The lives of Africans in Guangzhou have been negatively affected by China’s tight visa and residency restrictions as well as police control – whether it is through direct visa checking, which can lead to deportation, or indirect surveillance through shopping malls where Africans do business, the hotels they stay at, and neighbourhood committees where Africans reside. Most African importers are on a thirty-day tourist visa or a visitor visa lasting one to two months, which is too short for them to place orders, wait for factory deliveries and oversee shipping. Only a minor fraction of them have obtained longer residency permits (maximum one year) to stay in China to run cargo businesses or stores. Some are there illegally, either on fraudulent visas (sometimes provided by fraudulent visa agencies) or overstaying due to lack of funds for buying a ticket home.

Illegal immigration or overstaying, plus concerns over criminal activities such as drug trafficking,^[3] have brought Africans to the attention of police, especially since the implementation of the 2013 immigration law to combat the ‘three illegals’: illegal entry, illegal residence and illegal work.^[4] The commercial zones of Xiaobei 小北and Guangyuanxi 广园西, where there are high concentrations of Africans, are heavily policed (see figure 2). Africans are frequently stopped by police to check visas and residential permits, often as an exercise in shaking them down, which has allegedly become a lucrative business for underpaid local police.^[5] In 2009 and 2012, there were two rallies against police raids and racial profiling of African-owned businesses. The most recent clash between the police and the African population occurred during the COVID-19 pandemic, as discussed below.

Not all African communities have been affected equally by the efforts of police control and monitor. A veteran Chinese NGO worker mediating between the Immigration Department, Foreigner Management Police Stations 外管所and various African communities told us that Chinese authorities are more vigilant in dealing with allegedly troublesome Nigerians than with other Africans such as Malians and Guineans, who are perceived to be more peaceful and low key. Similarly, Gordon Matthews and the other authors of The World in Guangzhou: Africans and Other Foreigners in South China’s Global Marketplace have noted that some members of other African communities even cooperated with police raids against Nigerians.^[6] The Igbo Nigerians are the most conspicuous communities in Guangzhou, thanks to their religious presence (such as in the Sacred Heart Cathedral), business success, inter-racial marriage with Chinese women,^[7] and a history of open protests against police raids and the zero COVID policy. They also have a unique political identity and diaspora strategies that differ from other African nationals.

‘Troublesome’ Nigerians versus ‘peaceful’ Guineans

We first encountered the Igbo identity when our informant, Achebe (pseudonym), a young Igbo Nigerian, told us that his beret carries the unyielding spirit of Biafra, the secessionist movement in Nigeria that began in the 1960s. He was introduced to us by a Nigerian scholar in 2021, and in turn introduced us to a small Igbo community of some fifteen men working in a warehouse that was hidden behind a row of stores selling leatherware and luggage. Inside the warehouse, cartons were piled up to head height inside office cubicles (see figure 3). The piercing sound of duct tape being ripped was combined with greetings in Igbo. While we were there, Guangzhou police frequently patrolled this store, passing Africans in the narrow lane between the cubicles in an air of mutual neglect.

Daddy Obi came to China three years ago to take over a shop of a friend. His previous role as an elder of a village council has naturally translated to a consultant on communal affairs among his compatriots in Guangzhou. He explained some of the unique Igbo world view to us and spoke of how British colonialists slaughtered many of their people and that the Islamic Hausa ‘took their resources’. During the Biafra war (1960–70), the Igbos sought independence from Hausa–Fulani rule. Their effort to establish a new country called Biafra failed, and millions died as a result of the war and the ensuing mass starvation. Following their political downfall and the high rate of unemployment in Nigeria, the Igbo people attempted to increase their material wealth, viewing it as a ‘weapon to fight back’.^[8] Among their initiatives are the creation of the Igba Boi community-run apprenticeship program and the resuscitation of village square meetings.^[9]

Despite being one of the most dispersed ethnic groups in Africa and the world, Igbo people have a strong sense of community and developed the unrelenting ‘Igbo capitalism’ on a global scale.^[10] Igbo people in Guangzhou are renowned for their economic acumen and diligence, and African Americans from other ethnic groups look to them as a gauge of market trends. According to Achebe, the young Igbo trader – every Igbo man – wants to be a self-sufficient leader within a cooperative community. They would sit at a table as ‘real bosses’ to share the profit among themselves equitably and reasonably. Achebe’s narrative depicts a strong individualism associated with the Igbos’ belief in their personal god – chi (a concept that is concerned more with success or failure than with righteousness and wickedness),^[11] as well as a republican ethos when it comes to community matters.^[12]

The Biafra sentiment lingers and is even projected onto the governing of Africans by Guangzhou authorities. Daddy Obi argued (wishfully) that the Chinese government should treat Igbos nicely, claiming that China would be granted access to rich resources in Igbo, including gold, zinc and petroleum, once the Igbos gained independence and established diplomatic relations with China. Unhappy that in disputes between Chinese and Igbos, the Chinese just turned to the police, he criticised China for having neither ‘human rights nor freedom’.

When we met Cibuike, a chubby Igbo in his forties, he was in a sorry plight with his Chinese girlfriend. Many Africans, Igbo Nigerians in particular, have ‘transactional marriages’ with Chinese women. It is easier for their Chinese girlfriend or wife to obtain business licences, and a relationship would grant them longer visas. However, such transactions are not one-sided. In return, Cibuike is expected to remain with his girlfriend in the long term, even bringing her home to Nigeria. His would-be brother-in-law also demanded that he buy an apartment under his sister’s name in Guangzhou as bride price. This romantic crisis happened when Cibuike’s visa was about to expire in October 2021. He was still in Guangzhou when we visited in November 2021, but he only smiled and did not explain his situation further.

Compared to Igbo Nigerians, other African nationals, such as the Guineans and Malians, attract less police attention in Guangzhou. Among the reasons for this are good diplomatic relations between their home country and the People’s Republic of China (PRC) and other support networks that help to buffer potential conflicts. Guinea is among the first five African countries (the other four being Algeria, Egypt, South Africa led by Mandela’s ANC, and Sudan) that entered diplomatic or trade relations with the PRC in the late 1950s. The Malian chamber of commerce in Guangdong has been active in importing necessities to Mali, which is endorsed by the Malian government and its consulate in Guangzhou.

There are other business tactics that are low-key and help circumvent certain financial constraints, such as the alliance established between Guinean businessmen and students. The population of Guineans in China is estimated at 700, including 400 students in Chinese universities and 300 businessmen in Guangzhou and Yiwu. The Guinean government has been sending students to China since good diplomatic relations were established in 1959. Students on Chinese government scholarships have been surpassed by self-financed ones since the mid-1990s. Some Guinean students start working for their compatriot businessmen in Guangzhou even before they finish their studies. Students translate for Guinean bosses and Chinese businessmen, and Guinean businessmen can use students’ names to acquire additional foreign exchange quotas (US$100,000 a year per person) to order from Chinese suppliers. This is a legal grey area that is rarely prosecuted. Furthermore, their student visas allow them stay longer in China, making them ideal brokers between sojourning Guinean buyers and Chinese suppliers. With commission as start-up capital, they can even buy their own goods and ship them home.

Such arrangements do not exist with the Igbos. Some Igbo attend short-term Chinese classes in Guangzhou, which allows them to stay longer for business, but they cannot increase their foreign exchange limit with the student visa. There are a couple Guangzhou local colleges or vocational schools that capitalise on the needs of Africans by offering short-term Chinese or other business courses. A substantial percentage of students skip school, especially in the afternoons when they may contact business partners in Africa where the local time is morning.

Mobile churches

Religion is another cause of tension between African populations and Guangzhou authorities. African Christians in Guangzhou attend church habitually, as they do at home.^[13]  The state-sanctioned Sacred Heart Cathedral, which was built by the Société des Missions Étrangères de Paris in the heart of Guangzhou in 1888 (see figure 4), now has more Africans than Chinese attending Sunday mass. When trying to enter, Liang Chen (one of the authors) was shocked to be stopped by two tall Igbo Nigerians at the entrance and had to pretend to be Christian to enter. (Other masses normally accept non-Christians. Chen never hides his non-Christian identity from the pastors to whom he spoke.) The mass was presided over by African priests and had strong African elements. African parishioners raised their hands in the air to receive the Holy Spirit, and the carolling of hundreds of Africans (mixed with a minority of Chinese) echoed under the high, vaulted ceiling. Afterwards, the parishioners left their pews to offer donations in kind – quilts, food staples, sheets. Chen approached one of the Nigerian priests after the mass, and he promptly referred Chen to a Chinese priest. The priest turned down Chen’s request for an interview regarding the reason why the mass was conducted by African expatriates.

Most of our informants preferred to attend Pentecostal services at non-state-sanctioned ‘mobile churches’. As the name suggests, the sites of these church services constantly change. However, they manage to continue operating because they generate revenue for Chinese hotel owners who rent meeting rooms for Sunday congregations and night services.

These congregations granted us freer access but, owing to their unofficial nature as well as the loud preaching and music that accompany such gatherings, these churches have become targets of police raids and surveillance. Pastor Daniel Enyeribe Michael Mbawike, a Nigerian who founded Royal Victory International Church in Guangzhou in 1997, which had Chinese congregants as well, was not granted a visa for seven years because he refused to acknowledge the supremacy of the Chinese government over God.^[14] Not surprisingly, other Nigerian and Kenyan pastors associated with Royal Victory International refused our request for an interview, stating fears that it could be used against them.

Pentecostalism is one of the fastest-growing denominations of Christianity in Africa. Its popularity is also reflected in churchgoers in Guangzhou. Between 2018 and 2021, we joined several Pentecostal congregations on Sundays, including one led by a Nigerian couple, another by a Kenyan and two others by Congolese pastors. The congregations were attended by people from different African nations, not limited to the compatriots of the pastor, meaning that the churches afford cross-national connections to frequent participants. Our African informants told us that they can choose freely among the churches and are not obliged to develop loyalty to any one of them. Some Ethiopians, for example, attend Tewahedo churches at home, but in Guangzhou they join an Egyptian Coptic church, thanks the traditional links between the two denominations.

Our informants tell us that the pastors provide comfort for congregants facing existential issues such as business challenges and visa troubles. Indeed, much of the preaching aimed to lift the spirits of parishioners, recharge them with faith and energy to cope with everyday life, and issue moral injunctions against engaging in fraudulent or deceptive practices while in China. We witnessed many penances in which a congregant comes to the stage and kneels to receive blessings from the pastor and the other parishioners, who lay hands on him or her to heal their suffering soul. Pastors in turn ask for material contributions, including for their own homes. This is typical among Pentecostal churches: the more wealth a pastor amasses, the more he is seen as worthy of following.

Interestingly, some African Christians in Guangzhou believe the churches are declining in morality as a result of the local government’s intolerance of independent preachers. A Nigerian businessman told us that after good pastors were evicted by Guangzhou authorities, new ones coming in have proven less trustworthy and professional. Some even use witchcraft, such as juju. He believed the moral decline of pastors reinforced a trend towards immorality among congregations. He added that Chinese police contribute to moral decay by colluding with visa agents and shadowy intermediaries to charge exorbitant visa renewal fees (around US$8,000 in 2018) for those wanting to enter Guangzhou from Vietnam, where most expelled or overstaying Nigerians go. In his opinion, corrupt police and pastors made Africans more desperate for money, not God, in Guangzhou.

Pandemic governance and backlash

In April 2020, amid worldwide appalling death tolls from COVID-19, treatment of Africans in Guangzhou made international headlines. On 11 April, CNN reported on the large-scale eviction of Africans from their places of residence by Guangzhou police. Africans were asked to quarantine at home for fourteen days, yet many had been evicted by individual landlords acting on their own initiative, and the Africans were then denied access to hotels.^[15] According to a Chinese social worker we spoke to, who took part in mass screening, there were also Africans who refused to quarantine at home, protesting that it would ‘damage their freedom’. Some with visa problems hid out in friends’ places, as we learned from a few close African friends. The results of the mass screenings and mandatory hotel quarantine left many Africans short of money, food and medicine. Some could barely afford one hotel meal a day, much less an international flight back to their home country.

Just a day later, the Guangzhou Public Security Bureau (police) reported the exact number of African residents: 4,553, down from 13,652 in December 2019.^[16] History was repeating itself in an unsettling way. The last time Guangzhou’s Africans were officially counted was during the Ebola outbreak of 2014. The Guangzhou police appeared to be trying to use one stone to kill two birds: immigration control and epidemiological monitoring. In 2018, the responsibility for policing the community moved from the 6th Bureau of the Public Security Bureau (its exit and entry branch) to the newly founded National Immigration Administration, although the Public Security and its Foreign Management stations still oversaw mass screening of expatriates for COVID-19. Door-to-door screening involved police and residential committees who report to them.

In the same month, eleven African ambassadors to China protested against the discrimination and eviction of African nationals in Guangzhou, demanding ‘the cessation of forceful testing, quarantine and other inhuman treatments’.^[17] This diplomatic backlash was largely caused by the Public Security’s limited capacity to communicate with Africans who do not speak Chinese, English or French,^[18] while enforcing stricter pandemic control measures on African communities in Guangzhou, including compulsory quarantine of asymptomatic cases.

It should be noted that different African governments responded to the plight of their citizens differently. Uganda’s Foreign Affairs Minister, the Hon. Sam Kutesa, conveyed ‘serious concern’ about the ‘harassment and mistreatment of its nationals’ to the Chinese ambassador and called on the Chinese government to ‘address the plight of Ugandans in China’. Kenya’s Ministry of Foreign Affairs briefed its nationals on pandemic control measures in China and urged all ‘underground’ Kenyans to be properly documented. The most vehement response was from Nigeria, whose Congress passed a motion ‘to check the validity of all immigration documents of every Chinese person in Nigeria and the expatriate quota of all the Chinese businesses in Nigeria to ascertain the number of illegal and undocumented Chinese immigrants in Nigeria and to repatriate them to China’.^[19]

When evictions began, a group of Chinese volunteers and some of the wives and girlfriends of Nigerians delivered packaged food and water to homeless Africans, as did some African Americans. However, the police called the Chinese volunteers in for investigation, and their WeChat group was shut down. Then one of the volunteers contacted a lockdown neighbourhood committee enforcing the lockdown and organised consultation to the Africans discharged from hotel quarantine facilitated by some thirty Chinese volunteers who spoke English or French. Liang Chen and three anthropologists researching Africans in Guangzhou additionally provided consultation to the Guangzhou municipal government. African students soon took over the communication between grassroots government and their compatriots discharged from hotel quarantine in late April. They also helped to connect their compatriots with African consulates regarding visa issues and return flights. These informal links were allowed to function as the Guangzhou police lessened their control over the community following the diplomatic backlash. We even learned that Guangzhou police were admonished by higher authorities and ordered to take training on multiculturalism in Beijing.

In 2020, the visas of all Africans subject to quarantine were extended by two months by PRC immigration authorities. Hotel-quarantined Africans were given financial aid, and Guangzhou authorities even apologised to them, according to a Malian business leader. Guangzhou Foreign Affairs Bureau contacted African chambers of commerce to sponsor the repatriation of African nationals. However, these measures were short-term and remedial in nature. The crisis seems to have left no significant legacy in terms of how the Guangzhou authorities have governed African expatriates after the travel ban was lifted.

Digitisation of trade and post-pandemic rebound

In 2021, to limit the number of African traders in Guangzhou and to control the flow of money and currency, the Department of Commerce of Guangdong Province and its subordinate agencies pressured Chinese owners of trading centres to set up cross-border e-commerce platforms 跨境电商平台 among their tenant factory outlets. Individual companies registered with the platform are expected to declare exports jointly and to receive foreign currency via a joint platform account. By so doing the platforms would domesticise foreign trade and subject it to government regulation without having so many African buyers coming to China. The platforms would be responsible for the financial burden and management costs for bringing together myriad African buyers whose individual purchasing capacity might be less than a standard container. Nonetheless, it is challenging for Africans to use a Chinese platform as opposed to dealing with Chinese suppliers directly. As a result, the total volume of trade with Africa declined.

Another way to limit the number of African traders was through controlling Chinese trading centre owners and shopowners. In September 2021, the trading areas in Xiaobei were still heavily policed, and many Chinese shops were closed down by the police or the fire department because they sold expired beverage or had blocked fire exits (see figure 5). However, according to the owner of a trading centre whom we interviewed, the real reason was to stop African traders from trading in the Xiaobei district.

The attempt to limit the inflow of African traders did not work. In part owing to the worsening fiscal situation, however, local governments are more dependent on tax revenue from trading centres and shops. Even when shops were closed in Xiaobei district, in the nearby Yuexiu district, the local government reserved a zone for trading with Africans only because trading centres serve as important revenue sources for the district government.

By 2024, the African population in Guangzhou had bounced back almost to pre-pandemic levels.^[20] Africans cram shopping centres and, carrying overweight baggage, form long queues at Baiyun International Airport for their journey home. While the removal of travel bans between China and Africa is behind the recovery, the devaluation of African currencies to US dollars negatively affects the purchasing power of African traders and numbers. To save an international trade in decline, in August 2024 the Guangzhou Municipal Commerce Bureau invited Chinese shopping mall managers to a conference on how to boost trade with Africans. Notably, a few shopping centres have actively promoted e-commerce to African and Middle Eastern countries.^[21] Online traders include African students, buyers and cargo businessmen. SHEIN, the e-commerce platform that allows for small orders from Chinese factories and fast delivery to Africa, often in two to three weeks, arrived in Kenya and South Africa in 2024. Time will tell whether the digitalisation of the local supply chain as advocated by the provincial government will reduce the physical presence of Africans in Guangzhou.

Notes

[1] The results of this survey have not yet been published.

[2] Zhigang Li, Michel Lyons and Alison Brown, ‘China’s “Chocolate City”: An ethnic enclave in a changing landscape’, African Diaspora, no. 5 (2012): 51–72.

[3] Victoria Ojeme, ‘Nigerians’ notoriety in China is unprecedented – Ambassador Onadipe’, Vanguard, 16 Feburary 2014, online at: https://www.vanguardngr.com/2014/02/nigerians-notoriety-china-unprecedented-ambassador-onadipe/

[4] Gordon Matthews with Linessa Dan Lin and Yang Yang, The World in Guangzhou: Africans and Other Foreigners in South China’s Global Marketplace, Chicago and London: University of Chicago Press, 2017, p. 118.

[5] Guangzhi Huang, ‘Policing blacks in Guangzhou: How public security constructs Africans as sanfei’, Modern China, no. 45 (2019): 171–200.

[6] Matthews, Lin and Yang, The World in Guangzhou, p. 125.

[7] Yu Qiu, ‘Cleanliness and danger: Destigmatisation and identity politics in Nigerian–Chinese intimate relationships in south China’, Open Times, no. 4 (2016): 88–108.

[8] Paul Igwe, Robert Newbery, Nihar Amoncar, Gareth White and Nnamdi Madichie, ‘Keeping it in the family: Exploring Igbo ethnic entrepreneurial behaviour in Nigeria’, International Journal of Entrepreneurial Behaviour and Research (2018) 10.1108/IJEBR-12-2017-0492.

[9] Paul Agu Igwe, Chinedu Ochinanwata and Rebecca C. Emeordi, ‘Religion and spiritual influence on Igbo entrepreneurial behavior and persistence’, Journal of Small Business and Entrepreneurship (2023) 10.1080/08276331.2023.2253683.

[10] Amusi Odi, ‘The Igbo in diaspora: The binding force of information’, Libraries and Culture, vol. 34, no. 2 (1999), 158–67.

[11] Chinua Achebe, ‘Chi in Igbo cosmology’, NollyCulture, 17 March 2015, online at: https://nollyculture.blogspot.com/2015/03/chi-in-igbo-cosmology-by-chinua-achebe.html

[12] On the association between chi (personal god) and Igbo entrepreneurship, see I. Chukwukere, ‘Chi in Igbo religion and thought: The god in every man’, Anthropos, no. 3 (1983): 519–34; Igwe et al., ‘Keeping it in the family’, p. 43.

[13] On Congolese churches, see Katrine Pype, The Making of the Pentecostal Melodrama: Religion, Media, and Gender in Kinshasa, New York: Berghahn Books, 2013.

[14] Matthews, Lin and Yang, The World in Guangzhou, p. 179.

[15] Jenni Marsh, Shawn Deng and Nectar Gan, ‘Africans in Guangzhou are on edge, after many are left homeless amid rising xenophobia as China fights a second wave of coronavirus’, CNN World, 12 April 2020, online at: https://edition.cnn.com/2020/04/10/china/africans-guangzhou-china-coronavirus-hnk-intl/index.html

[16] People’s Government of Guangzhou Municipality, ‘Guangzhou Municipal Government Information Office Press Conference on Pandemic Prevention and Control (73rd Session)’, 12 April 2020, online at: https://www.gz.gov.cn/zt/gzsrmzfxwfbh/fbt/content/post_5815413.html

[17] Accessed through the WeChat group of research network forum CAAC (China in Africa and Africa in China) on 11 April. It was provided by a South African scholar.

[18] I participated an aid program organised by grassroots government to communicate with Africans in quarantine hotels in late April. Many volunteers who speak English or French were recruited online. We were allocated 239 expatriates in 8 hotels, including 164 Nigerians and nationals from other 17 African countries as well as 1 Indian and 2 Pakistanis. In the beginning, only 30 percent of them could be reached by telephone, and communication was difficult. Such a language barrier probably reflects that outgoing Africans are largely ‘bush-fallers’, who are from rural areas and have a strong desire to change their destiny through adventure.

[19] Benjamin Kalu (@OfficialBenKalu), ‘The motion passed on the maltreatment and institutional racial discrimination against Nigerians living in China by the Government of China seeks to ensure that’, Twitter, 29 April 2020, https://x.com/OfficialBenKalu/status/1255471879533592576

[20] Interview with a Chinese social worker involved in management of foreigners and Africans in particular in Guangzhou as well as a Chinese shopping mall manager.

[21] For instance, Liuhua Fashion Wholesale Market is running a Facebook page; see https://www.facebook.com/gzliuhuafashion

The post Governing Strangers: African Communities in Guangzhou appeared first on The China Story.

For most readers, the most puzzling thing about China’s local government debt might be why it is considered ‘hidden’ and why Local Government Financing Vehicles (LGFVs) are holding the bag for local governments. To understand this, it is necessary to understand what LGFVs are and why the collapse of the real estate sector has created such problems for them. The bigger question is why China’s powerful central government let this problem grow to this degree. Why didn’t Beijing do something about it earlier? LGFV debt skyrocketed during the zero-COVID policies, so is the pandemic to blame? Finally, what is Beijing doing about this crisis, and is it enough to solve the problem?

LGFVs and ‘Hidden’ Debt

While local government debt is common in all countries, China’s story is unique in several respects. First, if one looks at the on-the-books debt of local governments, the situation is manageable and relatively stable – one would not know there was a debt problem. What makes the China case so curious but also worrisome for Beijing is that the local government debt that has skyrocketed is ‘hidden’. But the adjective ‘hidden’ should not be construed as illegal but as off-the-books debt. Local governments do this off the books because Chinese law forbids them from bank borrowing. So local governments were allowed by Beijing to create institutional middlemen to borrow on their behalf – these are the special purpose vehicles, called local government financing vehicles (LGFVs), which incur and hold this ‘hidden’ debt. It is these LGFVs that now are teetering on default. Hence, while this debt is technically ‘hidden’, it is an expected and condoned outcome of a deal made between Beijing and the localities.

To understand why and how LGFVs are left holding the bag of local government debt, one needs to go back to the early 1990s when Beijing reformed the fiscal system, which had been in place since 1980. The need for the 1994 fiscal reform stemmed from the 1980 fiscal system, which was called a revenue sharing-system. The reason why that system proved to be such a potent incentive for local state-led development was that there was a category of taxes and fees, called Extrabudgetary Revenues, that localities did not have to share but could keep in their entirety. The most important and the fastest growing of these revenues was the collective and individual enterprise tax, which took off with the development of the Township and Village Enterprises, the TVEs. It was these TVEs that allowed China’s economy to take off. The problem was that all the new revenue from this sector was staying in the localities. By the early 1990s, Beijing was only receiving less than a quarter of total revenues.

To grab a bigger share of total revenues, in 1994, Beijing restructured the fiscal system by dividing taxes into those that would go exclusively to the centre, those that would go to the localities and those that would be shared; this is known as the ‘Tax-Sharing System’ 分税制. The hitch was that this 1994 fiscal reform would leave localities with insufficient tax revenues to meet their basic expenditures. Localities would face an annual fiscal gap – a shortfall between the amount of tax revenues left to them and their fiscal expenditures. The then vice premier of China, Zhu Rongji 朱镕基 and others, including the Minister of Finance Xiang Huaicheng 项怀诚, recognised the problem and knew that localities needed new incentives to pursue local state-led development to make up for the revenues that were taken away.

Zhu Rongji came up with a grand bargain that would allow Beijing to have its cake and eat it too. Beijing could recentralise tax revenues, and the localities would be given the rights and tools to raise new non-tax revenues that they could keep to replace the extra budgetary funds that were taken away. To make the bargain operable, localities were given the right to run local state banks and then establish LGFVs to circumvent the legal prohibition on government borrowing.^[1]

The Dependence of LGFVs and Local Governments on the Real Estate Sector

Local governments established LGFVs as middlemen to borrow on their behalf. LGFVs were also tasked with selling land to real estate developers, who then paid land transaction fees to local governments. Using land to generate revenue is known as ‘Land Finance’ 土地财政. This strategy allowed localities to fill the fiscal gap left by the 1994 fiscal reforms, which recentralised taxes to Beijing. Yes, localities had to borrow and incur debt, but the steady stream of revenues from land transactions allowed them to repay debt and have funds to drive growth.

Problems began with the Global Financial Crisis, when China implemented its stimulus package to keep the economy going. Nominally, the stimulus package provided RMB 4 trillion. In reality, however, the central government provided only 30 percent of that amount, and local governments were expected to find the rest.^[2] All of that borrowing created a huge debt burden for local government around 2013 when many of those loans started to come due. To help repay these debts, local governments started to issue bonds. Although debt was becoming more burdensome, it was manageable because land finance was still viable as the housing market continued to boom.

The current crisis stems from the collapse of the real estate sector, when the demand for land vaporised, rendering the land finance strategy inoperable. Because of their dependence on the real estate sector for revenues, its collapse left local government budgets with no incoming revenue stream. LGFVs must now borrow more on behalf of their local government to ensure the continued operation of public services and to service existing loans. Some localities have already had to cut back on social services or laid off government employees because of fiscal shortcomings. But the other options are also limited because there are now also restrictions on the ability of LGFVs to issue bonds if they are already holding too much debt.

COVID-19 and the Current Crisis

One might think that the local government debt problem can be blamed on COVID-19. The costs of testing, isolating and treating COVID-19 was borne almost entirely by local governments. Yet COVID-19 does not sufficiently explain the problem. While COVID-19 certainly raised expenditures for local governments, it was pandemic-era state policies, which enforced fiscal discipline and deleveraged the real estate sector that triggered the crisis of local government debt. The mountains of debt facing local governments across China are largely an unintended byproduct of these policies. A few factors came together, including COVID-19, to create a perfect storm that then magnified and made intractable an institutional problem that had its origins in the mid-1990s.

Before COVID-19, starting in 2016, Beijing had already begun to tamp down the real estate sector with a deleveraging campaign that tried to limit the sector’s borrowing and ensure that borrowers would have cash on hand to repay debt. The arrival of COVID-19 led Beijing to pause its efforts to enforce fiscal discipline. From about January to June of 2020, the central authorities provided substantial aid to localities to offset some of the costs to local governments during the initial phase of the pandemic, such as Special Low-Interest COVID-19 Bonds 抗疫特别国债.

Ironically, it was China’s success in tackling COVID-19 during the first six months that set it on the road that led to the local government debt problems. After a rocky start in Wuhan, Beijing was highly rated by the Nikei COVID-19 Recovery Index for its handling of COVID-19, as measured by case numbers, vaccination rates, mobility and functioning economic life. Beijing became so confident that in the summer of 2020, the central government returned to its pre-COVID-19 economic agenda to try to enforce fiscal discipline on the real estate section and curbing debt more generally, especially that of local governments.

Beijing implemented the ‘Three Red Lines’ policy三条红线, which prohibited real estate firms from borrowing beyond set limits. Overnight, the developers’ heretofore successful business model of borrowing to grow became inoperable. This left them with few or no new sources of funding to keep operating or repay debt, leaving many scrambling to sell assets for quick cash. Some stopped building, leaving construction sites empty or half built. Suppliers went unpaid. Some developers defaulted, but few were buying land from local governments. But the consequences did not stop with the developers not being able to get loans. Because homebuyers in China had start making mortgage payments before construction was complete, once they realised what was happening to the real estate developers, they went on mortgage strikes, refusing to make further payments out of fear that they would never get a finished apartment.

Ultimately, the failures of the real estate companies meant that revenues from land sales and preparation sank to almost nothing, leaving local governments cut off from the source of non-tax revenue that made up the gaps in funding of their local budgets each year. The impact of the loss of land sales revenues was made worse by the decrease in tax revenues after central authorities cracked down on the tech and the afterschool tutoring sectors during this same period.

The final factor that contributed to the perfect storm was the arrival of a new COVID-19 variant, Omicron, in January 2022. The lockdowns that followed further cost local governments as COVID-19-related testing, quarantining and treatment sent expenditures through the roof, even as revenues fell as most economic activity came to a halt. It became increasingly difficult, if not impossible, for local governments to repay their debts and cover rising expenditures. The real estate sector and housing market have yet to recover despite the end of zero-COVID restrictions at the end of 2022, as the economy – after a brief bump in activity – has remained in a slump.

To make matters worse for local governments, Beijing pushed aside concerns about curbing local debt. In an about-face, it instructed LGFVs to take up the slack from the demise of the real estate sector and make land purchases, even if it mean going into more debt, to provide revenues for local government coffers. It remains unclear what LGFVs are doing with this land. Reports suggest that few have actually used that land for new development. Recent reports reveal that although some LGFVs did buy land, others faked these transactions to comply with upper-level directives. These must have decided that they simply did not have the funds to do so, nor did they want to assume more debt. We await details of how local governments dealt with these directives, which are simply trying to make the on-the-books local government budgets look stronger even if the off-the-books borrowing skyrockets even further.

Why Did Beijing Not Stop This Hidden Debt Problem Earlier?

Since 2014, when the costs of the stimulus package loans became evident, Beijing has been trying to rein in local government debt. This included Beijing swapping out the LGFV bonds, which were most costly in terms of interest with shorter maturity dates, to longer maturing, lower-cost, centrally approved and guaranteed local government municipal bonds that could be more easily repaid. Importantly, these municipal bonds were strictly limited in the amounts issued and required approval by the upper levels. The assumption was that if they cleaned up these existing bonds and required approval for the municipal bonds, the centre could control local government debt. After the bond swaps, in 2018 another campaign was started to get rid of hidden debt, including having local governments sell assets or stakes in State-Owned Enterprises (SOEs). But none of the many attempts were successful because none addressed the root of the problem: the flawed fiscal system instituted in 1994 that left localities with a fiscal gap. The approved municipal bonds were insufficient to cover local fiscal needs.

The point that must be understood is that LGFVs and their borrowing on behalf of local government was an expected outcome of the grand bargain to mobilise support from the localities for its 1994 fiscal reforms. Beijing even assured localities that they should not fear upper-level intervention in revenue-generating activities, as long as they sent up the requisite tax revenues. This also explains why Beijing had no official accounting of local government debt until 2011. Beijing had agreed that it would not seek to know the details.

What Beijing Is Doing to Resolve the Crisis

Allowing the establishment of LGFVs was an effective short-term workaround for local government borrowing. As indicated in the introduction, the terms ‘legal’ or ‘illegal’ are useless in understanding their actions because they were condoned and created to get around official prohibitions against local governments borrowing from banks. But the grand bargain between the centre and the localities that allowed their creation also has created ambiguity around who is responsible for repaying LGFV debt and allows Beijing to pretend that local government finances are not in jeopardy.

As financial analysts around the world have become more rattled by the sheer size of this hidden debt and the possible consequences for the larger economy, Beijing has tried to calm markets by describing it as enterprise debt (LGFVs are state-owned enterprises) and denying that it counts as local government debt. As China’s Ministry of Finance has said, the liability for LGFV debt ‘lies with the entity that issued it’. It added, ‘local governments do not bear the responsibility to repay the debt of LGFVs and other state-owned enterprises’, citing the amended Budget Law in 2014. That means, however, that there is no explicit guarantee of payment; that is, local governments never promised to pay this debt. This ignores the fact that local governments also have what is called implicit debt, which is debt that they may pay if the original borrowing cannot pay. To thwart any hope of a central government rescue, the ministry has explicitly said: ‘If it’s your baby, you own it. There will be no bailout from the central government.’ Such statements seem at least implicitly to recognise that the problem will be the local governments’.

At the same time Beijing has taken steps to buy more time for LGFVs and local governments to repay their debt. Banks have been asked to give LGFVs new loans with ‘ultra-long maturities and temporary interest relief to prevent a credit crunch …’. Instead of the ten-year loans previously given to LGFVs, banks, including some of the big four such as ICBC and China Construction Bank, are now offering 25-year loans. But this strategy has moved huge risks onto the banks. As a result, Goldman Sachs downgraded its rating of China’s big banks, which led to a rout in bank stocks on foreign exchanges.

None of the above strategies solves the institutional problem of local government debt in China. The state can formally separate local governments from their LGFVs, but at the end of the day, somebody must take responsibility for their debts. But even if someone takes over existing LGFV debt, more local debt will reappear each year because of how the fiscal system is structured. Beijing must reconfigure the system or find an alternative source of revenue to plug the fiscal gap.

China realises that a property tax like that in the United States where the revenue would belong to the localities is a solution. A few cities have limited pilot programs, but Beijing keeps delaying its implementation. Such a tax would alienate a rising middle class, and in the current context it would further hurt a depressed housing market.

Ultimately, to end hidden debt, Beijing must address the fundamental flaws in the system established by the 1994 fiscal reforms. Without thorough fiscal reform, the problem of local government debt, hidden or not, will persist. It might be time for Chinese leadership to stop kicking the can down the road. There is no other sustainable solution.

Notes

[1] For details see Adam Y. Liu, Jean C. Oi and Yi Zhang, ‘China’s local government debt: The grand bargain’, China Journal, vol. 87 (2022): 40–71, online at: https://doi.org/10.1086/717256; and Adam Yao Liu, ‘Building markets within authoritarian institutions: The political economy of banking development in China’, doctoral dissertation, Stanford University, 2018.

[2] Liu, Oi and Zhang, ‘China’s local government debt’.

The post China’s Local Government Debt: Fallout from a Perfect Storm appeared first on The China Story.

Amidst overlapping conversations among workers on the shop floor, I heard Mrs. Wong informing her husband that she’d agreed to meet their deadline. She then trudged back to her sewing station beside me on the factory floor. I asked her whether there was any way for her to convince Carmen to push the deadline back by one day, so everyone could catch one night of sleep: what difference would one day make?

Mrs. Wong explained that since summer was fast approaching, little girls in Thailand would soon be out of school. Their parents would want their daughters to wear new dresses to play or to go shopping. I was surprised: why did she think that the dresses for little girls in Thailand were more important than a good night’s sleep after long hours of tedious labour? In the tone of a master explaining a basic principle to an apprentice, she said, ‘Sometimes you must understand the position of the other person by putting yourself in their shoes. Our client (Carmen) is getting pressure from her client, so we must do our best to serve her. Plus, we are happy and obligated to help her. When we needed to pay the lease a few weeks back, she asked us if we had enough money. I told her that we didn’t, so she lent us the RMB 10,000 we needed to keep our business going.’

I was taken aback to learn about Carmen’s financial assistance to the Wongs. Over the course of my two-year ethnographic research at the migrant couple’s household workshop (they were originally from the city of Guigang in the neighboring Guangxi province), I had observed the budding of Mrs. Wong and Carmen’s fictive mother-daughter friendship, which blurred the divisions between boss and employee. From 2010 to 2012, I worked alongside Mr. and Mrs. Wong so that I could observe the everyday challenges and rewards of small-scale entrepreneurship in Guangzhou’s fast fashion sector. Some of these challenges included unpredictable market declines, long working hours, demanding clients, exploitative working conditions, unyielding competition, and bankruptcy. Since the start of the COVID-19 pandemic and the ensuing economic downturn that unfolded, these challenges made migrant entrepreneurs more vulnerable to pressure to take on whatever production orders were on offer, including those that were only marginally profitable. As I helped to cut loose threads off assembled garments and package them for delivery, I had the opportunity to closely observe and interact with clients, itinerant migrant workers, and the Wongs themselves. Through participant observation, I documented the daily rhythms and everyday struggles of migrant self-enterprise in Guangzhou’s fast-fashion sector.

In the larger context of low-cost fast-fashion production and transnational subcontracting in China, the risk of financial loss, including debt and bankruptcy, was an everyday reality for migrant entrepreneurs like the Wongs. Even before the COVID-19 pandemic, many migrant entrepreneurs like the Wongs had to informally subcontract from self-employed market intermediaries like Carmen, who received production orders from multinational corporations and big box retailer chains.

Conditions for migrant entrepreneurs like the Wongs have become even more precarious since the outbreak of the COVID-19 pandemic. Because large fast-fashion corporations usually do not directly own or operate any factories or warehouses, small-scale subcontractors shoulder the risks of surplus inventories, capital flight, labour strikes, and falling margins, and do so without socio-economic safety nets. Risks are passed down the supply chains to local manufacturers who then hire migrant labourers at piece-rate wages. This hierarchical chain of command and risk deferment makes low-cost garment production even more vulnerable to exploitation, with the blurring of profit-seeking business activities with fictive kinship and opportunistic intimacy.

When I first visited the Wong’s factory, it was situated in the middle of a long row of densely built apartment buildings along an alleyway in one of Guangzhou’s urban villages. Like many small-scale household workshops or jiagongchang 家工厂in the surrounding garment district, it was hidden and informal. (Since then the Wongs have moved out of the garment district, and have set up another factory elsewhere in the city.) Using low-tech, second-hand industrial irons, cutters, and sewing stations, the migrant couple depended on their personal savings and their experiences as employees of larger garment factories in Shenzhen for financial and social capital. In the early years of their factory, which they started in 2012, the Wongs relied on walk-in clients and temporary migrant workers to kick-start their business. Most clients would drop off an order of about 500-1,000 garment pieces per order, while temporary migrant workers would earn piece-rate wages for a week at a time before venturing off to other jobs.

Like many similar household workshops in the area, the Wongs’ workshop drew upon the family as its basis of organisational support, which served as a buffer from the exploitative effects of industrial labour. The Wongs followed in the footsteps of Mr. Wong’s older brother, who operated a similar workshop nearby. On days when his business was slow, Mr. Wong’s brother would stop by and assist in the ironing or packaging of garments. While using the family (nuclear or extended) as the foundational source of labour and emotional support, the workshop, lacked the long-term stability conventionally associated with kinship.

In this garment district, production orders are often short-term and unpredictable, as is the supply of labour, with many migrant workers preferring temporary work before venturing out to find other jobs or to run their own businesses. Thus, the defining characteristics of this household workshop are short-term fictive-kin relations that blur the boundaries between trust and exploitation to make rapid cycles of fast fashion production work.

Scholars and observers of small-scale household workshops have shown how there is no clear line between the public and private or formal and informal.[1] Their works emphasise how production is cyclical and reliant on social and familial connections rather than formal institutions.[2] My investigations into small-scale household workshops in Guangzhou demonstrate how low-cost garment mass manufacturing also draws upon short-term, precarious, and fictive kin-based relations, which can obscure relations of inequality and exploitation between clients and their subcontractor/ manufacturers.

The relationship between Mrs. Wong and Carmen, for example, demonstrates how sentiments of care, love, and trust can sometimes hide the exploitative effects of fast fashion production. A fledging wholesaler in Guangzhou’s garment sector, Carmen had forfeited her studies at a university in Australia to take over her mother’s garment wholesale business in Guangzhou after her mother’s sudden illness and death, expanding the family business in her mother’s name. As Carmen was struggling to jumpstart her wholesale operations, Mr. and Mrs. Wong were establishing their factory in Guangzhou’s urban village. When Carmen met the Wongs, she and Mrs. Wong bonded over the loss of Carmen’s mother. Her feelings of void and sadness struck a chord with Mrs. Wong’s long-standing desire for a daughter.

Mrs. Wong and Carmen provided crucial assistance to one another as they launched their respective businesses. They shared information on the costs of fabrics and other raw materials, as well as on rental spaces in wholesale markets across the city. Carmen and Mrs. Wong also shared intimate details about their families, calling each other several times a day to chat about the difficulties of marriage, motherhood, and entrepreneurship. The boundaries between care and industrial labour, as well as between boss and employee, became blurred and ambivalent, shifting the dynamics of power between the independent subcontractors in ambiguous and unpredictable ways.

As Mrs. Wong prepared herself for another long night of tedious labour, she described her friendship with Carmen with such compassion and respect that I missed the uneven power dynamics that coloured their boss-client relationship. I went along with Mrs. Wong’s rationale about the ethics of a good manufacturer in understanding the pressures their clients faced. I attributed this to guanxi关系, of maintaining informal personal and business relations marked by reciprocity and mutual obligation. Once I mentioned the term guanxi, Mrs. Wong enthusiastically confirmed that I had correctly understood her characterisation of the friendship by saying, ‘Yes, that’s right. Sometimes many things in life are about guanxi. If she and I didn’t have such a good relationship, I might not be doing this for her.’ The Wong’s decision to fulfill Carmen’s last-minute request at the expense of rest came from their desire to maintain their guanxi with Carmen as both a family friend and as a client. The bonds of exploitation, obligation, and sacrifice between Carmen and the Wongs were tightly enmeshed, blurring the boundaries that separate boss/employee, care work/productive labour, and commodified/ non-commodified work. Their collaboration as independent contractors in the volatile and unpredictable world of fast fashion emerged not only from a shared interest in profits, but also from their fictive, but felt, mother-daughter bond.

Later in the week, when I had a chance to speak with Carmen privately over dinner, she and I shared our appreciation for the Wongs. I talked about the enormous sacrifices that the Wongs had made by living and working in the factory day in and day out. Impressed by the displays of modesty and pride, which the Wongs had shown through their hard work, Carmen and her business partner responded, ‘You know, we have met numerous factory owners around here, and it’s quite easy to find hard working people. But the Wongs are exceptional because we can rely on them. Once we place an order, we know that they will do the best they can to complete it. They do what they say they’ll do. That’s why we trust them.’ Carmen’s decision to provide financial assistance to the Wongs stemmed from her reliance on the couple as both her friends and as business partners.

Months later, Mrs. Wong once again had a difficult time finishing a last-minute production order for one of Carmen’s clients. She had to re-tag the labels from several hundred little girls’ dresses, which required slow and meticulous work. This led her to vent her frustration on her workers. Afterwards, she reflected on her relationship with Carmen as I accompanied her into the kitchen to wash the dishes and vegetables in preparation for dinner. I acknowledged the pressures she was under, including balancing factory work with household labour. She mentioned how one of the women she’d snapped at told her later that she couldn’t sleep that night because of Mrs. Wong’s harsh tone; Mrs. Wong told the woman, whom she called ‘little sister’, that she’d just been venting, and had already forgotten about it.

She said that Carmen would sometimes speak to her in similarly harsh tones. Earlier that week, Mrs. Wong had called Carmen to clarify the proper position of the buttons on an order for girls’ dresses: ‘Carmen snapped at me by saying that she had left the precise measurements with us in one of her notebooks. She said rather bluntly she was busy and couldn’t be bothered with such minor details.’ Carmen promptly called Mrs. Wong again to apologise. Mrs. Wong said she understood Carmen was busy, and she hadn’t taken it to heart. ‘I don’t really care about these things,’ Mrs Wong told me. ‘I simply forget it the next day. I understand that’s how you must be in the business world. I don’t care. I only care about raising my sons and providing them with a good life. That’s all I care about.

Even though Mrs. Wong mentally compartmentalised the business world from other aspects of her family life, her reflections on proper conduct as an entrepreneur reflected her moral disposition and sense of human decency 做人. Echoing her earlier comments about honesty and trust-building, she maintained a clear sense of the importance of moral and ethical conduct in the business world. Balancing multiple roles as a mother, wife, factory owner, and garment worker, she had to strike a balance between her struggles as a migrant entrepreneur and her other roles in the larger world.

Years later, I would learn that her friendship with Carmen could not survive the economic pressures of small-scale entrepreneurship. The Wongs eventually ended their collaboration with Carmen after an elaborate plan to co-invest in a new factory space in the Wongs’ hometown of Guigang. The initial investment in the factory was provided by Carmen. At the time, Carmen was running her own business and had partnered with a man from Dongguan in Guangdong who was about her age. I had seen the two deliver orders and arrange materials in the Wong’s factory several times. I had even had dinners with them years ago. Their business partnership became a romantic one, but after a few years, the relationship ended and they went their separate ways.

Later, Carmen met another romantic partner, this one from Hubei province. Much like the Dongguan man, her new boyfriend collaborated in her business ventures. According to Mrs. Wong, Carmen’s new boyfriend was more assertive in business. Seeing how well she got along with the Wongs, he convinced Carmen to send her production orders to a new factory he had opened in Hubei; he preferred all profits to remain within their joint partnership. This effectively severed Carmen’s business ties with the Wongs.

Mrs. Wong’s story led me to realise the significant role romantic partnerships could play in these small-scale subcontracting partnerships. I was surprised by the extent to which Carmen’s romantic partnerships influenced her business decisions. Migrants (like other businesspeople) often mixed business partnerships with marriage and romantic ties. But their status as rural migrants left them with fewer rights to state welfare and residency protection than city residents. These limitations compelled migrants to become dependent on informal business partnerships and patron-client relationships, which often seeped into the realms of romance and fictive kinship. While the Wongs struggled with their marriage in the context of running the factory, other migrant entrepreneurs in the wholesaling sector broke off their marriages and romantic partnerships in face of financial stress: where love and marriage played a central role in business partnerships they were badly affected by problems in the business.

I was also surprised that Mrs. Wong held little anger or resentment toward Carmen for backing out of the business plan, even though the factory space in the Wongs’ home in Guigang continued to sit idle. The Wongs acknowledged that the in Guangzhou would be eventually dismantled after the municipal government incorporated the area into the urban core and enforced the hukou (household registration) system there. The demolition of factories and warehouses would force many migrant businesses, including theirs, to close. It seemed the Wongs interpreted professional separation from Carmen as simply another part of doing business. Although I knew them for years, I was not sure whether Mrs. Wong saw it as a missed opportunity or as an act of fate.

Besides, the couple hoped to collaborate with Carmen again someday. Mrs. Wong informed me they occasionally communicated over WeChat. Carmen once invited Mr. Wong to visit her new factory in Dongguan. According to Mrs. Wong, Carmen had even tried to persuade Mr. Wong to give up their factory to work at hers. Although Carmen had broached this with the Wongs several times, the couple had not taken the possibility seriously. It did not seem to be a fair trade-off for the factory expansion and investment opportunity they had originally envisioned with her. I was not sure whether Carmen’s offer was an attempt at reconciliation or whether she saw the offer as beneficial for everyone involved.

The Wongs, by contrast, wanted to maintain some control over their labour and livelihood, however difficult. The years of struggling with the challenges of migrant entrepreneurship, from labour sub-contracting to negotiating the transnational supply chains of fast fashion, taught them that they needed to strike a balance between exploiting others and avoiding being exploited themselves. Looking back, they realised this was hardest when client-manufacturer relations blurred boundaries of kinship, entrepreneurship, and industrial labour.

Notes

[1] Hsiung, Ping-Chun. Living Rooms as Factories: Class, Gender, and the Satellite Factory System in Taiwan. Temple University Press, 1996; Narotzky, Susana and Gavin Smith. Immediate Struggles: People, Power, and Place in Rural Spain. University of California Press, 2006; Yanagisako, Syliva. Producing Culture and Capital: Family Firms in Italy. Durham: Duke University Press, 2002.

[2] Elyachar, Julia. Markets of Dispossession: NGOs, Economic Development, and the State in Cairo. Duke University Press, 2007.

The post Chains of Love and Exploitation: Fast Fashion and Migrant Entrepreneurship in Guangzhou appeared first on The China Story.

One possible explanation for the progress on barley focuses on foreign policy drivers. The barriers may have been removed due to warming bilateral relations under a new Australian government and a transition to a bargaining phase in the relationship. Another possibility is that Beijing dismantled the tariffs to avoid the potential reputational costs that might stem from the public release of a panel report adverse to China by the World Trade Organization (WTO). Here, we consider the logic of these two arguments, and introduce a third explanation that is largely missing from current analyses: the vested interests of groups within China, both government and non-government, and especially industry associations.

Examining the factors driving the removal of the barriers to Australian barley imports provides insight into a wider question which has received scant attention: when and why China removes sanctions. Although a burgeoning scholarly literature examines the termination of Western economic sanctions, it has not considered China. New insights on this issue may have significant policy implications. Most immediately, they are relevant to ongoing negotiations about the removal of China’s barriers on Australian wine. Many expect that the ‘template’ used in the barley negotiations — combining warming diplomatic relations with the concession of withdrawing a WTO case — will be successfully applied a second time. This appears to be playing out at the time of writing. On the back of some recent Australian decisions that may have sweetened the deal, Beijing has agreed to conduct a five-month review of its wine tariffs, and Canberra has temporarily suspended its WTO case. Unlike the case for barley, however, Beijing’s review may be complicated by substantially different underlying domestic political economy dynamics in the wine industry which could well determine whether the tariffs ultimately stand or fall.

The Imposition and Removal of the Barley Tariffs

The origins of China’s barriers on Australian barley go back to 2018. In October that year, the China Chamber of International Commerce (CCIC, 中国国际商会) requested that the Ministry of Commerce (MOFCOM, 商务部) investigate the dumping of Australian barley on the Chinese market. MOFCOM began its investigation in November. On 28 May 2020, after China-Australia relations had slipped into free fall, MOFCOM handed down its ruling and applied tariffs of 80.5 percent (73.6 percent anti-dumping, 6.9 percent anti-subsidy) on the import of Australian barley. The barriers reduced a trade of US$1 billion in 2018 to zero in 2021.

Against the advice of some commentators, the then centre-right Coalition government took the matter to the WTO dispute settlement system in December 2020. After two and a half years of deliberation, the WTO issued its draft panel report confidentially to the parties. This appeared to expedite bilateral negotiations for a resumption of trade, where Australia agreed to suspend its WTO complaint in April 2023 while MOFCOM undertook to conduct a three-month review of its tariffs. After extending the review to four months, China removed the barriers in August 2023. The WTO case was subsequently settled and within weeks large shipments of barley set sail from Australia for China.

What enabled this to happen?

Explanation One: Warming Bilateral Relations

The first explanation focuses on the state of the bilateral relationship between Australia and China. If imposition of the barriers, or at least a failure to negotiate their removal, stemmed from a range of political grievances on the part of Beijing, something was needed to enable a warming of the relationship. In this case, the election of a centre-left Labor government in May 2022 created the opportunity for both sides to move beyond positions hardened over the previous two years, first to resume high-level talks (previously rebuffed by Beijing) and later to negotiate the tariff’s removal. Critical of their Coalition predecessors’ rhetorical hostility toward China, the Labor government under Anthony Albanese stressed a change in tone even as it made clear there was no change in underlying interests. The goal was to ‘stabilise’ the relationship without making substantive concessions on any of the grievances believed to be motivating China’s sanctions. Canberra has, however, refrained from adopting new policies that may have been seen by Beijing as provocative, and which would have disrupted relations and the resolution of the trade disputes. A change in government and tone, and the resulting resumption of high-level contact, were likely major factors in causing Beijing to remove sanctions. However, the stabilisation of the political relationship alone cannot explain the removal’s timing and sequencing, nor does it provide confidence that the remaining barriers will be removed.

Explanation Two: the WTO Dispute and Aversion to Hypocrisy Costs

A second explanation is specific to barley itself and relates to the confidential draft panel report that was released to the Chinese and Australian governments shortly before the parties announced the suspension of the WTO dispute and Beijing’s review of the duties. The content of the draft report is not known and unlikely ever to be released. However, the decision was likely favourable to Australia due to significant weaknesses in China’s arguments that Australia had been dumping barley on its market.[1]

This explanation, also rooted in foreign policy logics, attributes Beijing’s removal of the barriers to the impending adverse decision. But why would the Chinese government be so reluctant for the panel report to be released? After all, China has lost WTO disputes in the past.

One possibility is that policymakers were particularly sensitive about this case given it related to measures which had openly been characterised as coercive sanctions. Although China is alleged to have deployed economic coercion in multiple cases over the past two decades, none of the underlying measures have ever been formally ruled upon by the WTO. The only case to come close — one concerning Canadian canola — was also resolved via negotiation before a panel report was issued.

The panel report would not have ruled on whether China’s measures were ‘coercive’ or ‘sanctions’, but rather likely presented a detailed critique of the compatibility of China’s approach with WTO anti-dumping rules. Nevertheless, Beijing may have wished to avoid a formal rebuke of its measures, which would give even more ammunition to critics arguing that the tariffs were ‘blatant economic coercion’, rather than legitimate trade measures. In other words, it may have sought to avoid ‘hypocrisy costs’. Chinese officials have annually denounced the use of sanctions — so-called ‘unilateral coercive measures’ — as a violation of international law at the United Nations General Assembly (UNGA) and other international forums since the 1990s. Policymakers may have had concerns that to be seen to be using sanctions might damage China’s credibility and reputation in world politics (especially with states who sign onto its anti-sanction UNGA resolutions).

According to this explanation, the draft WTO panel report created the space for a negotiated solution. It generated additional incentive for Beijing to find an alternative and avoid a formal and public ruling against it, thereby aligning with the goals of Australian industry and government to resume exports as soon as possible. Both sides preferred an outcome in which barriers were amicably removed.

One might think this explanation would generate optimism about wine, given Beijing agreed to conduct a similar review in tandem with Australia suspending its WTO case. However, it is possible that leverage from the WTO ruling alone was insufficient in achieving this outcome for barley, as we explain in the next section.

A Third Factor: Domestic Drivers of China’s Barrier Imposition and Removal

One factor that is often overlooked in analyses of China’s use of politically motivated trade barriers is the role of domestic interest groups and domestic policy objectives. As we have argued elsewhere, these factors are key to understanding the logic of the sanctions imposed on Australia. Likewise, they may help explain their removal.

The Imposition of Barriers on Barley

Policymakers: While China’s barley tariffs may have been partly motivated by a coercive objective when they were imposed in 2020, the original 2018 anti-dumping investigation was driven by agricultural protectionism. In particular, as revealed in legal case documents and other substantive reports on the issue, Chinese policymakers were acutely concerned with issues of food security or the ‘choke point’ 卡脖子 in China’s barley supply.

From a peak in the mid-1990s, China’s domestic barley production has undergone a long-term decline. By the period of anti-dumping investigation (2017–18), domestic supply accounted for an exceptionally low 11 percent of total barley supply. At the same time, barley imports for brewing and livestock feed accelerated, especially after 2015, with Australian companies accounting for 75 percent of all imports in some years (Figure 1). Chinese officials argued the imports led to losses in farmers’ incomes in the less developed areas of China where most barley is grown.

The barriers appear designed to arrest these trends, driven by a range of party and state units that have an interest in food security, including the Ministry of Agriculture and Rural Affairs (MARA, 农业农村部), which assisted with the investigation.

Industry associations: Like other products, barley is grown both as an agricultural commodity and an industrial input (for brewing and livestock feed). This brings into competition sectoral interests which need to be adjudicated at a higher level. Industry associations and chambers of commerce are key players, both as representatives of their industries and conduits for the interests of the party-state.

While there is an array of industry organisations in China, the more established and influential organisations are a vestige of the central planning era, where government departments with specialised economic functions managed the operations of state-owned enterprises under their control. During administrative reforms in the 1990s, many specialised economic departments were devolved to become industry associations, comprised of enterprise members that pay membership fees for representation and services. Reforms starting in 2016 and implemented through to 2019 aimed to further administratively decouple associations and chambers of commerce from the party-state, with caveats. The key powers of party-building in associations were to be centralised and led by the Party Committee of the State-owned Assets Supervision and Administration Commission of the State Council (SASAC, 国务院国有资产监督管理委员会), while foreign affairs were more clearly placed within the purview of the relevant (party-state) organs. A framework of state corporatism has been used to describe the ties that bind the party-state to associations and their enterprise members.

Barley provides an interesting case study in industry representation. Barley is grown in China by a multitude of individual households not represented by any industry organisation and so, by default, by government. Jurisdiction over barley production and farmer incomes from agricultural activities like barley lies with MARA. The ministry has long been concerned about China’s balance of production, consumption, and trade for barley.

Government units rarely make anti-dumping applications.[2] The organisation chosen to apply for the dumping investigation on Australian barley was the China Chamber of International Commerce (CCOIC), which has a mandate to represent the interests of Chinese enterprises in international trade and investment. CCOIC falls under the umbrella of the China Council for the Promotion of International Trade (CCPIT, 中国国际贸易促进委员).[3] CCPIT has a vast network of branches within China, a legal affairs department and a network of overseas law firms used for dealing with anti-dumping, subsidy and safeguard issues. It also runs the Economic and Trade Friction Early Warning System 中国国际贸易促进委员会经贸摩擦预警管理系统, which includes an international agricultural branch 中国国际商会农业行业经贸摩擦预警中心.

While the CCOIC notionally represents enterprises with foreign interests, the barriers on Australian barley are contrary to the interests of enterprises that use it for brewing and livestock feed. This is particularly the case for beer brewers that are members of the China Alcoholic Drinks Association (CADA中国酒业协会). CADA has origins as a department within the former Ministry (and then Bureau) of Light Industry before being moved into SASAC. It gained more administrative independence in the 2016–19 association reforms but retains links to the party-state.

CADA has been a participant in at least five international trade cases, either to support trade barriers (Australian wine, EU wine, US distillers’ grains) or oppose them (Australian barley, US sorghum). The differing positions reflect differences in the characteristics of alcoholic drinks including the inputs and outputs used in manufacturing and the relationship with adjacent products (ethanol and various livestock feeds). Different interests are expressed through branches within CADA, representing at least eight types of alcohol including baijiu, beer and wine. Barley is of primary concern to the CADA Beer Sub-Association (CBSA, 中国酒业协会啤酒分会) and the Beer Raw Material Expert Committee 中国酒业协会啤酒原料专业委员会. With seventy-three members, CBSA is powerful and has a strong interest in maintaining supplies of Australia’s malting barley. The attraction of Chinese brewers to Australian barley was not just access to consistent supplies of high-quality malting barley, but also access to a lower-priced grade of barley (‘Fair Average Quality’) permitted under China’s food laws for use in food (including beer) rather than being relegated to feed use.

CBSA made a forceful submission against the tariffs on Australian barley in the initial anti-dumping investigation in 2020, but to no avail. Policymakers concerned with agriculture and food security and the foreign policy preferences of the central government held sway in the initial round leading to the imposition of barriers. There was no prospect for an early reversal in 2020–22, a period of high tensions from COVID-19, strained international relations, the dual circulation policy to promote self-reliance and heightened concerns about food security, including for non-staple foods.

The Removal of Barriers on Barley

For Chinese policymakers, the tariffs had generated mixed success by 2023. As shown for the period 2020-22 in Figure 1, the tariffs successfully stopped Australian barley imports, forcing brewers and livestock companies to diversify inputs to other sources (Argentina, France, Canada, Ukraine). However, total imports in the period increased significantly, mainly for livestock feed. The trade barriers on Australian barley did not in themselves provide the protection that would generate an increase in Chinese barley production. China did however use the period to pursue new domestic policy measures including breeding, research and revised industry standards as well as the building of new barley production areas for breweries in China.[4]

Official statistics report a doubling of Chinese barley production over the period in which Australian barley was blocked (2019 to 2022) but this is a statistical quirk. From 2020 onwards, reporting on Chinese barley production (damai 大麦) included a different variety, highland barley (qingke 青稞) grown in Tibet, Sichuan, Yunnan and Qinghai: this doubled the reported planted area and production of ‘barley’. Nevertheless, with increased reported domestic production and diversification away from Australian barley, policymakers may have concluded that the barriers had served their purpose. Accordingly, when discussion of relaxing the barriers occurred in 2023, there could be expected to have been less resistance from interests within the Chinese party-state.

Simultaneously, domestic industry groups continued their opposition to the barriers. In fact, a submission made by CBSA earlier in the year became the centrepiece of the MOFCOM review. The submission argued China’s domestic barley production programs were unsuccessful and that, with the barriers in place, international supplies were expensive, inconsistent and did not meet requirements, all of which hurt the viability of Chinese beer companies. It also argued the tariffs were counter-productive to China’s own policy objectives in three areas: industrial upgrading and international competitiveness; increasing consumer confidence and spending; and meeting national standards (guobiao 国标) on beer and malting barley. The MOFCOM ruling to drop the barriers also included consideration of submissions from the China Feed Industry Association and Australian industry organisations. Chinese industry groups have similarly been active in government decisions to drop barriers on US sorghum and on lucerne, an item subject to China-US tariff escalations from 2018.

To sum up, in 2020, opposition to the barriers on Australian barley from domestic industry groups was overridden by the preferences of the central government and parts of the Chinese bureaucracy that favoured the introduction of the tariffs — either to achieve domestic agricultural policy objectives, or foreign policy objectives vis-à-vis Australia. By 2023, there was a realignment of interests in favour of the removal of the barriers, which helps to explain when and why the tariffs were dropped.

Implications for Australian Wine

The three conditions that allowed for the lifting of barriers on Australian barley — improved bilateral relations, leverage from WTO proceedings, and an alignment of industry and policy interests in China — provide some guidance on prospects for a similar outcome for Australian wine, on which China has applied similar anti-dumping tariffs. Certainly, negotiations are occurring within a similarly conciliatory bilateral environment. Moreover, given China’s case for imposing tariffs on wine appears even more tenuous than barley, the recently issued confidential draft panel report may motivate Beijing to settle if it is deemed to raise the spectre of hypocrisy costs.

However, unlike barley, there is no alignment of domestic interests in China against the barriers on wine. To the contrary, both industry associations and industry-oriented policymakers have vested interests in continuing the ban.

In the case of barley, the users of Australian product had close links to the state system and a strong stake in the resumption of the trade. But the buyers of Australian wine — importers, retailers and consumers — are not an organised group. Wine is also a luxury product that is not a priority for the party-state.

China’s wine growers, meanwhile, are in an influential position. China has for many years sought to develop a large domestic wine sector as a pillar industry with high potential for value-adding, to raise farmer incomes including in rural and undeveloped areas with grape-growing potential (Ningxia, Xinjiang and Gansu) and to promote ‘ecological’ land use and eco-tourism. Importantly, Chinese wineries are represented by an established industry organisation that falls under the same parent association that opposed the barriers on Australian barley — CADA — but a different branch, the CADA Wine Sub-Association (CWSA, 中国酒业协会葡萄酒分会). CWSA — which comprised 119 domestic wineries in 2022 — was the applicant in the investigation into the dumping of Australian wine and compiled the information for the case. In the lead-up to the investigation, the association said that imports were ‘robbing’ Chinese wineries of the domestic market, especially in the higher-value, cold-weather reds. Thus, unlike the breweries of the CBSA that benefit from Australian barley imports, the wineries of the CWSA compete with Australian wine imports and have an interest in establishing and maintaining the barriers.

The barriers on Australian wine may not have fully allayed the concerns of Chinese industry and policymakers. Chinese wine production and consumption continued to decline in 2022 and the proportion of domestic production in total supply decreased (to 54 percent, see Figure 2). China’s Minister of Commerce Wang Wentao 王文涛 relayed concerns about the production and profitability of the Chinese wine industry as a potential obstacle to his Australian counterpart in discussions about lifting the trade barriers on wine. The potential for this to be a snag was also reflected in a cautious statement from the peak Australian industry group earlier in the year. As a way of addressing the concerns of Chinese industry and interest groups, the largest Australian exporter of wines to China entered into a joint venture in 2022 to produce Australian wine in China. The venture involves an agreement with CWSA, which sees the venture as an opportunity to transfer expertise and build China’s domestic industry.

Nevertheless, the process used to resolve the barriers on Australian barley appears under way for wine. Following the circulation of the WTO panel’s draft report on the wine dispute in October, China and Australia reached an agreement to suspend the panel while Beijing conducts a five-month review of its barriers. It is unclear where the review will land, though the expectation in Canberra on the eve of Prime Minister Albanese’s visit to Beijing in early November was for a favourable outcome. Chinese policymakers may again wish to avoid a potentially adverse WTO ruling and signal their commitment to improving the bilateral relationship. However, it may also be possible that the relationship is sufficiently ‘stabilised’ and instead in a ‘bargaining’ phase, with Beijing therefore adopting a more transactional logic where it looks to extract concessions from Canberra as quid pro quo.

One possible concession is closing a separate WTO dispute with Australia. In September it was reported that Canberra had rejected a proposed ‘package deal’ in which the wine barriers would be removed if Australia dropped anti-dumping duties it had earlier imposed on Chinese wind towers. A statement from China’s Ministry of Commerce in October, however, linked the new wine review to progress on that exact issue. Canberra denied this linkage, and anti-dumping duties are normally determined by an independent Anti-Dumping Commission that would not consider foreign policy interests in its decision. However, even if coincidental, the timing is hard to ignore — the commission released a preliminary report indicating a willingness to let the wind tower duties expire in the same week that Canberra decided not to cancel a lease held by a Chinese company over the port of Darwin, just prior to the announcement of the deal on wine. Furthermore, the week prior Australian citizen Cheng Lei had been allowed to return to Australia following three years in detention. Both sides pocketing ‘wins’ in the month prior to the first visit by an Australian prime minister in seven years speaks to a new phase in the relationship.

At the same time, unlike the barley case, the fact that there remains robust support for the wine barriers within China suggests the policy calculus is more complex. The fact that the wine review period is longer than that for barley might suggest Beijing anticipates a longer internal debate to reconcile unaligned interests, although it may also be designed to coincide with the expiration of the wind tower duties. It may be that domestic concerns are ultimately overruled, not merely by the shadow of a potentially adverse panel report, but a broader deal in an increasingly transactional relationship. In the end, if China does eventually remove the barriers, it will indicate the prioritisation of foreign policy goals and other equities over the preferences of the affected domestic industry and interest groups.

Broader Implications

It is well-recognised that domestic interest groups play an important role in trade formation, processes, and the resolution of trade conflicts. While this is borne out in the case of China-Australian barley and wine, analysis of interest group representation has largely been absent from commentary both inside and outside of China on Beijing’s politically motivated trade barriers. Such analysis can be challenging given the sprawling and opaque nature of party-state and societal linkages in the Chinese ‘leviathan’, but is nevertheless crucial for informed public debate.

More generally, our analysis has implications both for policy and emerging research on the political economy of China’s power in world politics. Concerned about China’s apparent use of international trade as a ‘weapon’, several governments have recently announced plans to coordinate their responses to Beijing’s behaviour. If these coalitions are serious about influencing when and how China uses different international economic policies, they need to pay attention to the domestic micro-foundations that underpin them.

Since the Australia episode, China has continued to impose trade restrictions during political disputes. Notable instances have involved Lithuania, Taiwan and Japan. In each case, as with Australia, governments have looked to WTO dispute settlement as a mechanism to have the barriers removed. Brussels, Taipei and Tokyo should carefully study the domestic politics behind the when, how, and why of China’s removal of barriers in earlier cases — including those involving Australian barley and wine — and look for any parallels that could help them resolve their own disputes.

In terms of research, our findings illustrate the importance of exploring the mechanics and consequences of ‘fragmented authoritarianism’ in the trade domain. It is well understood that the Chinese party-state is not unitary — even in the Xi era. But there remains considerable scope to further illuminate the mechanisms and conditions by which domestic interest groups shape China’s international economic policies.

The authors are grateful to Pru Gordon, Benjamin Herscovitch and Paul Hubbard for helpful comments.

Notes

[1] Such as using the price of Australian shipments to Egypt — a very minor export market — to determine the ‘normal value’ of Australian barley, and the claim that Australian barley imports damaged Chinese barley production, even though it had been in decline for decades (see Figure 1).

[2] One exception was on sorghum from the United States.

[3] In 2022, the spokesperson of the CCPIT was the Secretary-General of the CCOIC.

[4] Wary of the distortions caused from previous interventions in the corn market from 2015, China has since refrained from large-scale, direct interventions in feed grains.

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A recent example of ‘offending China’ involved alleged discrimination against mainlanders by the cabin crew of Hong Kong’s flagship airline, Cathay Pacific. On a Cathay Pacific flight from Chengdu to Hong Kong on 21 May 2023, three flight attendants were accused of mocking a passenger who confused the English words ‘carpet’ and ‘blanket’. ‘If you can’t say “blanket”, you can’t have it,’ one flight attendant said. Another added, ‘Carpet is on the floor.’ The conversation was overheard and recorded by another Chinese passenger, who was sitting near the cabin crew’s rest area. The clip was posted on Xiaohongshu 小紅書 (an Instagram-like social media platform) the next day and went viral.

Making fun of the passenger’s English was misconduct; however, it is not known whether the crew member treated the passenger less favourably when they requested a blanket. Within a day, Cathay Pacific issued three public apologies in simplified Chinese and Mandarin to the passengers involved and to mainland consumers. Chief Executive Officer (CEO) Ronald Lam 林紹波 declared that the airline ‘had a zero-tolerance approach to any serious breach of the company’s policies and code of conduct’ and announced the three flight attendants had been dismissed. He also stressed that passengers with diverse cultural backgrounds must be respected. To prevent similar incidents in the future, the airline would review its flight attendants’ training. As part of this reform, in July, the airline began to recruit flight attendants from mainland China.

Despite prompt action by the airline, the scandal was elevated to a political controversy, unleashing a flood of mainland Chinese grievances against Hongkongers. Political actors and state media took turns condemning the airline. Hong Kong Chief Executive John Lee 李家超 reprimanded Cathay Pacific for the cabin crew’s disrespectful words, claiming they had hurt the feelings of the people of both Hong Kong and mainland China [1] and tarnished Hong Kong’s reputation as a courteous and hospitable place. Other Hong Kong government officials and lawmakers lined up to express anger and disappointment at the airline to ensure that their stance on the incident was communicated to Beijing.

Chinese state media characterised the incident as an exemplar of Hongkongers’ weak national identity and Cathay Pacific’s arrogance. Xinhua warned that consumers would vote with their feet. From a business perspective, the incident cost Cathay not only its reputation, but also one of its markets. China Central Television (CCTV) claimed it was not an isolated incident and criticised Cathay Pacific for neglecting the root of the problem in their governance. An online commentary published by the People’s Daily condemned the airline for worshipping foreigners and looking down on mainland Chinese twenty-five years after the city had returned to the ‘motherland’ and the more recent imposition of the territory’s National Security Law. The commentary also attributed Hong Kong’s prosperity to the Chinese State’s support and Chinese tourists’ spending. It demanded Cathay Pacific ‘take heavy-handed measures to rectify the situation, establish rules and regulations, and fundamentally put an end to this iniquitous corporate culture’. A Global Times commentary accused Hongkongers of having ‘a colonial mentality in their hearts’. It urged the Hong Kong government to develop a strategic plan through education and public communication to achieve decolonialisation of its society.

Cathay Pacific is a subsidiary of British conglomerate Swire Group, but 30 percent of its shares are held by Air China. The airline was one of the MNCs that faced tremendous pressure amid Hong Kong’s political turmoil in 2019, which was sparked by a proposed extradition bill that would have destroyed the legal firewall between Hong Kong and mainland China.[2] A labour and market strike was called for 12 June 2019 — the day the Bill was expected to pass. Working from home was rare before the COVID-19 pandemic, but HSBC, Standard Chartered, Hong Kong’s ‘Big Four’ accounting firms, and other corporations permitted employees to have special work arrangements on the day of the strike, signalling their acquiescence to participation in the protests.

Political tensions escalated over the next few months and another strike was called for 5 August. Some 2,300 staff in the aviation sector, including 1,200 Cathay Pacific employees, joined the strike. At least 200 flights were cancelled. Two days later, the Hong Kong and Macau Affairs Office of the State Council and the Liaison Office of the Central People’s Government Office in Hong Kong jointly organised a closed-door meeting with 500 pro-Beijing members, including business elites, in Shenzhen. In this united-front meeting, Chinese officials asserted the protests had developed ‘colour revolution characteristics’, which sent an unequivocal signal from Beijing that it would intervene in the political chaos in Hong Kong. After attending the meeting, several leading conglomerates that had previously been silent about the protests swiftly displayed their loyalty to Beijing. Hong Kong’s General Chamber of Commerce and the Real Estate Developers Association made statements denouncing the escalating violence in the movement. In the same week, the Civil Aviation Administration of China demanded Cathay Pacific bar any cabin crew who participated in or supported the illegal protests from working on flights to the Mainland. The aviation authorities also ordered the airline to submit crew members’ identification information for their approval before the crew was rostered on to any flights entering China’s airspace. As well as the censure from state media, netizens called for a consumer boycott.

John Slosar, then chairman of Cathay Pacific, initially defended the right to freedom of expression of his staff. Faced with political pressure and financial jeopardy, both Slosar and Cathay Pacific’s CEO Rupert Hogg handed in their resignations. More than thirty employees of Cathay Pacific and its subsidiary Dragon Airline were dismissed due to their political stance on the protests. Among them was union chairwoman Rebecca Sy, who had worked as a flight attendant for seventeen years and was immediately dismissed for lamenting the sacking of the CEO on her private Facebook account. Sy believed the private posts must have been passed on to management by her colleagues. Similarly, several Cathay Pacific employees publicly stated they had been summoned by management and questioned about their private social media posts on the protests before being dismissed. Employees who breach company regulations can expect to be disciplined, but the extent of Cathay Pacific’s intrusion into employees’ private lives was alarming.

Cathay Pacific’s travails, in both 2019 and 2023, present one of many examples of Beijing pressuring companies that operate in China to act as its agents in sanctioning individuals’ political views. The following cases — one of which dates back almost twenty years — indicate how economic coercion, fortified by consumer nationalism, has led MNCs to suppress freedom of expression on behalf of the Chinese state:

Yahoo! (2004): Human rights organisations, including Amnesty International and Human Rights Watch, accused Yahoo! of providing the Chinese government with Hunan-based journalist Shi Tao’s 師濤 email communications with Democracy Forum, a New York–based website. He had sent them censorship directives related to the Tiananmen Incident’s fifteenth anniversary from an anonymous email account. Shi was sentenced to ten years in prison for leaking state secrets.

• Lancôme (2016): The cosmetic company abruptly cancelled a promotional concert featuring Denise Ho 何韻詩, a Hong Kong singer who supported the 2014 Umbrella Movement, after pressure from the Global Times and threats by Chinese consumers on social media of a boycott.
• Cambridge University Press (2017): The press temporarily blocked readers in mainland China from accessing more than 300 China Quarterly articles at the request of China’s General Administration of Press and Publication. The publisher restored the articles after widespread criticism from academia worldwide.
• US National Basketball Association (NBA) (2019): A tweet on 4 October in support of the Hong Kong protests by Houston Rockets executive Daryl Morey led to a broadcast blackout of matches in China. The Chinese Consulate in Houston issued an online statement to condemn Morey’s tweet and demanded the Rockets clarify the team’s stance. Chinese netizens also called for the dismissal of Morey. Morey apologised for his tweet. In NBA’s initial statement, on 6 October, it regretted that Morey’s views ‘deeply offended many of our friends and fans in China’. Two days later, NBA Commissioner Adam Silver defended Morey’s freedom of expression in the wake of pushback from US politicians. CCTV stopped airing NBA games from October 2019 to March 2022, except for one match, in October 2020.
• BNP Paribas (2019): The Global Times denounced Hong Kong–based BNP Paribas lawyer Jason Ng for his Facebook posts supporting the protests in the city and denouncing the police’s management of them. Chinese netizens accused Ng of being a ‘secessionist’ and demanded the bank sack him. The bank apologised for Ng’s comments and emphasised that they ‘did not reflect the view of BNP Paribas’. Ng subsequently resigned.
• HSBC (2023): HSBC terminated the bank accounts of the League of Social Democrats (LSD) without explanation along with the personal accounts of several LSD members. The LSD is the only opposition party that has maintained small-scale street activities in Hong Kong since the introduction of the National Security Law. LSD leaders have been approached by national security police about their protest plans for ‘sensitive dates’, such as the anniversaries of the Tiananmen Incident and Hong Kong’s handover to China, and China’s national day. The homes of some members were raided ahead of those sensitive dates.

Companies must comply with domestic laws where they operate. Doing business in or with China, however, comes with an additional requirement: be careful not to offend the authoritarian state. The above cases show the Chinese state and its consumers not only effectively compel MNCs to play by authoritarian rules and norms while operating in the PRC itself, but also insist that MNCs operating abroad censor the political views of their employees. MNCs may believe that profit justifies their political compliance; however, the effects of such a compromise on the erosion of democratic values and freedom of expression are borne by the liberal world at large. The more dependent a company is on the Chinese market, the more susceptible it is to coercion. Not many MNCs are willing to do anything that will endanger their access to the Chinese market. Google is one of the few exceptions. The tech giant ultimately refused to be complicit in China’s censorship requirements and quit the lucrative market in 2010. Despite an attempt to re-enter the Chinese market with a censored search engine, Dragonfly, the controversial project was dropped in 2019.

China’s spectacular economic growth and rising power have given it more resources to reshape norms and standards in the global order. Many studies have investigated the influence of China’s foreign direct investment and foreign aid on target states.[3] Emerging research pinpoints how the Chinese government weaponises its domestic market to achieve political goals.[4] More work needs to be done to show how the Chinese government coopts and coerces MNCs to enforce its authoritarian values and policies — and the implications of this on the liberal world order. As consumer and shareholder activism for environmental and social justice expands to include human rights — for example, over the use of ‘blood diamonds’ and cotton grown in Xinjiang — it will be interesting to see how companies negotiate the demands of their home markets and those of the world’s largest one.

References

[1] Amy King explains the origin of the foreign policy phrase ‘hurting the feelings of the Chinese people’, which traditionally was often used when Chinese officials believed the country’s status was demeaned on the world stage. See Amy King, ‘Hurting the Feelings of the Chinese People’, Sources and Methods Blog, Washington, DC: Wilson Center, 15 February 2017, online at: https://www.wilsoncenter.org/blog-post/hurting-the-feelings-the-chinese-people.  Recently, the phrase has frequently been used not only by officials but also by any Chinese nationals who feel that China or the Chinese people are perceived in a negative way.

[2] Antony Dapiran, ‘Hong Kong’s National Security Law’, in Jane Golley, Linda Jaivin, and Sharon Strange eds, China Story Yearbook 2020: Crisis, Canberra: ANU Press, 2021, pp.60–65.

[3] See Denghua Zhang and Graeme Smith, ‘China’s Foreign Aid System: Structure, Agencies, and Identities’, Third World Quarterly, vol.38, no.10 (2017): 2330–2346, doi.org/10.1080/01436597.2017.1333419; J. Mohan Malik, ‘Myanmar’s Role in China’s Maritime Silk Road Initiative’, Journal of Contemporary China, vol.27, no.111 (2018): 362–378, doi.org/10.1080/10670564.2018.1410969; Suisheng Zhao, ‘China’s Belt-Road Initiative as the Signature of President Xi Jinping Diplomacy: Easier Said than Done’, Journal of Contemporary China, vol.29, no.123 (2020): 319–335, doi.org/10.1080/10670564.2019.1645483.

[4] For instance, Christina Lai, ‘More than Carrots and Sticks: Economic Statecraft and Coercion in China–Taiwan Relations from 2000 to 2019’, Politics, vol.42, no.3 (2022): 410–425, doi.org/10.1177/0263395720962654; Darren J. Lim, Victor A. Ferguson, and Rosa Bishop, ‘Chinese Outbound Tourism as an Instrument of Economic Statecraft’, Journal of Contemporary China, vol.29, no.126 (2020): 916–933, doi.org/10.1080/10670564.2020.1744390.

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Innovation in science and technology has become the main battleground of the global strategic contest.[1]

— Xi Jinping, 28 May 2021

Realising the complete reunification of the Motherland is the shared longing of all Chinese sons and daughters and represents the essence of National Rejuvenation.[2]

— Xi Jinping, 13 March 2023

Introduction

At the Two Sessions in March 2023, President of the People’s Republic of China (PRC) Xi Jinping defined complete ‘reunification’[3] with Taiwan as the ‘essence’ of China’s goal of National Rejuvenation, to recover the partly-imagined power, dignity, and territory enjoyed by China’s last imperial dynasty at its apex. However, the ‘Taiwan problem’ in recent years has been complicated by an issue that dominates global headlines: the emergence of Taiwan Semiconductor Manufacturing Company Limited (TSMC) as the global leader in the manufacturing of advanced logic chips. Taiwan now sits at the centre of a global contest for hard power and systemic legitimacy.

A country’s access to — or control over — TSMC’s advanced semiconductor manufacturing capabilities determines its ability to acquire the critical military and economic power enabled by frontier technologies such as artificial intelligence (AI). TSMC’s leading role has complicated both the Chinese and the American strategic calculus on Taiwan. On the one hand, the company’s advance to global prominence has increased both China’s incentive to pursue reunification and the United States’ incentive to prevent it. On the other, the reliance of both countries on TSMC has historically acted as a deterrent to any conflict that would compromise their access to its critical technology. The United States’ move to sever Chinese access to TSMC and reshore its own manufacturing capabilities could decrease the deterrent value of the company to both sides, further destabilising what President Xi in his report to the Twentieth Party Congress described as a ‘turbulent period of transformation’ 动荡变革期 in global affairs.

At a deeper level for the Communist Party of China (CPC), Taiwan’s leadership in a fundamental technology also inflames deep-rooted historical wounds. China was forced to cede Taiwan in 1895 after losing a war against Japan, which had beaten China to the modernisation process and grown strong by adopting Western technology from the Industrial Revolution. Taiwan is therefore a symbol of national humiliation as well as a cautionary tale of the risks of falling behind the global technological frontier. These issues of power, technology, and history are crystallised in US–China competition over TSMC.

The Global Semiconductor Industry

Semiconductors 半导体 — also called chips 芯片 and integrated circuits 集成电路 — fall into three categories. Logic chips act as the processing centre of devices and systems; memory chips store information; and analogue chips typically convert electrical signals into another type of energy, such as sound or movement, which interacts with the real world.

The semiconductor supply chain has three main steps — design, manufacturing, and assembly — that are underpinned by intellectual property, specialised software, equipment, and chemicals. Because of its high capital costs and complexity, the semiconductor supply chain has evolved to become globally distributed and specialised in a small number of countries. These global hubs of specialisation have created mutual dependencies across national borders, but also strategic chokepoints in the supply chain. Through its world-leading corporations, the United States occupies a dominant position in several crucial segments: the industry’s underlying intellectual property (IP), chip design — especially electronic design automation (EDA) software — and manufacturing equipment. Over the past ten to fifteen years, TSMC has become the world’s leading contract manufacturer of advanced logic chips, serving global giants such as Apple and Qualcomm, and conveying a major geopolitical advantage to Taiwan. China, a late starter in the global technology race, has long been uncomfortable with its dependence on foreign, and especially US and Taiwanese, semiconductor technology.

Hard Power

Semiconductors, as a fundamental and enabling technology, go to the core of hard-power considerations in Beijing and Washington. They are the building blocks of the digital world and a prerequisite for any country intending to lead the technologies of the future, including AI, quantum computing, biotechnology, and next-generation weaponry. The State Council’s Outline for Advancing the Development of the Nation’s Integrated Circuit Industry 国家集成电路产业发展推进纲要, published in 2014, offers the following assessment: ‘Accelerating the development of the integrated circuit industry is of major strategic significance to the transformation of the model of economic development, to safeguarding national security, and to increasing comprehensive national power.’

It is advantageous for any nation to have a certain level of self-sufficiency in semiconductor technology. Defensively, it offers secure priority access to the semiconductor technology required for the economic and military applications that underpin national strength. Offensively, it provides leverage over weaker countries, whether deployed as strategic denial through trade restrictions or as offensive cyber-capabilities. It is worth noting that in the wake of the revelations of Edward Snowden in 2013, official Chinese media insinuated — despite a lack of evidence in the public domain — that American semiconductor companies were complicit in the extraterritorial data-collection activities of the US National Security Agency.

Advanced logic chips — the production of which TSMC leads — are especially significant as they are crucial to AI, which the State Council’s 2017 New Generation Artificial Intelligence Development Plan identified as ‘a new focus of international competition’ and ‘a strategic technology that will lead in the future’. AI supports a wide range of Chinese government objectives, such as an ‘intelligent’ 智能化 military, an upgraded industrial base, and ‘smart’ governmen. Given the centrality of AI to the economic and military goals of Beijing, Washington, and other capitals, the stakes for access to TSMC-produced leading-edge logic chips are only rising.

The Historical Stakes for China

In modern history, one of the root causes of China’s backwardness and vulnerability to attack was its backwardness in science and technology.[4]

— Xi Jinping, 9 June 2014

For China, the presence of TSMC in Taiwan is not simply a hard-power consideration. It is inseparable from Beijing’s deeper historical commitment to ‘reunify’ with Taiwan and a present-day incarnation of old anxieties. Central to the narrative of China’s Hundred Years of Humiliation is the decisive role played by advanced technology in determining national power. Recent official accounts trace the Qing dynasty’s (1644–1912 CE) most shameful defeats to its failure to grasp critical inflection points in the global development of technology. According to CPC historiography, the failure of the Qing to engage with the First Industrial Revolution that emerged in the United Kingdom in the 1760s led to China’s vulnerability to attack and exploitation by the British Empire in the Opium Wars. Likewise, the failure of the late-Qing reforms starting in the 1860s — often called the Self-Strengthening Movement 自强运动 or Western Affairs Movement 洋务运动 — saw China miss the Second Industrial Revolution and lose the First Sino-Japanese War (1894–1895) that resulted in Taiwan coming under Japanese control. That is, the loss of Taiwan itself is directly connected to China’s historical failure to, in the Party’s language, ‘occupy the strategic high ground’ in advanced technology.

Since the turn of the twenty-first century, the Party has identified developments in information technology, biotechnology, new materials, and new energy as an emergent technological revolution on the scale of the Industrial Revolution. The opportunity to seize the unfolding technological revolution is ‘fleeting’ and the spoils of history await those who can successfully translate technology into power and prosperity. For Beijing, against the backdrop of China’s history of missed opportunities, US actions to deny its access to TSMC are freighted with a sense of foreboding that likely informed Xi’s prediction of ‘high winds and even stormy seas’ in his report to the Twentieth Party Congress. That is, for China’s leaders, acquiring world-leading capabilities in science and technology is central to the broader goal of ‘recovering’ national strength, dignity, and prosperity — an objective described by Xi as ‘growing strong’ 强起来 and achieving National Rejuvenation. Taiwan, by offering a version of Chinese modernity that differs from Xi’s ‘Chinese-style modernisation’ but has also successfully developed world-leading capabilities in a technology central to the new technological revolution (that is, semiconductors), represents an existential threat to the Party’s claim to being the sole steward of Chinese civilisation. In this respect, power and history converge in the ‘problem’ of TSMC.

Towards Decoupling

The Biden administration’s move on 7 October 2022 to significantly broaden technology export restrictions on Chinese semiconductor firms was the latest major step in an unravelling in relations over a decade or more.

Since at least the issuance of the US White Paper on China in 1949, Beijing has been concerned about American subversion, which evolved into a fear of containment during the Cold War. This translates into a longstanding discomfort with its dependence on foreign, and especially American, technology. This discomfort informed China’s renewed drive for technological self-sufficiency in 2006 with the issuance of its National Medium and Long-Term Plan for the Development of Science and Technology (2006–2020), the techno-nationalist ideas of which took shape in the Made in China 2025 initiative.

Since the release of the State Council’s 2014 Outline, the Chinese State has intensified its campaign to increase self-sufficiency in semiconductor technology. The first major pillar of this effort was the establishment of the two so-called Big Funds, capitalised in 2014 and 2019 with a total of 343 billion yuan. These are state-funded investment vehicles designed to support China’s domestic semiconductor industry. They were complemented by generous tax, land-use, and financing policies. The second pillar was an aggressive international mergers and acquisitions drive, often funded by capital from the Big Funds, to acquire overseas talent and technology. These strategies, combined with China’s willingness to use its increasing economic and military power in ways potentially damaging to American interests, alarmed business, political, and military constituencies in the United States and elsewhere, leading to an American policy response with two dimensions.

The first is a strategy to constrain China’s advanced semiconductor capabilities for the stated reason of safeguarding US national security. Starting in 2019, the United States utilised its dominance of the research and development that underlie the global semiconductor supply chain to target China’s two most important semiconductor companies: the semiconductor design company HiSilicon (a Huawei subsidiary) and foundry player Semiconductor Manufacturing International Corporation (SMIC). Both firms were added to the US Bureau of Industry and Security’s Entity List, which names companies and individuals subject to licence-based trade restrictions. The US Foreign Direct Product Rule (FDPR), meanwhile, restricted HiSilicon’s access to third-nation suppliers that use US technology, including TSMC, for advanced manufacturing.

The United States’ diplomatic strategy to convince allies and partners to constrain China’s advanced semiconductor capabilities has scored key victories. Most recently, Japan announced — without naming China — that it plans to impose export restrictions on twenty-three types of semiconductor manufacturing equipment. Dutch company ASML, the world’s monopoly supplier of extreme ultraviolet (EUV) lithography, has withheld or restricted the sale of key manufacturing equipment to Chinese firms. Without EUV lithography machines, SMIC will be unable to manufacture commercially at leading-edge nodes of five nanometres and below. Logic chips of that complexity — over which TSMC has a near production monopoly — are vital to advanced industrial economies because they enable the most powerful computational capabilities.

The second US policy response is a state-led effort to ensure US leadership in semiconductor technology and the reshoring of production of advanced semiconductors, for which the United States currently depends on Samsung and TSMC. The enactment of the CHIPS and Science Act on 9 August 2022 appropriated US$52.7 billion dollars to this end, of which US$39 billion is for manufacturing incentives.

In an important speech on 16 September 2022, National Security Advisor Jake Sullivan signalled an expansion of US technological containment of China. He discarded the previous approach of maintaining ‘relative’ advantages over competitors in a small subset of critical technologies: ‘Given the foundational nature of certain technologies, such as advanced logic and memory chips, we must maintain as large of a lead as possible.’ He also conceptualised technology export controls as ‘a new strategic asset in the US and allied toolkit to impose costs on adversaries’. On 7 October 2022, the Department of Commerce’s Bureau for Industry and Security issued a set of rules that restrict China’s ability to obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors. At the core of these rules is a broadening of the scope of companies and persons restricted from selling to China and the deployment of the FDPR against a further twenty-eight Chinese advanced computing companies, preventing them from benefiting from US-origin technology that would enable access advanced semiconductors (defined as sixteen nanometres or below) for logic chips.[5]

As the decoupling of American and Chinese supply chains continues, there are implications for TSMC and its function as a deterrent to war.

Declining Deterrent: Taiwan’s ‘Silicon Shield’?

In her article in the November–December 2021 issue of Foreign Affairs, entitled ‘Taiwan and the fight for democracy’, Taiwanese President Tsai Ing-wen referred to her country’s semiconductor industry as ‘a “silicon shield” that allows Taiwan to protect itself and others from aggressive attempts by authoritarian regimes to disrupt global supply chains’. There was a degree of consensus among technologists and those engaged with global trade that TSMC acted as a strong deterrent to a hot war over Taiwan. Before the United States severed China’s access to TSMC’s manufacturing capabilities, both Chinese and American corporations were dependent on TSMC for the production of their leading-edge logic chips. TSMC’s factories operate under specific conditions and depend on uninterrupted sources of materials, water, and energy, as well as the highly trained scientists and professionals that operate them. A hot war would imperil these conditions and prove disastrous for both US and Chinese technological ambitions. But American measures to cut off China from TSMC’s advanced logic-chip manufacturing capabilities reduce the costs to China of any disruption to TSMC caused by war, thereby decreasing the deterrent effect of the ‘silicon shield’.

If technologists approached the question of war over Taiwan in terms of the stabilising role of TSMC, military planners saw the problem in terms of relative military capabilities. While the enormous costs of any war are obvious, some military experts are expressing concern about the deterrent effect of US military capabilities. Oriana Skyler Mastro of Stanford University has written that, in late 2020, her contacts in the Chinese military expressed for the first time the belief that the People’s Liberation Army (PLA) could successfully invade Taiwan. A March 2023 piece by veteran defence intelligence officer Lonnie Henley offered a sobering assessment of US military capabilities to overcome a sustained Chinese blockade of Taiwan. If the Chinese side perceives a favourable military balance or tentative American resolve, it will only further destabilise an already fragile status quo.

The strategic situation surrounding Taiwan is deteriorating, as longstanding and irreconcilable Chinese and American strategic interests with respect to the island move to the surface. The visit to Taiwan of Nancy Pelosi’s delegation on 2 August 2022 precipitated extensive military exercises by the PLA Eastern Theatre Command that effectively blockaded the island and triggered an increase in military activity in the Taiwan Strait. In his report to the Twentieth Party Congress in October, President Xi reaffirmed that unification with Taiwan ‘will certainly be realised, and can certainly be realised’, preferably by peaceful means, but by other means if necessary. Around the same time, US Secretary of State Antony Blinken and Chief of Naval Operations Admiral Mike Gilday both asserted the possibility that China’s timeline for unification with Taiwan had been brought forward.

While the looming danger of American power is a constant in the Party’s collective psyche, at the Two Sessions in March 2023, Xi for the first time squared off against the United States directly. He named the ‘unprecedentedly severe’ threat of American-led containment, foresaw a deteriorating international environment in which ‘the risks and challenges China faces will only become more and more severe’, and used a more decisive formulation to signal that reunification with Taiwan is absolutely integral to the destiny of the Chinese nation. Xi’s carefully chosen words matter, and these rhetorical shifts indicate that Beijing’s strategic posture is hardening against the perceived Western threat. The gravity of such pronouncements should not be underestimated.

Wartime Stories

Amid worsening relations and as the fabric of the globally integrated supply chain in advanced technology continues to fray, both Washington and Beijing are employing wartime metaphors and rhetoric to inspire national efforts for strategic security in semiconductors.

In his remarks delivered on 16 September 2022, Jake Sullivan referred to the CHIPS Act as ‘an investment larger than the real cost of the Manhattan Project’ — the United States’ era-defining acquisition of the atomic bomb, which ended the Pacific War and laid the foundation for the postwar order that China sees as preserving American interests. China’s leaders, state media, and the scientific community have long touted the Two Bombs, One Satellite 两弹一星 achievement of the Mao Zedong era as the model for China’s proven ability to realise technological breakthroughs that dramatically improve its security situation. China’s successful testing of an atomic bomb through the Two Bombs, One Satellite program in 1964 provided an effective deterrent to US encroachment into Asia and attack from the Soviet Union, with which it had severed relations. In a January 2021 interview, the prominent scientist and Fellow of the Chinese Academy of Engineering Li Guojie 李国杰 referred to lithography machines, etching technology, and EDA semiconductor design software as the ‘Two Bombs One Satellite project for the new era’.

Achieving self-sufficiency in core technologies that convey strategic advantage now sits at the centre of China’s economic model. This was reinforced by bureaucratic reforms announced at the Two Sessions that restructured the Ministry of Science and Technology to focus on breaking technological chokepoints. China’s quest for strategic autonomy in a febrile geopolitical context recalls the 1950s and early 1960s: it signifies a broadened role for the Party-State and a likely return to major national technology projects led by scientists who will devote their efforts to the patriotic cause. Mao called such reliable technocrats ‘red and expert’ 又红又专.

Despite SMIC’s reported breakthrough in manufacturing at seven nanometres, the medium-term prospects for China’s advanced semiconductor capabilities are not bright. It is uncertain how the US Department of Commerce’s rules will be implemented, but the stated intention of the Biden administration, building on the strategy of the Trump administration, is to utilise its extraterritorial reach to contain China’s development in advanced semiconductor technology to the greatest possible extent. The wheel of decoupling is now turning with its own internal momentum.

Conclusion

Since the 16th century, the world has gone through several revolutions in science and technology, each of which has profoundly shaped the structure of global power. In a sense, strength in science and technology determines the changes in the balance of political and economic forces in the world, and also determines the future and destiny of all countries and nations.[6]

— Xi Jinping, 9 June 2014

The lessons of history are never far from President Xi’s mind. He gave the above speech in 2014, which he observed was a Jiawu 甲午 year in the traditional Chinese calendar of sixty-year cycles — one of ‘special meaning’. The most famous Jiawu year in modern Chinese history was the disastrous year of 1894 when the Sino-Japanese War broke out, resulting in a humiliating peace treaty that granted sovereignty over Taiwan to the Japanese Empire. Xi’s mention of the Jiawu year freights China’s pursuit of technology with existential significance and indirectly links it to the fate of Taiwan.

From his recent language at the Two Sessions, President Xi appears to perceive that the Party’s protracted struggle against the American-led capitalist West has entered a new and potentially decisive phase. In attempting to deny China the very lifeblood of the new technological revolution — advanced semiconductors — the United States has struck at the heart of both Beijing’s anxieties and its ambitions. For US policy not only threatens China’s ability to rectify its history of missed technological revolutions; in doing so, it also imperils Xi’s vision for a rising Chinese world order that would use control over Taiwan to break through the American postwar ‘island chain’ containment strategy. In the narrow battle for technological primacy and the broader contest of systems between Beijing and Washington, history, power and destiny converge on Taiwan.

References

[1] Author’s own translation. For a bilingual version of this speech, see Wang Zichen, ‘Xi Jinping’s speech on science & tech on May 28, 2021’, Pekingnology, 9 June 2021, online at: https://www.pekingnology.com/p/xi-jinpings-speech-on-science-and?s=r

[2] Xinhuanet, ‘Xi Jinping delivered an important speech at the closing of the Fourteenth National People’s Congress in Beijing 十四届全国人大一次会议在京闭幕 习近平发表重要讲话’, Xinhuanet, 13 March 2023, online at: http://www.news.cn/politics/2023lh/2023-03/13/c_1129430109.htm

[3] This article uses the Party’s translation, ‘reunification’, for the Chinese term 统一, putting it in quotation marks to signify that Taiwan and mainland China have never been unified under the rule of the CPC.

[4] Xinhuanet, ‘Xi Jinping: Control key technology in own hands 习近平: 把关键技术掌握在自己手里’, Xinhuanet, 9 June 2014, online at: http://www.xinhuanet.com/politics/2014-06/09/c_1111056694.htm

[5] Access to advanced NAND and DRAM memory chips is also targeted.

[6] Xinhuanet, ‘Xi Jinping: Control key technology in own hands 习近平: 把关键技术掌握在自己手里’, Xinhuanet, 9 June 2014, online at: http://www.xinhuanet.com/politics/2014-06/09/c_1111056694.htm

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One of the most fertile grounds for such personalised speculation in recent years has been the regulatory offensive against the platform economy. Why, for instance, did Jack Ma 马云 disappear from public view for three months after the Ant Financial IPO — slated to be the largest in history – was cancelled? Did Xi Jinping personally axe the deal because Jiang Zemin’s grandson, Jiang Zhicheng, was a major investor through Boyu Capital, a private equity firm he co-founded, as one shot in a larger, internecine battle? Did Tencent get into trouble, as an academic colleague attempted to convince me at a conference, because it had been prominently posting information favourable to Li Keqiang in the run-up to the 20^th Party Congress? What happened to Bao Fan 包凡, the rainmaker for big tech investment deals, who resurfaced in early March after being reported as missing by his firm in late February; it was subsequently revealed that he is assisting authorities with an inquiry into Cong Lin the former president of Renaissance Holdings, an investment company he founded.

The standard story presented by foreign news media of what became known in the West as the ‘tech crackdown’ is as follows: Xi Jinping got angry with Jack Ma after the latter gave a speech, in October 2020, to the good and the great in China’s financial sector, at the ‘Bund Summit’ of China Finance 40, a leading economic think tank. Ma belittled regulators and government banks as being behind the times, directly opposing the message of greater regulatory prudence delivered by Wang Qishan at the same meeting, that same morning [1]. Seeing an opportunity not just to take an uppity Ma down a peg, but also to take a swing at the interests of the Jiang family, Xi killed off the Ant Financial IPO and, for good measure, fired off a barrage of rules to constrain other platform companies and ensure absolute Party control over the digital sector. Predictably, this ‘crackdown’ has gone too far. Faced with catastrophic consequences in the platform economy, and economic malaise across the board, the leadership is now seeking ways to roll it back and return to growth.

This common narrative attempts to provide an explanation for something Western observers have found difficult to fathom: why would China inflict so much damage on the most innovative sector of its economy? Moreover, it’s an explanation that confirms our prior assumptions: authoritarian states are going to do authoritarian things, Xi Jinping is the puppet master of the entire Party apparat, Chinese policy decisions are primarily taken in view of top leaders’ personal political interests, and as long as those decisions diverge from the dictates of neoliberal market economics, they are predictably misguided and incompetent.

The problem with that story, however, is that it is highly selective in many instances, and plain incorrect in others. This regulatory wave was not a sudden whim of Xi Jinping’s, but had been in preparation for quite some time. The drafting of the Personal Information Protection Law 个人信息保护法, for instance, started in 2018. In 2019, the State Council published a document outlining the problems and abuses it saw existing within the platform economy, and listing the regulatory tasks intended to be undertaken, as well as the ministries to which those would be assigned. In other words, anyone claiming the regulatory offensive came out of nowhere simply wasn’t paying attention.

The problems identified in this 2019 document and elsewhere are real. For example, the success of platform companies depends on legions of immiserated delivery drivers and gig workers, as well as overworked programmers and software engineers. Third-party merchants, reliant on platform firms for their businesses, suffer from onerous contract obligations and monopolistic practices. Telecommunications fraud, enabled by platform firms’ lax data protection practices, is rife. Poor risk management practices in fintech had already caused the meltdown of the P2P lending industry, evaporating the savings of millions of retail investors.

Those elements are, however, far less dramatic and eye-catching than the disappearance or detention of high-profile CEOs or gossip about palace intrigue. Moreover, to assess them requires consistent engagement with the drudgery of analysing Chinese policy and regulatory documents — a calvary the great Belgian Sinologist Simon Leys (Pierre Ryckmans) memorably described as ‘akin to munching rhinoceros sausage, or to swallowing sawdust by the bucketful’. Doing so reveals a stack of dozens of texts, issued by multiple Party and government organs, which paint a somewhat more complex picture, where there is no single discernible cause or motivation, nor even clear evidence of much interagency coordination. Regulations in fintech, for instance, have evolved nearly in parallel with interventions in the realm of competition, or protection for consumers and workers more generally. Some of the fintech rules resemble market regulation initiatives undertaken elsewhere, most notably in the European Union. The Personal Information Protection Law, for instance reproduces many of the General Data Protection Regulation’s (GDPR) terms, concepts and mechanisms, defining largely similar legal grounds for personal information processing, introducing similar procedures for data transfer abroad and imposing similar levels of punishment for violations. New Chinese regulations on competition in the platform sector contain similar definitions for large-scale ‘gatekeepers’ to Europe’s Digital Markets Act.

Traversing the turgid prose of such documents is time-consuming. Journalists, think tank experts and even academics are rarely able to concentrate on tracing single policy areas across time, beholden as they are to the demands of their editors, to news cycles and the demands of immediate hot takes. The Chinese written language, too, forms a layer of encryption: many non-native readers (myself included) simply process Chinese documents far more slowly than texts in English. In those circumstances, it’s easier to reach for a standard narrative, spice it up with details of the latest scandal, and serve while it’s piping hot. Deep engagement with the matter at hand doesn’t necessarily carry a reward: ‘Chinese Regulators Attempt Incremental Improvement of Working Conditions for Gig Workers’ is a far less attractive headline than ‘Xi Jinping Assaults Jack Ma’s Empire’.

Doing the work requires taking Chinese policy thinking around certain questions seriously, and recognising that it might diverge from Western instincts for reasons other than the wielding of blunt authoritarian power. Consumer-oriented online services may be seen as the pinnacle of innovation in the United States, but policymakers in Beijing disagree somewhat. Beijing recognises that big tech has contributed in no small way to enhancing the convenience of Chinese citizens’ daily lives, but at the same time, does not believe it makes a durable contribution to the fundamental qualities of the Chinese economy. Instead, China’s techno-industrial policy under the Fourteenth Five-Year Plan (2021-2025) focuses on upgrading the efficiency and productivity of the manufacturing industry. Platform firms are expected to support that effort, for instance by providing innovative services in logistics and supply chain management. Cryptocurrencies, in the eyes of Chinese regulators, moreover, are mere vehicles for non-productive speculation and law-breaking, and consume vast amounts of electricity to boot. No wonder they have now been banned completely.

Beijing’s willingness to damage the fintech sector, which has lost over US$ two trillion in market capitalisation, for instance, becomes a lot more explicable when it is recognised that nearly all publicly traded Chinese fintech companies are listed on stock exchanges outside of mainland China. The shareholders receiving a haircut are, therefore, far less Chinese than one might initially think. However, to admit Chinese authorities might have good reasons for acting in the way they do implies that the Western political and economic model is not universally applicable, and undermines an easy dismissal of Chinese policy solutions. The fact is that China acts in many ways similar to, say, the EU, and the bureaucracy in Beijing is beset by the same pathologies that trouble Washington, Brussels, Canberra or any other capital.

A similar problem lies in discussions of the ‘end of the crackdown’. This phrase seems to imply the regulatory campaign was temporary, and the normal order of business will resume. This is incorrect: it is better to understand what happened as a ‘rectification’: the introduction of a new governance paradigm for a sector that Chinese authorities view as highly important and therefore in need of effective and strict regulation. Safety requirements in cars aren’t an effort to stop people driving, but to ensure they are not killed or maimed as often while doing so. Not only are the new rules here to stay, so are the structures designed to enforce them. The State Administration of Market Regulation, China’s relatively new competition regulator, has established a new Anti-Monopoly Bureau and hired scores of new enforcement personnel. Multiple recent policy releases suggest satisfaction with progress thus far, and there is no evidence that any department intends to roll back any of the measures that were introduced. If that results in the sector’s profitability being permanently depressed, so be it: those profits would have come from unsustainable or undesirable practices anyway. One can reasonably disagree with that logic, but we need to recognise why it exists in the first place.

The inability or unwillingness of much Western commentary and analysis to engage with the drudgery of deep policy analysis relate both to our human fondness for a good yarn, as well as a predisposition for making sense of China in ways that are psychologically comfortable to those of us who closely identify with the Western liberal order. However, that comes at a cost: we are less able to make sense of the Communist Party of China’s motivations and actions. This not only impacts our direct engagement with China, but also the broader world with which it is inextricably intertwined.

[1] See, for instance, The Economist, ‘China’s tech crackdown starts to ease’, The Economist, 19 January 2023, online at: https://www.economist.com/business/2023/01/19/chinas-tech-crackdown-starts-to-ease; Giulia Interesse, ‘Is China’s ‘Tech Crackdown’ over? Our 2023 regulatory outlook for the sector’, China Briefing, 22 February 2023, online at: https://www.china-briefing.com/news/is-chinas-tech-crackdown-over-our-2023-regulatory-outlook-for-the-sector/; Coco Liu, Zheping Huang and Sarah Zheng, ‘China’s tech giants lost their swagger and may never get it back’, Bloomberg, 24 June 2022, online at: https://www.bloomberg.com/news/articles/2022-06-23/china-tech-crackdown-eases-but-startups-worry-xi-may-up-regulatory-pressure 

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This article takes stock of recent developments in China-Russia strategic alignment from three often neglected angles. One has to do with the consistency of China-Russia cooperation. One is about growing military-technical cooperation. The third deals with the structural shifts in great power politics that drive China-Russia relations. The article also addresses the main weaknesses of China-Russia strategic cooperation as well as the impact of Russia’s invasion of Ukraine on it.

Consistent consolidation of bilateral cooperation

The current relatively high level of China-Russia strategic cooperation is not an ad hoc phenomenon. Nor is it a knee-jerk reaction to the deterioration of US-Russia relations in the aftermath of the Ukraine crisis or recent US-China tensions in Southeast Asia and beyond. It is a continuation of a consistent consolidation of China and Russia’s strategic partnership since the breakup of the Soviet Union. The steady expansion of China and Russia’s comprehensive mechanism of strategic cooperation has proven immune to episodical perturbations, progressing into what in alliance studies is defined as an advanced form of strategic cooperation.

This consistent trend is reflected in official statements, according to which the relationship has progressed from ‘good neighbourliness’ in the early 1990s to ‘constructive cooperation’ in the late 1990s to ‘comprehensive strategic partnership’ in 2001, then further on to ‘comprehensive strategic partnership of coordination’ in 2012 and a ‘comprehensive strategic partnership of equality, mutual trust, mutual support, common prosperity and long-lasting friendship’ in 2019. On 5 June 2019, Xi Jinping and Vladimir Putin upgraded China-Russia relations to ‘a comprehensive strategic partnership of coordination for a new era’. This progression highlights consistent consolidation of the alignment, its immunity to exogenous shocks, and the willingness of both sides to deal together with the challenges of the future.

The consolidation of China-Russia alignment materialised mostly in military-strategic terms, including the introduction of a comprehensive mechanism of military consultations at different levels. The number of joint military exercises, involving Army, Airforce, and Navy, in different parts of the world, as well as regular computer-simulated missile defence drills, significantly increased coordination between the two militaries. The critique and condemnation of US policies in Asia and elsewhere as ‘increasingly threatening’, as well as the proclamation of the intention of China and Russia to jointly resist the growing US threat, became an embedded norm of China-Russia security dialogue. Cooperation across economic and diplomatic dimensions, while not yet as strong, also steadily increased.

There have been ups and downs. Examples include a temporary stagnation in China-Russia military-technical cooperation in the mid-2000s and the occasional suspension of otherwise regular bilateral consultations. However, the overall trend is upward; viewed in its entirety, the relationship shows itself immune to short-term fluctuations. It is in this context that on 4 February 2022 the two leaders announced a ‘no limit partnership’ that ‘surpasses an alliance’ because it has ‘no forbidden areas’.

Then came Russia’s invasion of Ukraine. Beijing has tried to carefully distance itself from Russia with regard to Ukraine to avoid being affected by the global sanctions, which suggests at least one limit to the partnership – an unwillingness to be partners in economic adversity. However, China has procured more energy resources from Russia since the Russian aggression against Ukraine. Russia has become China’s biggest supplier of oil as Moscow sold discounted crude oil to Beijing amid sanctions over the Ukraine war. In May 2022, imports of Russian oil rose by 55 percent from a year earlier, reaching a record level and displacing Saudi Arabia as China’s biggest provider. Moreover, the continuing bilateral military exercises and joint air patrols over the Western Pacific, especially recent incidents of Chinese and Russian warplanes together entering South Korean air defense zone from the Sea of Japan, suggest that China is not distancing itself from Russia when it comes to the strategic aspects of the bilateral cooperation, even though China’s voting decision on Ukraine at the UNSC might suggest more neutrality than support.

Growing military-technical cooperation

Military-technical cooperation (MTC) has to do with the degree of military alignment between China and Russia and is ultimately a question of how technically prepared the two countries are for a hypothetical full-fledged alliance, including united military actions.

China and Russia have travelled a long way in terms of strategic cooperation since the early 1990s. Currently, China and Russia carry out twenty to thirty high-level security-related consultations every year, which is at the level of a functional alliance. This number excludes regional consultations between Chinese and Russian provinces and cities and exchanges between military academies.

Russia’s attitude toward a more comprehensive and interdependent MTC with China has evolved, with Moscow increasingly less wary of relying on China in this area. Political factors that used to constrain Russia in its MTC with China, which included concerns about China’s unlicensed reverse-engineering of weapons and potential competition with the cheaper China-made weapons on international markets, as well as worries about excessive dependence on China, have disappeared and interconnectedness has started to become the dominant tendency. Russia started to rely on China for such things as electronic components for its space programs, composite materials and technologies used in drone construction, and engines for warships, all of which result in closer military-technical interdependence. Russia’s tendency to consider China as not only a target market for its weapons but also a source of critical equipment and technologies has only consolidated in the context of its war in Ukraine. Willingly or not, Russia has reconsidered its previous defence-equipment-for-cash model of cooperation with China. The imposition of global sanctions on Russia, however, has made China more cautious about sending supplies to Russia and has incentivised the use of more complex and less traceable schemes in the bilateral transactions.

China and Russia have undertaken a growing number of joint military exercises in different parts of the world. For example, ‘Joint Sea-2015’ took place in the NATO-dominated Mediterranean, and ‘Joint Sea-2016’ became the first major exercise of its type to include China and a second country in the disputed South China Sea after the Hague-based tribunal overruled China’s claims on the waters under its nine-dash line claim. The increasing operational complexity of these joint exercises has laid the foundation for potential simultaneous joint military actions in multiple theatres of operation. This could enable China and Russia to draw the attention and capabilities of the US and its allies to a specific region, reducing their ability to react to, for example, Chinese actions in the Pacific or Russia’s in western Eurasia. This is one of the reasons why, in the context of Russia’s ongoing war in Ukraine, the US has paid so much attention to China’s potential military invasion of Taiwan. As some recent congressional reports specified, the US might struggle to win a war against China or Russia if forced to fight on two or more fronts simultaneously.

The degree of interoperability between Chinese and Russian forces has increased: recent joint military exercises have involved the creation of temporary joint command centres, tactical groups under a single command, and air groups implementing simulated attacks jointly. China and Russia have also started integrating their satellite navigation systems – China’s Beidou and Russia’s GLONASS. Huawei Technologies Group has also been facilitating China-Russia cyber integration by opening data centres in Moscow, St. Petersburg, Kazan, Novosibirsk, and Nizhny Novgorod.

A new height of military cooperation came with the announcement, by President Putin in October 2019, that Russia was actively helping China to create a missile attack early warning radar system. According to some assessments, the new system will be based on the Russian ‘Tundra’ satellites and ‘Voronezh’ modular ground-based radar stations set up in Chinese territory. The system will provide advance warning on potential incoming missiles’ trajectory, speed, time-to-target and other critical information needed for an effective interception. Missile early warning systems are strategic arms constituting one of the most critical aspects of any country’s defence capability. Potential integration of the two countries’ early warning systems can facilitate the convergence of Russia’s and China’s defence strategies, in which case China-Russia military integration and interdependence would potentially match that of US alliances with such countries as France and the UK.

Structural shifts in great power politics

To understand the third aspect – the structural balance of power – requires looking into the structural shifts in great power politics. There are strong international-systemic factors that drive China-Russia alignment. Historical research on power transition between great powers suggests that out of sixteen power transitions (shifts of the global balance of power in which a rising power catches up with or surpasses the dominant great power in terms of comprehensive capabilities), only four were peaceful.

In the contemporary international system, power transition is happening between China and the US. According to World Bank, in 1991, the US’s total GDP of US$6.158 trillion was more than sixteen times that of China (US$383,373 billion). By 2020, China’s GDP reached almost 70 percent of that of the US (US$14.343 trillion vs. US$21.374 trillion). History shows that an established superpower (the US in this case) represents the greatest threat to states that are on the cusp of becoming superpowers (e.g., China). In this context, China has every reason to develop its strategic alignment with Russia, which, given Russia’s anti-US foreign policy orientation, military and geopolitical characteristics, and the permanent seat in the UN Security Council, presents the most effective counter-balance against US power.

At the same time, the US explicitly identifies China and Russia as major strategic threats, an assessment that drives its defence decisions and allocation of military resources. As the US’s main strategic rival, China is given a primary place in US defence strategy. Russia, in turn, is dubbed as a ‘revitalised malign actor’ that must be contained through comprehensive sanctions (made even more comprehensive since its invasion of Ukraine). A simultaneous focus on both China and Russia by the US contributes to a situation in which the two countries start viewing the US the same way the US views them – as the greatest threat to national security and the primary focus of defence policy.

This tendency was exacerbated on 27 October 2022, when the Biden Administration unveiled a new defence strategy that effectively puts the US military in Cold War mode with both China and Russia. The new strategy details the US’s plan to confront the two nuclear peers and potential adversaries (China and Russia) with a historical multi-year build-up of modernised weaponry, enhanced foreign alliances and a top-to-bottom overhaul of the US’s nuclear arsenal. The issue is complicated by the fact that while the US and Russia have negotiated on nuclear weapons, China has never agreed to any such negotiations. As a result, the power balance within the international system that is conducive to China-Russia alignment is buttressed by China and Russia’s shared perception of external threats: both increasingly feel that the US jeopardises their geopolitical interests, civilisational identities, and domestic political regimes.

The current behaviour of the US suggests a lack of questioning within its strategic establishment if adopting a hostile attitude towards both China and Russia makes strategic sense. According to some assessments, such an approach does not bode well for US long-term strategic interests because it systematically encourages China-Russia alignment. In the context of the evolving power balance, this deterioration generates an external compulsion that removes any remaining political barriers to closer China-Russia alignment.

‘Unfavourable complementarity’ in economic relations

Economic cooperation remains the Achilles heel of China-Russia strategic alignment. The two countries have become more complementary economically and more interdependent in the energy sector. However, as relative shares of China and Russia in each other’s external trade indicate, Russia depends much more on China than China depends on Russia in terms of trade. China ranks as Russia’s top trading partner, but Russia is only China’s fourteenth largest trading partner. Moreover, Russia has ended up in a role in the current China-Russia economic cooperation model that it is reluctant to embrace. The so-called ‘complementarity’ of China’s and Russia’s economic models, allegedly conducive to closer cooperation, also creates unfavourable geopolitical pressures on the relationship.

The rapid growth of China-Russia trade’s total volume – from meagre USD 5.56 billion in 1992 to $153.9 billion in the first 10 months of 2022 – has been accompanied by the emergence of a bilateral trade structure that is too unbalanced to be healthy for the relationship and reflects the degradation and primitivisation of Russia’s economy since the collapse of the Soviet Union. Since then, Russia’s manufacturing sector has all but collapsed, and the country has become a petrostate. Meanwhile, China has become the world’s factory on a gargantuan scale, producing more than 20 percent of global manufacturing output. Between 2001 and 2021, the share of machinery and equipment in China’s export to Russia rose from less than 10 percent to almost 50 percent but drastically dropped in Russia’s exports to China from almost 30 percent to less than 1 percent. Simultaneously, the share of oil and oil products in Russia’s exports to China soared from 10 percent in 2001 to more than 70 percent by 2020. Despite this, China, unlike Europe, does not strongly depend on Russian resources, which represent only 19 percent of its total energy/oil consumption. For some European countries such as Germany, by contrast, Russian resources accounted for more than 50 percent of total energy/oil consumption in 2021. The war in Ukraine and the comprehensive sanctions imposed on Moscow will most likely accelerate the technological degradation of the Russian economy, reducing Russia’s significance to China from being a true economic partner to being little more than just an energy provider.

The deterioration of Russia’s economic standing vis-à-vis China has a range of implications. Except for the Russian military-industrial complex, China perceives Russia less and less as a source of innovation and new technologies and more and more simply as a source of energy resources and a market for finished manufactured products. For Russia, which only twenty years ago was ahead of China on many economic development indicators, this is a disappointing outcome that thins out the otherwise strong foundations of and support for China-Russia strategic cooperation.

On a psychological level, China’s increasing perception of Russia as a net energy exporter discomfits many Russians, including political elites, and make the Russian government need to seem cooler on China than it might otherwise be.

These tendencies consolidated after Russia invaded Ukraine on 24 February 2022. Barred from access to Western technologies by comprehensive economic sanctions that are unlikely to ease in the foreseeable future, Moscow has rushed to extend its energy exports to Asia at discounted prices – a situation that China has naturally taken advantage of. Thus, the pattern of unequal bilateral economic transactions is likely to continue. This in turn will lead to demand within Russia for Moscow to protect Russia’s national markets and producers from Chinese economic expansion, and to prevent Russia from turning into little more than China’s resource appendage.

The test of the Ukraine war

The ongoing war in Ukraine that Russia started in February 2022 is stress-testing China-Russia strategic cooperation. By not distancing itself from Moscow Beijing has incurred serious reputational costs and potentially risks becoming a target of secondary economic sanctions. Yet the war in Ukraine is unlikely to significantly reverse China-Russia strategic alignment. That is due to Beijing’s growing recognition that China and the US are on a long-term collision course.

US policies towards China indicate that Washington has embarked on a strategy of containing China, though its official rhetoric tends to favour the use of the word ‘competition’. On top of a de facto economic containment of China, enforced through such measures as restricting the export of microchip technologies to China and pressuring partners to ban the Chinese companies Huawei and ZTE from getting involved in building their 5G network infrastructure, the US continues to back Taiwan with arms sales and high-profile visits by top US officials. These measures seriously stress China-US relations and make China increasingly reluctant to distance itself from Russia.

Ten days after Russia invaded Ukraine, former US Secretary of State Mike Pompeo travelled to Taipei and urged Washington to ‘take necessary and long-overdue steps to do the right and obvious thing’, by which he meant to recognise ‘free and independent’ Taiwan. Speaker Nancy Pelosi’s visit to Taiwan on 2 August 2022 (five months after Russia’s invasion of Ukraine), despite Beijing’s vehement criticism and the staging of live-fire exercises off Taiwan’s coast, further added fuel to the fire. For Beijing, any proclamation of Taiwan independence is a red line. Washington could have tried to use the Ukraine war to pull China away from Russia, but actions such as those of Pompeo and Pelosi have made this difficult. An argument can be made that neither Pelosi’s visit nor Pompeo’s words represent US policy and that, thanks to the nature of the US’s political system, both are independent actors. However, if it is the case (i.e., Pelosi’s visit is a pursuit of her personal political interest) and the US is interested in minimising tensions with China, Pelosi’s visit should have been criticised by the Biden administration.

Xi has continued to speak directly with Biden, including for three hours in Bali, as the two leaders affirmed their mutual opposition to any use of tactical nuclear weapons in Ukraine. Nonetheless, Beijing remains suspicious that Washington is promoting a new Cold War. These suspicions were exacerbated significantly by, among other things, the recently minted AUKUS initiative that former Australian prime minister Scott Morrison claimed was a way to push back against a China-led ‘arc of autocracy’.

Another factor that contributes to China’s unwillingness to openly criticise Putin’s war in Ukraine is Western hypocrisy in not making much noise about India’s friendship with Russia. Like China, India has never condemned Russia’s invasion of Ukraine, and through its purchases of crude oil from Russia, is supporting Moscow no less than China is. In March 2022, India was preparing a rupee-ruble trade arrangement with Russia that will allow India-Russia trade to continue despite Western sanctions against Russia. Attempts to warn India of the consequences if it tries to circumvent the sanctions have only been mild and delivered with nowhere near as much pressure and hostile rhetoric as those targeted at China.

From Beijing’s perspective, this behaviour would appear to confirm that the US criticism of Beijing is not about the war in Ukraine. Instead, it is about using that war to contain China. In such a hostile context, then, Beijing has been reluctant to condemn Russia over Ukraine and risk undermining their strategic alignment.

Conclusion

China and Russia’s alignment is not a formal military alliance and may not become such. Moreover, it is not impossible for China-Russia military cooperation to unravel. For all its reluctance to condemn it directly, China remains ambivalent towards Russia’s war in Ukraine, and Beijing’s position on the issue of state sovereignty does not fully coincide with Moscow’s. Economic factors may also hinder the further upgrading of China-Russia relations to the level of a fully-fledged alliance. The different economic roles of China and Russia in the global division of labour remains another challenge for bilateral strategic cooperation.

And yet, China-Russia strategic alignment is currently in place and is affected by international systemic trends. It is solid, institutionalised, and comprehensive, and it should be taken seriously. It is also trending incrementally upward. Their shared great power hostility towards American hegemony in world politics suppresses the most likely centrifugal forces that could pull them apart. The simultaneous deterioration of China-US and Russia-US relations after Russia’s invasion of Ukraine prevents the Ukraine war from becoming a factor that might slow down or undermine China-Russia strategic alignment. An alliance is possible, although if it’s in the works, China and Russia may delay an official announcement or not make such an announcement at all.

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But is China really on track for the ‘collapse’ that Gordon Chang famously first predicted in his 2001 book, The Coming Collapse of China, one he still thinks is imminent in 2022? Or is Tom Orlik, author of the 2020 book China: the Bubble that Never Pops, more likely to be correct, writing in October in Bloomberg that although the ‘China bubble is losing air’, it’s ‘not going to pop’ – because of the nation’s ‘unparalleled record of surmounting crises’?

The question of whether China can keep rising looms large in the reporting and analysis published in Foreign Affairs. It’s a theme they return to time and again, presenting competing narratives, with no obvious bias. In October 2021, an article by Michael Beckley and Hal Brands, was titled ‘The End of China’s Rise: Beijing is running out of time to remake the world’. The authors begin by asserting that, despite China ‘moving aggressively to forge a Sinocentric Asia and replace Washington atop the global hierarchy,’ there is little for the West to worry about because ‘China’s government is concealing a serious economic slowdown and sliding back into brittle totalitarianism. The country is suffering severe resource scarcity and faces the worst peacetime demographic collapse in history.’ China is, in short, ‘running out of people’ and the ‘economic consequences will be dire.’ This, combined with the government’s ‘force-feeding capital through the economy since 2008,’ leads Beckley and Brands to argue that ‘China is tracing an arc that often ends in tragedy: a dizzying rise followed by the spectre of a hard fall.’

A second article by Jude Blanchette in November 2021 conjures up a very different picture: ‘Xi’s confidence game: Beijing’s actions show determination, not insecurity.’ Blanchette challenges the ‘Collapsing China Syndrome’ head on.  Blanchette argues that, while the ‘doomsayers’ are not entirely wrong in identifying the factors that constrain China’s growth, they fail to weigh these up against Beijing’s potential and actual strengths.

Perhaps Blanchette’s most contentious point is that Beijing’s biggest strength is its ‘effective authoritarianism’: its ability to mobilise and channel resources with ‘remarkable speed.’ The efforts to minimise the economic impacts of COVID in 2020 is one example. While acknowledging that this ‘disregards the rights and freedoms of Chinese citizens,’ he contends that the ‘CCP in 2021 has been stronger, more capable, and in command of more resources than at any other time in its 100-year history’.

This chapter reflects on some of the topics that obsessed the English-language press reports on China in 2022, alongside other topics that perhaps should have received more attention, to identify the key challenges affecting that nation’s economic health. Assessing these challenges based on evidence and fact – rather than fear and fiction – is essential for understanding where the Chinese economy is headed, and what might prevent it from getting there.

‘Running out of people’?

For decades, I travelled around China asking people what they thought the country’s biggest challenge was. Time and again they would say ‘Too many people’. In the 1950s and 1960s, Mao Zedong had pushed the narrative that ‘many people would make China strong.’ This ‘population optimism’ fed into China’s population boom during that time (from just under 544,000 people in 1949 when the People’s Republic was founded to 929,000 in 1976 when Mao died). Chinese demographers had already started to think this was a serious problem, but the fate of economist Ma Yinchu 马寅初, who warned in 1957 of the dangers of overpopulation and was attacked as trying to ‘discredit socialism,’ served as a cautionary tale for those who would say so out loud.

Deng Xiaoping, who oversaw Ma’s political ‘rehabilitation’, including a formal apology to him from the CPC in 1979, adhered to a different narrative. He was ‘population pessimistic’, believing that reducing China’s population growth was key to increasing per capita income. He launched the One-Child Policy in the early 1980s, aiming to bring population growth to zero and quadruple per capita income by the year 2000. He didn’t quite get to zero population growth, but per capita income did quadruple by 1996.

While fertility decline wasn’t the only driving factor, it was a significant one. According to Cai Fang 蔡昉, former Director of the Population Institute at the Chinese Academy of Social Sciences, around one quarter of the increase in China’s per capita income during its ‘growth miracle’ years from 1978 to 2010 can be explained by declining fertility. There is a simple logic behind this demographic dividend: a reduction in fertility leads to a reduction in youth dependency and a surge in the working age population, and because there are now relatively more workers and fewer dependents in the population, output or income per person increases.

Fast forward to the introduction of the two-child policy in 2016, and the three-child policy written into law in 2021. Cai Fang strongly advocated for this policy relaxation and I, too, on non-economic terms support it. But in purely economic terms, if reducing fertility was so important for raising per capita income, how could increasing fertility also be a good thing? Would it be catastrophic if – as looks likely to be the case – China is headed for a ‘low-fertility trap’ as, despite the freedom to have more, many Chinese couples now choose to have one child only?

I argue it wouldn’t be. China’s working-age population is projected to decline by 18 percent between 2020 and 2050. If labour force participation rates don’t change, its workforce will also decline by the same amount. Yet, taking into account labour’s contribution to aggregate output (currently around 60 percent), in terms of the impact on average annual GDP growth, that amounts to a reduction of just 0.35 percentage points per year through to 2050.

Having more babies now won’t change these figures much at all, because those babies won’t join the workforce for about twenty years. Investments in education are one obvious way to boost productivity in the long run. But other policy changes could produce a faster, positive boost to GDP growth and per capita income gains. One is raising the retirement age. Back in 2015, there was talk of new policies that would gradually raise the ages from sixty for men, and fifty and fifty-five for white- and blue-collar women respectively. These changes were touted to begin in 2022, and true to its planning word, this year the State Council announced a gradual extension of retirement ages to be achieved by 2025 – although the details on how high they’ll go are scant, apart from noting that it will vary with age. Equalising the retirement age for women – the gender with universally higher life expectancies – with their male peers could readily extend China’s workforce with the stroke of a pen. (Political leaders are expected to retire at 68, but the rules don’t seem to apply to Xi Jinping, who is 69 and about to begin his third five-year term in office.)

Another policy to offset population ageing would be to increase labour force participation rates, especially among women. The record on this is even less positive, with just 62 percent of women over the age of fifteen engaged in the labour force in 2021. While high by developing-country standards, this is a three-decade low for China, and on a declining trend, having fallen steadily from 73 percent in 1990. With China’s global gender gap ranking at 102 this year – a sharp decline since its peak rank of 5 in 2008 – and the number of women on the previously 25-person (now 24-man) strong Politburo Standing Committee falling from just one to zero, there is little reason to think Xi will act to boost the number of women workers more generally. Indeed, given the high youth jobless rate, due to a record number of university graduates seeking limited jobs in an economy beset by COVID uncertainties, Xi may continue to undermine the female workforce, focusing on raising participation among young men instead. Either way, under- and unemployment among youth and women counter the argument that China is ‘running out of people’. They do, however, reveal other challenges for China’s long-term growth prospects.

Returning to Mao and Deng, I think they were both at least partially right. High fertility rates in the Maoist era did help China become powerful, because in power terms, size matters. Lower fertility then made Chinese people richer. It is true that China is ageing more rapidly than other countries of comparable levels of development, and that comes with problems. But fertility decline also leaves its citizens much better off, on average at least.

 ‘Common Prosperity’: Rhetoric or reality?  

In 1985, in pursuit of his goal of quadrupling per capita GDP, Deng Xiaoping famously said that some regions and people could become prosperous before others, and that would help others gradually achieve common prosperity. He insisted that there must ultimately be ‘no polarisation of rich and poor’ because ‘that’s what socialism means’. Those waiting patiently for some of China’s immense wealth to trickle their way have been doing so for four decades. In 2021, disposable income per capita in rural households was just 40 percent of their urban counterparts – an improvement from 32 percent a decade earlier, but still a substantial income gap. By 2022, China’s 539 billionaires were collectively worth nearly US$2 trillion, while the World Inequality Lab reported that the top 10 percent of its population earned 14 times more than the bottom 50 percent. Despite official claims that poverty was completely eradicated in 2020, studies since then have revealed a new pandemic-induced poverty wave, taking the poorest Chinese people further backwards. Could Xi Jinping’s latest solution finally give those people reason to hope?  Since 2021, ‘Common Prosperity’ 共同富裕, has become a signature policy goal in Xi’s ‘Socialism with Chinese characteristics for a New Era’.  Yuen Yuen Ang has written in Foreign Affairs that ‘common prosperity’ is not just rhetoric but ‘a set of instructions for government officials who are tasked with implementing Xi’s vision.’ This vision ‘is not a call for egalitarianism’: it is instead a commitment to ‘encouraging wealth creation through diligence and innovation.’ Among other things it involves ‘proactively leveraging the important role of the state-owned economy in advancing common prosperity’ and calling on those who ‘got rich first to voluntarily share their wealth.’

Yet, for all the billionaires rushing to prove that they were listening by donating money to various charities, philanthropy cannot solve rural-urban inequality in China today, which stems from gross underinvestment in health and education in the countryside. In their 2020 book Invisible China: How the Urban-Rural Divide Threatens China’s Rise, Scott Rozelle and Natalie Hell write that to address these inequalities, which relate to ‘structural issues within China’s political system,’ China first needs to reform the hukou system (of residence permits), which has ‘maintained and reinforced inequality through law’. Secondly, it must recentralise the fiscal system so that poor areas are able to fund better education and health outcomes; and shift the focus from short- to long-term growth, to prepare for the future. Should the Chinese government carry out these three reforms, Rozelle and Hell contend the country can escape the ‘middle-income trap’ (when countries develop to a certain point but then growth plateaus) and deliver sustainable, inclusive growth for decades to come. If it doesn’t, in the worst-case scenario, the results would be ‘catastrophic.’

China’s track record offers little cause for optimism. For example, reform of the hukou system has been ongoing for several decades now, and has stepped up in recent years, especially in small- and medium-sized cities. Yet, by October 2022, just one ‘megacity’ – Zhengzhou, the capital of Henan province, with a population of twelve million – has plans in place to abolish all restrictions. In June, Shanghai announced a relaxation of its regulations: its coveted hukou would now be granted to ‘non-locals who’ve graduated from the world’s top 50 universities and work in the city’. This smacks of a fragmented and elitist authoritarianism – as opposed to Blanchette’s ‘effective’ kind – in which wealthier provinces and cities implement policies that counteract Beijing’s equalising ambitions, ensuring that wealth continues to trickle up, not down. The impacts on China’s long-term growth prospects could be profound.

Chains of debt

China’s overseas and internal debt ‘crises’ were an ever-present topic in Western media throughout 2022. The former is invariably linked to accusations of ‘debt-trap diplomacy,’ a phrase ubiquitous in Western discourse about the Chinese government’s Belt and Road Initiative and other global investments. Deborah Brautigam, a scholar of China-Africa relations, has described how within twelve months of the first appearance of the phrase ‘debt-trap diplomacy’ in 2017, nearly two million search results could be found on Google. The concept, she says, somehow began ‘to solidify into a deep historical truth’. Yet Brautigam draws on a database of more than 1000 Chinese loans to Africa to argue that she ‘has not seen any examples where … the Chinese deliberately entangled another country in debt, and then used that debt to extract unfair or strategic advantages.’ Other scholars support this finding, including in the oft-cited case of Sri Lanka, as in Shahar Hameiri and Lee Jones’ report on ‘Debunking the Myth of China’s debt-trap diplomacy’ in which they, like Brautigam, conclude that the debt-trap narrative is ‘simply incorrect.’

This isn’t to say that the Chinese government is innocently and only pursuing ‘win-win’ development in its global economic engagements. Of course, it is pursuing power and influence as well. And some of its multinational companies – state-owned and otherwise – behave badly in the process. Again, this is indicative of a less-than-entirely effective authoritarianism: not all domestic actors behave in accordance with the wishes of the centre. It is also true that countries across the globe have taken on substantial Chinese (and other foreign) loans that could cause them – and their Chinese lenders – significant problems in the future. The full facts in this particularly complex zone, where geopolitics, economics and grand strategies intertwine, can be impossible to ascertain. But we should at least rule out the fictions.

This is harder to do when talking about China’s internal debt challenges, including in the real estate sector. According to one narrative, the Evergrande crisis that began in August 2020 (when it was revealed that the country’s second largest property developer was over $300 billion in debt) has now spilled over to the industry to the point where there is ‘a total collapse in confidence, and only [more] government intervention can save the day’. A Financial Times report in October characterised China’s ‘property crash’ as a ‘slow-motion financial crisis’.

In the same month, writing in Bloomberg, Tom Orlik pointed out that: ‘For more than a decade, analysts have warned that excesses in borrowing and building have pushed China’s property sector onto an unsustainable trajectory.’ And yet when policymakers ‘get ahead of the problem by cutting off sources of financing to overleveraged developers,’ it is those same analysts that cry out for more intervention, not less. Orlik sees it differently, describing the history of China’s real estate sector as a ‘series of exuberant booms and near-disastrous busts. Every time it appears the end is nigh, policymakers have tweaked the dials on down-payment requirements, mortgage rates, and financing for developers to get things back on track. They’re doing so again, though this time their goal isn’t engineering another boom, but moderating the pace of decline.’

Crises are, by definition, unpredictable events and economists are notorious for mis-predicting them. Simply put, the risks are high and rising, and there’s contention over how well the Chinese government can mitigate them.

Conclusion

Tom Orlik has used the term ‘Sinophrenia’ to describe a ‘condition of modern commentary that combines the belief that China will imminently collapse with the belief that it is taking over the world.’ The article by Beckley and Brands above falls into this category. In contrast, Jude Blanchette’s article might seem ‘Sinophoric,’ although placed in the broader context of his writings, this would be inaccurate. He had previously described how Xi’s gamble on consolidating power in his own hands has set him on a ‘current course [that] threatens to undo the great progress China has made over the past four decades.’ In October 2022, he observed that ‘authoritarian systems and authoritarian leaders always appear solid on the outside—until suddenly, they don’t.’

No-one doubts that the lockdowns in response to Xi’s zero-COVID policy have made 2022 a very rough year for China’s economy (and its people). With the Russia-Ukraine war, rising tensions in the Taiwan Strait and the ever-escalating rivalry between the US and China, the geopolitical headwinds are getting stronger. Add to these the economic headwinds identified here, and it is certainly possible to construct a narrative of crisis or collapse. But it is also possible that the Chinese government will demonstrate more flexibility than it has in recent times, adopting effective policies that not only stave off crisis, but also set the country on the path for long-run, sustainable and inclusive growth.

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Coming out less than two years after President Xi Jinping announced the PRC’s 2030-2060 targets, the Strategy reaffirms China’s determination to achieve its decarbonisation goals, stating that China’s CO₂ emissions would peak before 2030 and reach carbon neutrality before 2060.

The iron and steel industry is the second largest carbon emitter in China and accounts for about 17 percent of its total emissions. ‘Green steel’, made from a carbon-free reductant such as hydrogen (a source of renewable energy) instead of coal, is hailed by scientists and policy makers as a global solution for reducing carbon emissions. China’s push towards greener steel production, even though this cannot happen overnight and requires costly changes within the industry, will have a profound impact on Australia’s export industry.

Decarbonising the Steel Industry

Adopting low-emission technologies is just one of the three main approaches that the PRC has adopted to accelerate the decarbonisation of the steel industry.

Less production means less emission. In the early 2010s, China addressed the issue of over-production by closing down steel mills that failed to meet standards of pollutant emissions and energy consumption. In 2018, the Ministry of Industry and Information Technology (MIIT) set up ‘capacity replacement’ rules, stating that a new steel mill can only be built if its capacity is less than 80 percent of the one that it’s replacing. Essentially, new steel mills are required to produce less.

Since the 2030-2060 targets were announced in September 2020, the steel sector has moved further to reduce steel output. In 2021, China’s crude steel output was 1.03 billion tons, a 3 percent drop from the year before. It was the first decrease in six years. Steel output during the first five months of 2022 dropped a further 3.81 million tons, or 8.7 percent year-on-year.

To further decarbonise the steel sector, China plans to use more recycled scrap steel as feedstock, instead of iron ore. Scrap steel comes from various sources including offcuts from the steel industry itself as well as obsolete materials, such as railroad tracks, ships, cars and steel cans. Comparatively speaking, the proportion of China’s crude steel production from scrap steel is still relatively low, lagging far behind other big steel producing powers, like the European Union and the United States, where steel produced from scrap accounts for half of the overall production. However, things are changing quickly. In 2020, China used 220.3 million tons of scrap to produce 20.7 percent of its crude steel, replacing 410 million tons of iron ore. The lifting of China’s ban on the import of scrap steel in January 2021 is a clear sign of an increased domestic demand for recycled steel. Experts have projected an increase of around 500 million tons in China’s domestic scrap steel resources in the next three decades, with the majority of it coming from end-of-life of steel-containing products.

Hydrogen-based Steelmaking Comes Slowly and With a Price Tag

There are two ways that hydrogen can be used in steelmaking, either as an auxiliary reducing agent being injected in a blast furnace (technically referred to as H₂-BF), or as the sole reducing agent in a process known as direct reduction of iron (H₂-DRI). Although the former shows promise, the cooling effect of hydrogen limits injection rates (the volume of hydrogen being injected per minute). This method reduces emissions by only about 15 percent. The second method, on the other hand, requires high-quality iron ore with an iron content of 67 percent or more. High grade iron ores are in short supply and can be very costly to produce.

In January 2022, the Ministry of Industry and Information Technology, the National Development and Reform Commission and the Ministry of Ecology and Environment jointly published the ‘Guiding Opinion on Promoting High-Quality Development of the Iron and Steel Industry’. The guide stipulated that the steel industry should invest 1.5 percent of its profit on developing green technologies, including the use of hydrogen in steel production. This is the first time that hydrogen-based steel making has been formally included in national policy.

Although major state-owned steelmakers like Baowu Steel (the world’s top steel producer since 2020) and Ansteel Group have started trialing hydrogen-based steel production, this does not mean China is already entering into a new era of carbon-free steelmaking. A shift towards hydrogen entails a total reconstruction of the steel industry and its value chain, including various processes from producing goods to delivering products.

Currently, more than 92 percent of steel in China is still produced using blast furnace-basic oxygen furnaces (BF-BOF) with coking coal acting as both a heating source and reductant. And the average age of China’s BF-BOF mills is just over eight years old, since most of them were built or rebuilt to meet the high standards on air pollutants emissions set in the early 2010s. Upgrading or rebuilding steel mills is not only wasteful but also financially risky as new technologies are still under development.

So for now, reducing steel output remains the primary approach to reducing emissions and is projected to account for 45 percent of China’s decarbonisation of steel industry to be achieved by 2060. Scrap-use will reduce emissions by another 39 percent; hydrogen’s contribution will be less than 10 percent.

End of the Road for Australian Iron Ore?

China is the world’s largest importer of iron ore. It imports around one billion tons of iron ore annually, constituting 82.3 percent of China’s iron ore consumption. Australian iron ore accounts for about 67 percent of the total imports.

However, Australia is close to losing its place as China’s number one supplier for several reasons. First, China has been looking for new suppliers of high-grade iron ores. It has previously turned to Brazilian producers and more recently towards Guinea’s iron ore to wean itself off reliance on Australia. Second, China is unhappy with Australia’s domination over the pricing of iron ore. To counter this, Beijing plans to set up a centrally controlled group that will act on behalf of all Chinese companies to get lower prices on iron ore through larger bulk purchases. Last but not least, China’s move to decarbonise the steel sector will in itself reduce demands for Australia’s iron ore as well as other raw materials such as coking coal. Recent research projects Australian coal exports to fall by 20 percent by 2025.

Australia has abundant natural resources. But it is not sustainable for its economy and environment to depend on metallurgical coal and iron ore exports to China. Australian policy makers and investors need to proactively consider a more sustainable use of Australia’s resources, such as shifting to domestic manufacturing of ‘green’ steel, which aided by Australia’s abundant solar and wind resources, will be of significant value to Australia’s future exports.

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