environment-friendly policy suggests that China is able to attain that goal. If this were only about the environment, there will be many more doubts, yet the Chinese-made “green deal” is also a business venture poised to send an extra economic stimulus and ease social discontent. In addition to how rapidly it will be implemented, there comes social pressure from the Chinese middle class and the desire of Chinese officials to improve the image of the People’s Republic of China worldwide. These factors make the green transition a permanent element of both the five-year plan and long-term activities carried out by both the state and top party officials.
“Critical point” in the history of the People’s Republic of China, or why tech transformation has become a strategic imperative for Beijing
The Chinese authorities focused on high-tech development, gaining a top position in global value chains and energy transition amid the worsening social and international situation and deficiencies in the existing growth model. According to Secretary General Xi Jinping and strategic papers such as the 2019 Security White Paper, China is now at a “critical moment” in its whole contemporary history. It is hard not to disagree with these statements as the Chinese state faces complex challenges going far beyond the domestic or international domains. Both the future of the Communist Party of China and the outcome of China’s long-term competition with the United States depend on whether the Chinese authorities are able to stimulate the tech and resource-related progress of the People’s Republic of China. With economic intertwines between these two and their military and nuclear potential, any all-out conflict could bring about dramatic losses to both participants and those not being involved. This makes domains like economics, financial markets, and technology the key areas of competition to win the position of the world’s most powerful state.
The intensified rivalry between superpowers stands as one of the top factors making it difficult for Chinese businesses and the state to expand its influence across the world. As Donald Trump took office in January 2017, a new, far more confrontational chapter opened in the U.S.-China ties. Since the early days of the 21st century, political elites have raised mounting awareness of China’s growing threat to the position of the United States. It was nevertheless Donald Trump who unequivocally recognized China as the biggest challenge for the U.S. policy and introduced the issue to the broad public discourse. In yet another example of harsh and rule-breaking rhetoric toward China – even Joe Biden allowed himself during his presidential campaign to call Xi Jinping “a thug.” Trump’s four years in office (2017–2021) brought a global diplomatic offensive, a bigger U.S. defense budget, and economic efforts to contain the growing influence of the People’s Republic of China. While what is known as the trade war failed to bring any goals, a package of sanctions on Huawei restricting its access to semiconductors and software dealt a serious blow to the Chinese tech company. As the United States exerted pressure on its partners and allies over the rollout of 5G technology, the Chinese telecoms giant faced barriers for its further expansion in Europe and production of cutting-edge mobile devices. As for the above, in their speeches, Xi Jinping, Prime Minister Li Keqiang, and China’s Technology Minister Wang Zhingang tend to mention the issue of the country’s tech self-sufficiency in the context of China’s sovereignty in foreign policy. As long as China is reliant on foreign-made goods, its policies are constrained.
In Beijing’s immediate vicinity, the countries of Quad (short for Quadrilateral Security Dialogue group) – Australia, India, Japan, and the United States – have noticeably strengthened their defense ties. As they held high-level dialogue, conducted joint military drills, shared intelligence data, and were involved in logistical cooperation, Beijing feared the group being an Asia-based NATO-like structure tasked with containing China. Although it is an exaggeration to make such comparisons, the very dynamics of cooperation and its course comes as unfavorable for the People’s Republic of China. China’s breakdown in ties with India over skirmishes on the disputed border areas of Eastern Ladakh push the latter country into greater cooperation with the US, Japan, and Australia to mitigate threats from a more powerful neighbor.
Uncomfortable shifts are not only relevant to the United States or some Indo-Pacific states. Amid China’s increasingly confrontational policy, the country’s image worldwide worsened sharply in the eyes of highly developed nations. A survey that Pew Research carried out in October 2020 found that 70% of respondents from OECD states had a negative view of China – a result mirroring the growing antipathy of the West towards actions by the Chinese authorities. However, it is not the image that determines the rank in the international hierarchy, but the state’s material power channeled in offensive capabilities of the armed forces as well as the economy, with both its condition and structure. Nevertheless, social reluctance will naturally affect policies in developed countries that will be increasingly cautious about cooperation with China. This could hinder investment prospect and obstruct efforts to build critical infrastructure, allow technology transfers, and shape technical standards.
As for domestic affairs, the authorities have to deal with the structural problems of the Chinese economy, for which in many cases they hold personal accountability. What stands out is the rapidly growing level of household indebtedness. Since 2008, its level has increased from 17.87% of GDP to over 56%, and from 40% to 120% of disposable income. While the rate of 56% is still lower than in many developed economies, the mere fact of how rapidly it goes up is disturbing for the authorities in Beijing. Similar processes also tend to occur at the state level. Total Chinese debt rose from 302% of GDP to nearly 318% in the first quarter of 2020, according to estimates published by the Institute of International Finance (IIF). The group expected that ratio to reach 335% of GDP in Q2. With these problems come others, including ineffective government investment schemes, shadow banking sector, and risky loans (some 15–16%). Entrepreneurs voice concerns over the Party’s efforts to expand control on other domains of the private sectors as these attempts might run the risk of subordinating companies to the political agenda of the People’s Republic of China. For many years now, disproportions have grown between the country’s wealthiest provinces in the east and those in both west and center. Despite Beijing’s pro-social rhetoric having its roots in the ideological legacy of the People’s Republic of China, this gap is likely to maintain, and even grow bigger as the country’s richest areas in the east are capable of generating both growth and innovations to start an equal rivalry with the United States. Doubts arise also over China’s pension system that is likely to see increasing pressure with the country’s rapidly ageing population.
China’s five-year plan (2021–2025) comes as a deliberate response from the country’s authorities to the ever-bigger pressure from the United States as well as the slowdown in economic growth, and the expectations from the Chinese. The new strategy is to be a step towards victory in the global struggle for influence and position in the global economic system. The stake is extremely high – gaining domination worldwide while keeping the legitimacy of the Communist Party of China at home. The top goal is to introduce a quality change in the Chinese economy to move China from being the “world’s largest assembly facility” to the hub tasked with designing and producing the highest added-value goods. Strengthening the Party’s social mandate and efforts to develop a high degree of self-sufficiency will lead to Beijing’s ever-growing confrontational policy. A lesser degree of dependence will boost the extent to Beijing’s sovereignty in foreign policy and thus unlock actions that would be too costly under the current circumstances. Those that would first acknowledge China’s new assertiveness will be Asian nations locked in territorial disputes with Beijing. The implications of China’s growing power will not be limited to this region only. For Europe, China’s “long march” towards becoming a tech superpower means mounting economic competition of the Europe-based high-tech industry. With the growth in China’s power, the liberal world order will continue to erode. As for now, international institutions or individual states hold very limited powers to enforce worldwide standards and human rights protection. As China will boost its capacity to shape the situation worldwide, other system-alike regimes will grow in power while human rights protection will weaken. Despite their relative vulnerability, Western nations are still holding a position of power in many domains. Maintaining the lead in critical technologies is important not only to provide development opportunities, but also to preserve and promote the values that should guide humanity. However, it will require closely coordinated actions and cooperation – both transatlantic and between partner democracies around the globe.