Key Takeaways

• China’s 2023 general public budget projects revenue of RMB 23.6 trillion ($3.4 trillion) and sets spending at RMB 27.5 trillion ($4 trillion), resulting in an official deficit of nearly RMB 3.9 trillion ($564.1 billion).
• China’s official 2023 deficit is pegged at about 3 percent of Chinese GDP, but the full deficit—which accounts for other spending areas—is much larger, at around 7.4 percent of GDP.
• New data on China’s 2022 general public budget shows the government brought in less revenue than previously projected, largely due to declining land sales, which are a critical source of income for local governments.
• China’s zero-Covid policies weighed on Chinese coffers. Spending on health and sanitation rose 17.8 percent in 2022—more than twice the growth rate of any other category.

China’s General Public Budget

At the heart of China’s government budget is the general public budget. It includes revenue and spending by the central government and local governments, as well as transfers from the central government to local governments. The newly released budget projects general public budget revenue of RMB 23.6 trillion ($3.4 trillion) in 2023, a 3.5 percent increase from the previous year. Expenditure is set at RMB 27.5 trillion ($4 trillion), a 5.6 percent increase, leaving China with an official projected deficit of nearly RMB 3.9 trillion ($564.1 billion), up 15.1 percent from 2022.¹

The 2023 budget does not include a detailed breakdown of spending across categories at the national level. It only provides a limited breakdown of a handful of categories at the central level, including general public services, foreign affairs, defense, public security, education, science and technology, stockpiling of grains and other materials, and interest on debt payments. These figures only provide part of the full picture since the lion’s share of spending in most of these categories takes place at the local level.

A notable exception to this is the defense budget, since virtually all spending on the military takes place at the central level, not the local level. China’s 2023 defense budget was set at RMB 1.55 trillion ($224.8 billion), a nominal 7.2 percent increase from the 2022 budget of RMB 1.45 trillion ($229.6 billion). This continues a recent trend that has seen nominal yearly percentage increases in the upper single digits.

Even with steady increases, China still spends far less on defense than the United States. The U.S. Department of Defense’s 2023 budget rose 9.5 percent in fiscal year 2023, bringing American spending to $797.7 billion. While it lags behind U.S. military spending, China boasts the world’s second largest military budget and continues to widen its lead over other countries. Additionally, it is important to note that China’s official defense figures do not capture total spending on the military. Actual defense spending is estimated to be considerably higher.

China's actual defense spending is hotly debated. Explore our feature to learn about various estimates of Chinese defense spending and how they differ from China's official figures.

Explore More.

In addition to laying out spending figures for 2023, new budget data provides the closest look yet at spending in the 2022 general public budget. The data shows that China’s fiscal situation came under significant pressure amid economic headwinds and the heavy burden of China’s strict zero-Covid policies, which have since been lifted. China’s largest source of government revenue, value-added taxes, dropped by 23.3 percent from the previous year. This stemmed from tax rebates that were put in place to support Chinese businesses in the face of weak domestic spending and sluggish economic growth. Revenue from taxes on property deeds likewise came in 22 percent below 2021 totals, and taxes on land value appreciation dropped 7.9 percent due to a slowdown in China’s property market.²

These declines were partially offset by increases in other categories, including a 20.3 percent increase in revenue from consumption taxes, which are imposed on certain luxury or environmentally-damaging products such as some cars, cigarettes, and alcoholic beverages. In all, tax revenue in the general public budget was down 3.5 percent—a decrease of about RMB 612.2 billion ($90.9 billion) from the previous year.

While revenue fell, government spending on health and sanitation surged in 2022 as local governments were forced to pay for Covid-19 testing and other efforts to fight the spread of the virus. Total spending on health and sanitation was up 17.8 percent over the previous year—more than double the rate of increase of any other category. That is also notably higher than the 15.3 percent increase seen in 2020 as China faced the initial outbreak of the virus. China’s increased health spending during the pandemic is mirrored by other countries that took substantial measures to limit the spread of Covid-19. In Australia, which implemented a series of extended lockdowns throughout 2021 and 2022, spending on health goods and services grew by 7.1 percent, which is more than double Australia’s average annual growth rate on health expenditure.

High spending in one area requires making tradeoffs in other areas. Despite Beijing’s concerted efforts to promote developments in science and technology, government spending in this area rose only 3.9 percent in 2022—well below the pre-pandemic average. Some categories even saw spending slashed in 2022. Energy and environmental protection was hardest hit among the categories currently listed, with a 3.2 percent decrease from the previous year. Expenditure on culture, tourism, sports, and media (which are categorized together) also fell by 2 percent, and spending on urban and rural community development dropped 0.2 percent.

The release of detailed 2022 data provides a more complete picture of how China’s government budget has evolved during the decade that Xi Jinping has been China’s leader. Buoyed by China’s rapid economic growth, the general public budget has ballooned significantly since Xi came to power in 2013. From 2013 to 2023, total expenditure grew 93.7 percent and revenue expanded 80.7 percent.

As spending has outpaced revenue each year, China has been left with a widening government deficit. In 2023 the official general public budget deficit is slated to reach RMB 3.88 trillion ($561.2 billion)—the highest level recorded in the general public budget.

Not all parts of the budget have grown at the same pace. Between 2013 and 2022, spending on debt interest payments skyrocketed 271 percent, faster than any other major budget category. The increase reflects the growing strain China is coming under as it grapples with rising debt. China is by no means alone in this. In fiscal year 2022, 7.6 percent of U.S. government outlays were towards interest payments on debt, and 22 percent of Japan’s 2022 budget was spent on dept redemption and interest payments. This number is expected to increase as the Bank of Japan raises long-term interest rates.

China’s spending on social issues has also risen substantially. Expenditure on social security and employment—one of China’s largest spending categories—rose 153 percent between 2013 and 2022. Importantly, however, growth in this category stalled in recent years amid budget constraints imposed by the pandemic. In 2021, spending on social security and employment grew less than 4 percent and in 2022 it grew 8.1 percent—well below the average pace of nearly 13 percent growth in the preceding eight years.

Other categories, such as science and technology and defense, have also experienced high rates of growth over the last decade. Both have been major priorities under Xi Jinping. China’s high spending on science and technology has helped to fuel major national projects such as the Chinese Space Station, the core module of which was initially lofted into orbit in 2021. Spending on defense has also risen at a fast clip amid a major push to modernize the People’s Liberation Army.

Other categories have lagged in comparison. Spending on foreign affairs increased just 37.4 percent over the 2013-2022 period—less than half as fast as spending on defense. Amid belt-tightening during the Covid-19 pandemic, spending on foreign affairs dropped nearly 17 percent in 2020 before dropping further in 2021 and 2022. Notably, however, spending on foreign affairs is set to recover somewhat in 2023 with an increase of over 12 percent.³

At first glance, the budget figures also seem to suggest sluggish growth in spending on transportation, but it is important to note that this does not reflect total spending on infrastructure. China has spent heavily on infrastructure in recent years, in part as a means of spurring economic growth. Much of this spending is obfuscated in various parts of local government budgets. For example, China has issued special sovereign bonds to help local governments fund infrastructure and other projects. Unlike regular government spending, these bonds are earmarked for specific projects and are not reflected in the general public budget.

China's Other Budgets

The general public budget is important, but it only tells part of the story. China has three additional national budgets: the government funds budget, the state capital operations budget, and the social insurance fund budget. In 2014, China’s Budget Law was revised to include a stipulation that revenues and expenditures from all four budgets should be included to create a “full-caliber” budget. Each of these budgets contains different components of China’s fiscal portfolio, as outlined below:

• Government Funds Budget: This budget largely falls under the purview of local governments. Revenue is primarily financed through land sales, with additional revenue from central and local governments purchases of special bonds. Expenditure flows are focused on capital expenditures such as infrastructure projects. In 2023, this budget’s revenue is projected to be RMB 7.82 trillion ($1.13 trillion) and expenditure will be RMB 11.8 trillion ($1.71 trillion), resulting in a deficit of RMB 4 trillion ($578.6 billion).

• State Capital Operations Budget: The state capital operations budget is managed by the State-owned Assets Supervision and Administration Commission and centers on the revenue and expenditure associated with China’s sprawling network of state-owned enterprises. In 2023, the state capital operations budget is projected to bring in revenue of RMB 535.84 billion ($77.5 billion) and its expenditure will stand at RMB 346.88 billion ($50.2 billion). With an additional RMB 27.5 billion ($4 billion) carried over from the previous year, there will be a resulting surplus of RMB 216.5 billion ($31.3 billion), all of which will be transferred to the general public budget.

• Social Insurance Fund Budget: The social insurance fund is managed by the National Council for Social Security Fund and is dedicated to meeting China’s social security needs. Income is generated from a subset of funds and the bulk of this is spent on costs related to pensions and medical insurance. In 2023, this budget’s revenue is projected to reach RMB 10.94 trillion ($1.58 trillion) and the expenditure will be RMB 9.8 trillion ($1.42 trillion), resulting in a surplus of RMB 1.1 trillion ($159.1 billion), which will be added to the fund’s overall capital.

With the exception of the social insurance budget (which operates somewhat separately), the Chinese government has utilized transfers across these budgets to offset deficits in other areas. This has had the added effect of making it more difficult to analyze China’s fiscal situation.

For example, in 2023, China’s budget report calls for transferring RMB 1.9 trillion ($274.8 billion) into the national general public budget from other budgets and various carryover funds. This includes transfers of RMB 500 billion ($72.3 billion) from the government funds budget and RMB 216.5 billion ($31.3 billion) from the state capital operations budget. This shifting of funds helps to significantly reduce the official deficit of the general public budget. China states that its official general public budget deficit in 2023 will be RMB 3.88 trillion ($561.2 billion), but without transfers from other areas, the actual general budget deficit would total RMB 5.78 trillion ($836.1 billion).

When transfers between budgets are removed and China’s various budgets are consolidated into one total budget (excluding the social insurance fund budget), China’s fiscal situation appears significantly less healthy. China’s official 2023 deficit of RMB 3.88 trillion amounts to approximately 3 percent of China’s GDP. When the other budgets are accounted for, China’s total deficit climbs to 7.4 percent of GDP.

When China’s full budget deficit is tracked over time, it paints a picture of a rapidly worsening fiscal situation for China. In the past, surpluses in the government funds budget and state capital operations budget typically helped to offset deficits in the general public budget, but this changed significantly in 2020 as China spent heavily to offset the economic fallout from the Covid-19 pandemics.

One key part of this has been the issuance of trillions of RMB worth of special purpose bonds. These fall under the government fund budget and were primarily created as a new vehicle for local governments to raise money for infrastructure projects and other special needs. Since 2020, China has authorized the issuance of roughly RMB 3.6 trillion ($520.7 billion) of these bonds each year.

In 2022, China’s fiscal woes were compounded by a major slowdown in the country’s sprawling real estate sector. Land sales are a crucial source of revenue for many local governments. Data from China’s National Bureau of Statistics show that land sales dropped by 53 percent (in terms of area). According to China’s latest budget report, declining land sales led to a 20.6 percent drop in revenue within the government fund budget.

China is not alone in facing a tough fiscal environment. Governments around the world have been challenged by the pandemic and the ensuing economic fallout. Yet China’s situation is worsening at a rapid pace. If its deficits continue to grow, Chinese leaders will be forced to grapple with increasingly tough decisions about how to increase revenue or cut spending—or both.

Authors:
Brian Hart, Bonny Lin, Matthew P. Funaiole, Samantha Lu, Hannah Price, Matthew Slade

The post Making Sense of China’s Government Budget appeared first on ChinaPower Project.

Russia’s war in Ukraine has cast a spotlight on the China-Russia relationship. On February 4, 2022, just weeks before Russia’s invasion of Ukraine, President Xi Jinping and President Vladimir Putin met and issued a historic joint statement which stated their bilateral relationship has “no limits” and that “there are no ‘forbidden’ areas of cooperation” between them.

The two countries have indeed significantly strengthened their relationship in recent years. Chinese President Xi Jinping and Russian President Vladimir Putin enjoy close working relations, which drives high-level cooperation. The two sides also cooperate based on shared threat perceptions that the United States and its allies seek to encircle and undermine them. Close military ties and complementary economic dynamics help cement their relationship.

Yet the China-Russia relationship is complex and comes with costs for both sides. Leaders in Beijing and Moscow appear to have assessed for now that the benefits outweigh the costs, but that calculus could change. In the sections that follow, this ChinaPower feature analyzes three key weaknesses of the relationship:

• Historical and structural factors engender strategic mistrust between Beijing and Moscow;
• Russian stagnation renders Moscow a less useful partner and contributes to a growing power asymmetry; and
• Russian military aggression sparks blowback for China and exacerbates Russia’s stagnation.

Historical and Structural Factors Create Strategic Mistrust

Despite the strengthening of relations between Beijing and Moscow in recent years, considerable strategic mistrust exists between the two countries. Chinese strategic mistrust stems partly from the checkered history between the two countries, which saw the more powerful Russian Empire and the Soviet Union take advantage of a weaker China. For Russia’s part, enduring structural factors—especially geography—stoke fears that an increasingly powerful China may encroach on its interests and take advantage of Russian weaknesses. Moscow’s concerns are heightened by a strategic culture that harbors deep-seated great power ambitions and chafes at being the junior partner in a relationship with China.

The present close relationship between China and Russia is a notable deviation from history, which often witnessed the more powerful neighbor taking advantage of the weaker country. In the 19^th century, the Russian Empire was party to many of the “unequal treaties” that compelled China to hand over territory, money, and other spoils to European powers. The 1858 Treaty of Aigun and 1860 Treaty of Peking were particularly harsh, forcing China to forfeit approximately 1 million square kilometers (km) of territory to the Russian Empire.

In the mid-20^th century, tensions between the newly founded People’s Republic of China and the Soviet Union devolved into the Sino-Soviet Split, which lasted into the 1980s. The two countries’ longstanding border disputes were a central flashpoint of the period. In 1969, hostility along the border escalated to nuclear posturing and nearly resulted in large-scale conflict between the two communist powers. Moscow also pressed Beijing on other fronts, including criticizing Chinese repression in Tibet and indirectly calling for Tibet’s independence.

Following the normalization of Sino-Soviet relations in 1989, China and Russia officially resolved their longstanding border disputes and Moscow began expressing support or neutrality on sensitive Chinese issues like Taiwan, Tibet, and Xinjiang. Nevertheless, Moscow’s decades of antagonism have remained a source of suspicion within China. The unequal treaties that Russia was partner to were central to China’s “century of humiliation,” which the Chinese Communist Party still draws on as a source of nationalistic energy. It is impossible to de-link Russia from that legacy. Many Chinese thinkers still view these historic incidents as indicators of Russia’s willingness to use its power to pursue its own interests at China’s expense, and many in China continue to be wary of Russia’s reliability as a strategic partner.

On top of historical factors, enduring structural factors generate friction in the relationship—chief among them, geography. China’s immediate proximity to Russia leads to competitive dynamics in areas along their shared periphery, most notably in the Russian Far East, Central Asia, and the Arctic. More fundamentally, China’s immense size and power make it a daunting neighbor in the event that relations between Beijing and Moscow sour.

Following the opening of the China-Russia border in 1988, China’s presence in the Russian Far East emerged as an irritant in the relationship. As China’s economy grew, Chinese workers and businesses flowed into the region. Many went into the agricultural sector. One study found that in 2018 Chinese citizens owned or leased approximately 350,000 hectares (3,500 square km) of farming land in the Russian Far East—approximately 16 percent of the total land used for agriculture. The presence of Chinese workers in the region stirred up anger among some Russians, with many complaining about Chinese workers stealing Russian jobs and exploiting Russian natural resources.

Concerns about China’s presence in the Russian Far East have waned somewhat in recent years, and China is broadly popular among the Russian public. According to the Pew Research Center, 71 percent of Russians said they viewed China positively in 2019—the highest of all 35 countries surveyed. However, China’s presence in the Russia Far East continues to provoke negative views. A 2017 poll by the Russian Academy of Sciences found that more than one in three Russians view China's increasing presence as “expansion.” Half of respondents said that China threatened Russia's territorial integrity, and one-third of them believed that China’s policies endanger their country's economic development. This negative local sentiment has at times stalled planned Chinese investment projects, such as a Chinese-funded water bottling plant in the Irkutsk region, which was suspended after local protests in 2019. 

China and Russia also face competitive dynamics in their shared backyard of Central Asia, which could become a source of tensions. Moscow remains influential in the five former Soviet states of Central Asia (Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan) and it considers the region to be within its “privileged sphere of influence.” Russia has thus far been willing to accept China’s activities there, for example, by cooperating with Beijing in the Chinese-led Shanghai Cooperation Organization and by not opposing China’s Belt and Road Initiative (BRI) ambitions. Russia currently even reaps some benefits out of China’s presence in the region: China’s considerable economic engagement there helps to facilitate regional stability and development allowing Russia to focus more on shaping military and security dynamics.

However, China is stepping up its security and economic footprint in Central Asia in ways that may increasingly be perceived through a competitive lens by Moscow. In 2021, it was announced that China would construct an outpost for police special forces in Tajikistan. While it appears that Chinese forces will not be stationed there, China’s move was seen by some as an encroachment on Russia’s ties to Tajikistan, which is a member of the Russia-led Collective Security Treaty Organization (a rough analogue to NATO comprising former Soviet states) and home to Russia’s largest overseas military base.

On the economic front, China has rapidly replaced Russia as the larger trading partner of all five Central Asian states. In 2000, Chinese imports from Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan totaled less than one-fourth of Russian imports, but by 2020 they were more than double Russia’s imports. China’s exports have ballooned as well, with $19.3 billion worth of Chinese goods destined for Central Asia in 2020. As this trend continues, it threatens to undercut Russia’s ability to wield its economic influence in the region.

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Finally, Russia is wary of Chinese ambitions in the Arctic, where Moscow has significant interests. Approximately one-fifth of Russia’s expansive territory is located within the Arctic Circle. This area encompasses more than 24,000 km of shoreline and is home to some 2.5 million people. Under Vladimir Putin, Russia has made the Arctic a key region of focus, including reviving Russia’s military presence there. In recent years, Russia has refurbished 50 previously closed Soviet-era military posts, including 13 air bases, 10 radar stations, 20 border outposts, and 10 integrated emergency rescue stations.

Despite lacking territory in the arctic, China has pushed to establish itself as a “near-Arctic state,” and in a 2018 white paper on the arctic, China put forward a vision for building a “Polar Silk Road” to complement the broader BRI. China and Russia have so far cooperated on energy and infrastructure projects in the region, but there have been considerable setbacks. Russia initially opposed allowing China onto the multilateral Arctic Council as an observer, and Moscow continues to be suspicious of Beijing’s strategic goals in the region. In 2012, Russia blocked Chinese research vessels from conducting surveys along the Northern Sea Route, and in 2020 Russian prosecutors charged a prominent Russian Arctic expert with treason for passing classified information to China.

In the future, Russia may feel the need to push back against China’s growing influence in these areas. In the spirit of the Chinese idiom “一山不容二虎” (one mountain cannot tolerate two tigers), China may also assert its interests over Russia’s as it pushes to shore up its regional and global power. So far, China and Russia have managed to compartmentalize competition in these areas, and they have succeeded in strengthening relations despite their turbulent history. Yet the seeds of mistrust remain planted within the relationship and could someday grow into a major impediment in the relationship.

Russian Stagnation Exacerbates Tensions

China and Russia have long sought to cast themselves as equal partners, but this narrative is increasingly difficult to maintain given the growing power asymmetry between the two. As Russia stagnates or even declines, and as China continues to bolster its national power, Russia is poised to be a less useful partner to China in countering Western influence. China’s growing lead over Russia could also exacerbate existing tensions and mistrust between Beijing and Moscow if Russia feels it is being disrespected or treated as a junior partner.

Across virtually all elements of national power—including economic, technological, and military power—China is surging ahead of Russia or rapidly catching up. Economically, China has already far surpassed Russia. On a nominal basis, the Chinese economy was nearly 10 times larger than Russia’s in 2021.¹ For the first time, China even surpassed Russia in nominal per capita GDP in 2020 (though Russia remains ahead of China when adjusted for purchasing power parity). The gap is set to widen significantly in the coming years. Economic forecasts by the International Monetary Fund expect China's GDP to climb toward nearly $30 trillion by 2027 while Russia's GDP is forecasted to stall at well under $2 trillion.

Russia’s stagnating economic growth is rendering it less important as an economic partner. In 2020, Russia only accounted for about 2 percent of China’s total trade (imports and exports). By comparison, China was Russia’s largest trade partner, accounting for about 18 percent of Russia’s trade.

Long-term trends will likely render Russia even less economically relevant for China. Russia’s current value to China is in supplying energy, with oil, gas, and coal collectively accounting for two-thirds of Russia’s exports to China. Barring a major paradigm shift, Russia will decline in importance in the coming decades as China weens itself off fossil fuels. This trend is already in the works. In 2010, oil and coal made up nearly 87 percent of China’s energy consumption. In 2020, that figure had dropped to less than 76 percent. Similarly, renewable energies made up approximately 16 percent of China’s energy consumption—up from about 9 percent in 2010.

Russia would face enormous headwinds in transitioning toward a more balanced and competitive economy since Russia lags far behind China and other global leaders when it comes to technological power and sophistication. In 2020, China spent 14 times more on research and development (R&D) than Russia. This was not simply the result of differences in economic size: China also spent more than twice as much as Russia as a percent of GDP.

Across the board, Russia lacks the science and technology ecosystem needed to produce the kinds of products that would make it a more valuable and dynamic economic and technological partner for China in the long-term. The Global Innovation Index, a leading index measuring innovative capabilities and performance, ranked China 12^th globally in 2021, just behind France and ahead of Japan. Meanwhile, it ranked Russia 45^th alongside Vietnam (44^th) and India (46^th).

Russian stagnation on the economic and technological fronts is weighing on its military power, which has traditionally been a key source of its strength and influence. In 2021, Russia spent virtually the same on its military as it did in 2014 (about $64 billion). China’s military budget grew over 47 percent during that period, from $183 billion to $270 billion.²

This has multiple implications for China. In recent decades, Beijing has looked to Russia as a major military partner in competing with the United States and its allies, but Russia’s faltering defense spending is weighing on China and Russia’s collective capacity to compete militarily. In 2021, the United States and its NATO and Indo-Pacific allies collectively spent 3.7 times more on defense than China and Russia. More concretely, Chinese experts have complained about the state of the Russian military, highlighting, for example, that the Russian naval fleet largely comprises outdated Soviet-era vessels and equipment.

It is unclear whether, or at what point, the power disparity between the two countries would threaten their relationship. If Russian power wanes and Western isolation of Russia continues, Moscow may conclude that it has no choice but to bandwagon with China. However, given Russian perceptions of itself and its history as a great power, Russia may be unwilling to have a close partnership with China that is not built on equality.

There are signs that some Russians are already wary of being treated poorly by China. In March 2022, former Russian Foreign Minister Andrei Kozyrev described China’s leaders as “ruthless businessmen” and said “China will never take [Putin] as an equal partner or even as ally." If Russian leaders feel that they are being taken advantage of or treated like the junior partner, they may ultimately choose to cool relations with Beijing and limit cooperation. Russia may even assess at some point that the power imbalance has become so severe that China poses a direct challenge or threat to Russia, which could result in a full pivot away from China.

Russian Aggression Runs Counter to Chinese Interests

Compounding these issues is Russia’s persistent military aggression on the world stage. Russia’s numerous military interventions—especially its ongoing war in Ukraine—have created political and economic blowback for China. On top of that, Russia’s war in Ukraine has weakened Russia, diminishing its utility to China and further exacerbating the widening power gap between China and Russia..

Chinese strategists and analysts have contrasted Russia’s willingness to use force with China’s forbearance. Some have described Vladimir Putin as a “revolutionary” seeking to overturn the existing international order and noted that Moscow’s goals render it more willing to use violence to advance its interests. By comparison, Chinese scholars have characterized China as having the more modest goal of rendering the existing international system more conducive to China’s growth and development—and therefore less willing to resort to force.

Russia’s willingness to use aggression has put China in politically awkward situations. Chinese officials have long described territorial integrity and non-interference in the internal affairs of other countries as a cornerstone of China’s foreign policy. Chinese officials and propaganda outlets frequently try to cast China as having never invaded or bullied other countries. Russia’s repeated invasions of other countries run in direct opposition to those principles.

China has at times gone so far as to subtly criticize Russian military aggression. In 2008, then-spokesman of China’s foreign ministry Qin Gang stated that China “expressed concern” over the situation in Abkhazia and South Ossetia during Russia’s war in Georgia. Mostly, China has sought to neither criticize nor directly side with Russia. Beijing, for example, has not recognized the independence of Abkhazia and South Ossetia from Georgia; nor has it recognized the breakaway Ukrainian territories of Donetsk and Luhansk or Russian claims over Crimea.

In the case of Russia’s 2022 invasion of Ukraine, Xi Jinping has gone farther by publicly legitimizing Russian security and sovereignty concern, but this has come at a political and diplomatic cost. In the United Nations, China was compelled to make unpopular votes that placed it among a small minority of countries. In March 2022, for example, 141 countries voted in the UN General Assembly in favor of a resolution condemning Russia’s invasion of Ukraine, while China joined a minority of 34 other countries in abstaining.

Russia’s war in Ukraine has also propelled a rapid and significant improvement in relations between the United States and its European allies as they collectively counter Russia, and it has strengthened perceived fault lines between democracies and autocracies—unwelcome outcomes for China. In the United States, China’s tacit support for Russia has brought a spotlight to the China-Russia relationship, with 62 percent of people polled describing it as posing “a very serious problem.” In Europe, a key economic partner for China where Beijing has been pushing to gain influence, countries there have toughened their stance toward China. In April and May, China sent an envoy to meet with officials in eight central and eastern European countries with the hopes of improving ties, but China’s outreach was rebuffed.

The war in Ukraine has also inflicted economic pain on China. The global rise in energy prices sparked by the war led oil prices to spike in China—much as they did in other countries. According to Chinese customs data, the price of China’s crude oil imports rose to RMB 5,070 per metric ton in April 2022—up 37 percent from January 2022.

China and its companies are also facing the added burden of navigating Western sanctions on Russia. While China has not joined U.S. and European sanctions on Russia, and despite Beijing’s calls for companies to continue conducting business in Russia, many Chinese firms have paused or cut operations there. This includes major Chinese tech companies like computer-maker Lenovo, smartphone-maker Xiaomi, and drone-maker DJI.

As a result, China’s exports to Russia plummeted to RMB 24.1 billion in April 2022—down 53 percent from the recent high of RMB 52 billion in December 2021. Technology exports have been particularly hard hit. In March, laptop sales to Russia were down more than 40 percent and smartphones down by nearly two-thirds. In late May, five Chinese firms were told to stop construction of a Chinese-Russian liquefied natural gas pipeline, a key node in China’s “Polar Silk Road,” to avoid EU sanctions.

In addition to causing political and economic blowback, Russia’s wars threaten to further diminish Russia’s utility as a strategic partner for China. Russia’s 2014 invasion of Ukraine created significant setbacks for the Russian military and its supporting defense industry. The war disrupted Russia’s ability to deliver weapons systems to Vietnam—one of Russia’s top arm export markets—which in turn contributed to a broader decline in Russia’s arms exports in recent years. During the 2016-2021 period, Russian arms sales around the world declined 24 percent over the previous six-year period, and its share of global arms sales fell from 25 percent to 19 percent. This undercut a notable benefit of the China-Russia relationship for Beijing, wherein Russia could wield its prominence as an arms exporter to influence countries—like Vietnam—with which China has tense relations.

Russia’s latest invasion of Ukraine has had far more drastic consequences for Russia. Western sanctions have had substantial impacts on the Russian economy. Russia’s GDP is expected to shrink by 8.5 percent in 2022 and unemployment is expected to rise substantially. Russia’s military losses in Ukraine are also staggering. In June 2022, U.S. Chairman of the Joint Chiefs of Staff General Mark Milley stated that the Russian military had already lost roughly 20 to 30 percent of its armored force in Ukraine, which he described as a “huge” and “significant” loss.

For now, Beijing has chosen to double down on its relationship with Russia despite these drawbacks. These developments nevertheless represent meaningful headaches for China. Russia is stagnating, and perhaps in outright decline, which could ultimately exacerbate existing mistrust between Beijing and Moscow and potentially render Russia of far less strategic value to China.

The post What Are the Weaknesses of the China-Russia Relationship? appeared first on ChinaPower Project.

China has largely eschewed formal alliances, but over the years Beijing has increasingly courted close ties with Russia. On February 4, 2022, just weeks before Russia invaded Ukraine, Chinese President Xi Jinping and Russian President Vladimir Putin met in Beijing and issued a historic joint statement emphasizing that the bilateral relationship has “no limits,” and that “there are no ‘forbidden’ areas of cooperation” between them.

Why did China commit to the relationship at such a pivotal moment? Why did Beijing double down on the relationship by refusing to criticize the Russian invasion of Ukraine? This ChinaPower feature explores how the relationship came to be so close, up until the time of the invasion. This analysis centers on five key ways in which China benefits from the relationship, each of which is examined in detail:

• Russia supports China’s core interests;
• Vladimir Putin personally supports Xi Jinping and his key initiatives;
• Russia helps to magnify China’s global reach at the expense of Western influence;
• Russia enhances China’s military power through arms sales and joint military exercises; and
• Russia assists China in meeting important economic and energy needs.

Supporting China’s Core Interests

The China-Russia relationship is founded, first and foremost, on mutual respect and accommodation of each side’s core interests. For China, this means accepting China’s authoritarian political system, supporting (or not opposing) China’s sovereignty and territorial claims, and aiding China in maintaining stability on its periphery. Without these preconditions, the relationship would not be as close as it is.

While the Chinese and Russian political systems are meaningfully different, they share similar tendencies toward authoritarianism. Moscow’s acceptance and support of China’s basic political system, and its attempts to legitimize alternative, non-Western visions of democracy and human rights, made it possible for Russia to deepen relations with China as Western countries criticized Beijing on human rights issues.

Also crucial to Beijing’s core interests is Russia’s support or acceptance of Chinese sovereignty claims. During the 1995-1996 Taiwan Strait Crisis, Moscow blamed Taiwan and the United States for heightened tensions and refrained from criticizing China for conducting military exercises and missile launches near Taiwan. In the 2001 China-Russia Treaty of Good Neighborliness and Friendly Cooperation, Russia endorsed Beijing’s One-China Principle and stated that it “opposes any form of Taiwan’s independence.” Russia has continued to support Beijing’s stance on Taiwan, including in the February 4, 2022, joint statement.

Beyond Taiwan, Moscow has supported Beijing’s draconian policies toward Hong Kong, Tibet, and Xinjiang, and it has even appeared to signal support for Chinese claims over the disputed Senkaku/Diaoyu Islands that Japan also claims—most notably through a joint China-Russia bomber patrol near the islands in 2019. Russia has remained officially neutral on disputed Chinese claims in the South China Sea, but it has tacitly supported China by criticizing “non-regional powers” (i.e., the United States) for involving themselves in the region, and Russia even joined China in a naval exercise in the South China Sea in 2016 after an international tribunal sided with the Philippines and ruled against Chinese claims in the South China Sea.

China has reciprocated by supporting or not opposing Russian activities and claims. Beijing has largely avoided criticizing Russian military activities in Chechnya, Georgia, Syria, and Ukraine, and it has tacitly sided with Russian claims over the Kuril Islands, which Japan disputes.

Russia has further supported Beijing’s core interests by cooperating with China to shape favorable security dynamics along their shared periphery. The two countries cooperated in the 1990s and 2000s to resolve their decades-old border dispute, which eliminated a long-existing irritant in the bilateral relationship and set the stage for the two nuclear neighbors to view each other as strategic partners instead of rivals. It also freed up Beijing’s political attention and military resources to focus on other pressing concerns along China’s periphery.

Russia is a core member of the China-headquartered Shanghai Cooperation Organization (SCO), which comprises eight Member States (China, India, Kazakhstan, Kyrgyzstan, Russia, Pakistan, Tajikistan, and Uzbekistan), as well as four Observer States and six Dialogue Partners.¹ The SCO has provided a platform for China and Russia to coordinate their interests and manage competition in Central Asia and connected regions. The two countries have also used the SCO as a platform to cooperate on anti-terrorism and countering separatist activities, including through multilateral military exercises.

China and Russia both seek security and stability in Central Asia and are wary of what they perceive to be potential western “interference.” Chinese officials have voiced support for cooperating with Russia to fight against potential “color revolutions” in neighboring countries, which Beijing worries could lead to instability spilling over into its western regions of Xinjiang and Tibet. From Beijing’s perspective, Russia plays a crucial role in shaping regional security dynamics thanks to its close relationships with former Soviet states in the region. Russia demonstrated its ability to shape the region in January 2022 when it deployed troops to Kazakhstan to quell violent protests that erupted over high energy prices. China and Russia also both see shared interests in working with the Taliban in Afghanistan to reduce the risk of terrorist activity there and throughout the region.

Elsewhere in the region, Beijing has pursued cooperation with Moscow in managing the North Korean nuclear issue. Both countries have pushed back against calls by the United States and its partners to impose additional sanctions on North Korea, and they have recommended lifting certain sanctions. At the same time, Beijing is aware of Pyongyang’s desire to maneuver between its two large neighbors, as it has at times sought to pit Beijing against Moscow. To sustain any major policies toward North Korea, China needs Russian support or to at least ensure that Moscow does not play a spoiler role.

Supporting Xi Jinping’s Priorities

Russia is not unique in being willing to accept or support China’s core interests. Many countries are willing to do so. A key factor that differentiates Russia is high-level political support from Beijing, which stems from the close personal relationship between Xi Jinping and Vladimir Putin. Their personal ties help to drive high-level strategic convergence and overcome any distrust or differences at lower levels.

Xi has repeatedly heaped praise on Putin, calling him his “best friend and colleague” and his “bosom buddy.” This has been reflected in Xi’s diplomatic agenda. As of March 2023, Xi has met one-on-one with Putin 41 times—more than twice as many times as he has met with the leader of any other country. Xi has also traveled to Russia nine times since 2013, which is more than double the number of trips he made to any other country.

The personal ties between the two leaders have brought their countries closer across several key areas. Under Putin, Russia has supported virtually all of Xi Jinping’s most important priorities on the world stage. Russia has at least rhetorically supported the Belt and Road Initiative (BRI), Xi’s signature foreign policy aimed at expanding China’s global economic and political influence through heightened economic and physical connectivity. Russian and Chinese leaders have repeatedly voiced joint calls for linking up the BRI with its Russian counterpart, the Eurasian Economic Union; however, progress on synching the two initiatives has been lackluster.

Russia joined the Chinese-sponsored Asian Infrastructure Investment Bank, a multilateral bank headquartered in China that provides an alternative to the World Bank and Asian Development Bank. Russia has also supported China’s Global Development Initiative, which Xi proposed amid the backdrop of the Covid-19 pandemic to focus on issues such as poverty alleviation, food security, Covid-19 response, and other areas. Additionally, Xi Jinping likely saw Putin’s visit to China to attend the 2022 Beijing Winter Olympics as a gesture of good will, especially given that most Western leaders chose not to attend or instituted diplomatic boycotts of the games due to concerns about human rights abuses in Xinjiang.

Amplifying China's Global Reach

The third major force driving closer ties is a shared desire by Beijing and Moscow to expand their influence on the world stage at the expense of the United States and its democratic allies. While Russian power is stagnating in crucial areas, many in China see Moscow as being capable of “playing a weak hand well.” Beijing sees significant benefits in Russia’s capacity and willingness to wield its political, economic, military, and discourse power in ways that align with Chinese interests.

China and Russia are both wary of a U.S.-dominated international order that they believe undermines their interests. The two maintain convergent threat assessments that Washington, with support from its allies, seeks to encircle and isolate them militarily while undermining their political systems and promoting “color revolutions.” They view Western economic sanctions, technological decoupling, and other efforts as being aimed at undermining their development.

The two countries have frequently criticized the United States and its partners in their joint statements. Their February 4, 2022, joint statement—which highlighted their closeness on the eve of Russia’s invasion of Ukraine—criticized the United States nine times, including complaints about the U.S. Indo-Pacific Strategy, the trilateral AUKUS security partnership, and U.S. developments related to missile deployments, missile defense, and biological and chemical weapons.

In pushing back against Western influence, Beijing benefits from Russia’s ability to shape international developments and leverage its power over countries—especially within the developing world.

On the political front, Russia holds significant positions within international organizations such as the United Nations Security Council (UNSC), where it (like China) enjoys veto power as a permanent member. Through the UNSC, China and Russia have sought to steer international developments in their favor. China and Russia jointly condemned NATO’s use of force in Yugoslavia and the U.S.-led invasion of Iraq. In 2020, China and Russia spearheaded a successful campaign within the UNSC to stop U.S.-led efforts to re-impose UN sanctions on Iran in the wake of the Trump administration’s withdrawal from the Iran nuclear deal.

China’s 13 most recent vetoes within the UNSC have all aligned with Russian vetoes. Ten of these have been related to opposing U.S. and allied efforts to address the conflict and humanitarian crisis in Syria. China has also abstained from voting on UNSC resolutions that run counter to Russian interests, including a 2014 resolution declaring invalid a referendum that led to Crimea’s independence and a resolution condemning Russia for its invasion of Ukraine in 2022.

Beijing and Moscow have specifically sought to cooperate within international organizations to undermine Western norms around democracy and human rights. Since the late 1990s, China and Russia have been involved in the informal Like-Minded Group, a coalition of largely authoritarian countries that have worked together in the United Nations to weaken the international human rights regime and redefine human rights. The two countries have jointly signed over 40 statements in the UN Human Rights Council to endorse alternative views on human rights.²

Beyond the United Nations, China and Russia have worked together in other important multilateral settings to offset Western influence. In 2009, Russia advocated that the International Monetary Fund (IMF) expand the basket of Special Drawing Rights to include the Russian ruble and Chinese yuan as part of reforming the IMF to be more inclusive. The two countries have also advocated for their shared interests within BRICS Summits—annual meetings of the world’s leading developing economies (Brazil, Russia, India, China, and South Africa)—and they continue to call for further cooperation within the BRICS framework.

On the economic front, Russia wields significant leverage over several countries through its provision of energy resources. In 2020, 10 European and Central Asian countries purchased more than 60 percent of their crude oil imports from Russia, with Estonia, Kyrgyzstan, Slovakia, and Kazakhstan buying virtually all of their imported crude oil from Russia. These countries, and others, are also heavily reliant on imports of Russian refined oil, gas, and coal.

Russia has a track record of using its prominence in energy markets to its advantage. In 2014, Russian energy giant Gazprom cut off gas deliveries to Slovakia, Austria, Poland, and Romania to disrupt diversions of oil to Ukraine. The European Union scrambled to find alternative sources of energy, but it was forced to pay a higher price in doing so. Many of these same dynamics played out in Europe amid Russia’s 2022 invasion of Ukraine, with Russia’s Nord Stream pipeline being a major source of contention. For Beijing, Russia’s ability to use such influence is an important asset for constraining and countering countries on key issues.

Moscow also exerts significant influence in much of the developing world through its military power, especially its weapons sales. Particularly important for Beijing is Russia’s influence over Vietnam and India, both of which have tense relations with China. Since 2010, Vietnam has received some 80 percent of its weapons imports from Russia. India likewise ordered 62 percent of its arms imports from Russia during that period, and today nearly 70 percent of India’s military equipment is Russian-made. Moscow may be able to use its leverage over these two countries to discourage them from aligning closer to the West (and against Russian and Chinese interests).

Russia’s international influence in the military realm does not just stem from arms sales. Moscow holds sway in developing countries through military deployments. Over the last few decades, Russia has amassed a substantial military footprint around the world, including within the Caucuses and Syria, but also further afield in the Central African Republic, Egypt, Libya, Sudan, and even Venezuela. More recently, Russia has sought to expand its influence in the African country of Mali through the deployment of Russian private military contractors.

Finally, China sees benefits in Russia’s ability and willingness to shape global discourse through disinformation and propaganda that converges with China’s own anti-Western messaging. The Russian government has long used online tools to spread pro-Russian, anti-Western narratives. The government-funded organization Russia Today, for example, regularly spreads divisive, anti-Western disinformation to its nearly 7.5 million Facebook followers and 3 million Twitter followers from around the world.

Amid the Covid-19 pandemic, Russia and China have used their state-linked online platforms in complementary efforts to shape global discourse and spread disinformation. Russia, has focused intently on undermining confidence in Western vaccines and flaming internal divisions within Western countries over issues like vaccine mandates. Early on in the pandemic, China marshalled its diplomats and state-linked media to spread propaganda defending China’s response to the pandemic, but over time it focused more heavily on criticizing the West’s handling of Covid-19. Studies suggest the two countries learned from each other in spreading disinformation and that they benefited from shared efforts to undercut the image of the United States and its allies.

Advancing China's Military Power

Military cooperation has been a crucial element of the China-Russia relationship over the years. The two sides have demonstrated a high level of cooperation on military technology—most notably through arms sales—as well as military-to-military cooperation through joint exercises.

Following the 1989 normalization of relations between Beijing and Moscow, Soviet and Russian arms sales to China were critical to China’s push to modernize and equip the People’s Liberation Army (PLA) as Western countries limited their provision of weapons to China. In the 1990s, China spent billions of dollars ordering dozens of Russian Su-27 and Su-30 aircraft and securing the licenses to produce hundreds more of the planes within China. Throughout the 1990s and 2000s, China ordered other major systems from Russia, including a dozen Kilo-class diesel-powered submarines, four Sovremenny-class destroyers, and S300 PMU2 anti-aircraft missiles, as well as numerous additional aircraft. Altogether, between 1990 and 2005, China purchased more than 83 percent of its arms imports from Russia.

The years that followed saw a marked decline in Chinese arms purchases—from both Russia and other countries. This stemmed in part from Russian concerns about Chinese copying and IP theft of Russian military technologies as well as the Chinese defense industry’s growing ability to produce more equipment indigenously. China’s arms purchases from 2011 to 2021 fell 46 percent from the 2000-2010 period, and purchases from Russia as a percent of China’s total arms imports slipped to around 67 percent.

Under Xi Jinping and Vladimir Putin, China and Russia made efforts to arrest this trend and revive arms sales as an important part of the relationship. A series of deals in 2015 saw China purchase some $5 billion worth of Su-35 combat aircraft and S-400 air defense systems. In 2019, President Putin also announced that Russia was helping China to create a missile attack warning system, suggesting a continued high degree of military technological cooperation.

In addition to arms sales, China and Russia have achieved substantial progress on cooperation through joint military exercises. The two countries conducted their first bilateral joint exercise in 2005. Known as “Peace Mission 2005,” the exercise saw 10,000 Chinese and Russian troops take part in land, sea, and air operations in Vladivostok in Russia and on the Shandong peninsula in China. Like many joint China-Russia military exercises that have followed, it was described as being largely aimed at counterterrorism operations; however, the inclusion of major military assets like strategic bombers was seen by many as an indication that it was broader in scope and also intended as a warning to the United States and Taiwan.

The next several years saw the two countries participate in a handful of joint exercises, averaging approximately one to two exercises per year. Starting in 2013, however, China and Russia significantly ramped up their bilateral and multilateral exercises with each other. Through mid-2022, they have held at least 78 military (and paramilitary) exercises.

Want to learn more about China-Russia military ties? Explore this ChinaPower page, which features a unique dataset on China-Russia joint military exercises and more.

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These military exercises have not only grown in number but also in complexity. In October 2021, China and Russia completed joint naval drills in the Sea of Japan, followed immediately by their first joint naval patrol in the western Pacific. The joint naval patrol consisted of 10 Chinese and Russian warships as well as six carrier-based helicopters and featured joint maneuvers and live-fire drills.

These frequent exercises present several benefits for China. Earlier on, they provided an opportunity for the PLA to learn from the more experienced and technologically advanced Russian military. In more recent exercises, Chinese defense experts have noted that the PLA now plays an equal or more senior role in planning and operations. The exercises also serve as an important means of institutionalizing bilateral military ties, promoting interoperability and confidence building, and sending deterrent signals to third parties such as the United States.  

Economic and Resource Complementarity

Finally, China’s ties with Russia generate notable benefits on the economic front. The last two decades have witnessed enormous growth in trade between the two countries. Between 2000 and 2021, China’s annual trade with Russia grew more than 18-fold, from just $8 billion to more than $147 billion.

While this only represents about 2 percent of China’s total trade with the world, it is the content of the trade relationship—not the size—that is crucial to China. Major energy products, such as oil, coal, and gas, comprise approximately two-thirds of China’s imports from Russia. Crude oil alone accounts for over half of China’s imports from Russia. In 2021, China imported some $40.5 billion worth of Russian crude oil—roughly 16 percent of its total oil imports—making Russia its second largest oil supplier after Saudi Arabia.

Russian trade with China also has a disproportionate impact on certain local economies within China. Trade with Russia is particularly important among northeastern provinces that border Russia. According to Chinese customs data, 24 percent of exports out of China’s Heilongjiang Province went to Russia in 2021, and a massive 78 percent of the province’s imports came from Russia. Jilin and Inner Mongolia—both of which border Russia—are likewise more dependent on Russian trade than other provinces (though to a lesser extent than Heilongjiang).

From Beijing’s perspective, Russia plays a crucial role in promoting economic growth in a lagging region. Both Jilin and Heilongjiang form part of China’s northeastern “rust belt,” an area of the country that has struggled to overcome the impacts of de-industrialization. China has sought to maximize the benefits of Russian trade to the region by forming pilot free trade zones in Heilongjiang and enabling Jilin export access to a Russian port. Additionally, two land ports within Hunchun, a city in Jilin, were approved as official seafood import ports from Russia, allowing Russian seafood exports to directly reach Hunchun, lowering costs and improving quality.

The post What Are the Key Strengths of the China-Russia Relationship? appeared first on ChinaPower Project.

Backgrounder: How Has the China-Russia Relationship Evolved?

This backgrounder explores the history of China-Russia relations, from the establishment of relations between the People’s Republic of China and the Soviet Union to the present. The backgrounder features an interactive timeline of major milestones in the bilateral relationship, which you can preview below.

Major Milestones in the China-Russia Relationship

Feature 1: What Are the Key Strengths of the China-Russia Relationship?

This feature explores how the China-Russia relationship came to be so close, up until the time of Russia’s 2022 invasion of Ukraine. The analysis centers on five key ways in which China benefits from the relationship, each of which is examined in detail.

One of the key strengths highlighted in this feature is the strong personal relationship between Chinese President Xi Jinping and Russian President Vladimir Putin. Since he became China’s president in 2013, Xi has met with Vladimir Putin over 40 times—more than double the number of times Xi has met with leaders of any other major power.

Feature 2: What Are the Weaknesses of the China-Russia Relationship?

This feature explores key areas of uncertainty and weak points within the China-Russia relationship. While ties between Beijing and Moscow are currently close, there are areas of tension and uncertainty within the relationship. One potential long-term stressor on the relationship is the growing power disparity between the two countries, as China solidifies its position as the more "senior" partner.

This is most visible with respect to economic power. China's GDP has already far outpaced Russia's, and the gap between the two is set to widen as China's GDP is expected to climb toward nearly $30 trillion in the coming years, while Russia's is forecasted to stagnate at well under $2 trillion.

Feature 3: How Deep Are China-Russia Military Ties?

The final feature in the series analyzes the strengths and weaknesses of China-Russia military relations, focusing on arms sales and joint military exercises.

Arms sales have ebbed and flowed over the years, with a notable decrease in recent years. Joint exercises, however, remain a critical element of military ties between the two countries. Altogether, China and Russia participated in at least 78 joint military exercises between 2003 and mid-2022, with more than half of these taking place since 2016.

The post Series: China-Russia Relations appeared first on ChinaPower Project.

China’s Rationale for a New Economic Strategy

The last several years have presented China with enormous challenges. Chinese leaders, including Chinese Communist Party (CCP) General Secretary Xi Jinping, now frequently stress that the world is undergoing “profound changes unseen in a century” amid fluctuations in the existing international order and balance of power. While Beijing sees promise in some of these changes, Chinese leaders have concluded that China needs to chart a new economic course to avoid falling prey to global economic volatility and growing fears of geopolitical encirclement.

Underlying many of Beijing’s concerns is a growing sense that further integration into the global economy is not the reliable engine of growth that it once was. In the 1980s, when China first began opening to the global economy, the world outside of China was growing roughly 4 percent each year. By comparison, the world minus China only managed to grow about 1.6 percent per year during the last decade.

Adding to concerns about a structural slowdown in world economic growth, the last 15 years alone witnessed a historic global financial crisis and a catastrophic pandemic. China weathered these slowdowns better than other major economies, but they were nonetheless major shocks. Covid-19 proved particularly damaging for the Chinese economy. According to official government figures, China’s GDP fell 6.8 percent in the first quarter of 2020, compared to the same period in 2019. Industrial output and retail sales saw even sharper declines, dipping 8.5 percent and 19 percent, respectively.

Beijing’s “state capitalist” approach to managing the Chinese economy has also provoked a growing international backlash over the last several years. Under Xi Jinping, the CCP has significantly expanded its influence within private companies, prompting national security concerns for foreign governments. The state has also doubled down on a techno-nationalist approach to industrial policy under the banner of the Made in China 2025 strategy while also pursuing an aggressive mercantilist approach to trade policy that has advantaged Chinese companies at the expense of foreign counterparts. 

The United States and others responded with efforts to blunt the impacts of Beijing’s policies. Since 2018, the United States and China have been mired in a trade conflict that has proved costly for Chinese (and American) exporters. The administration of former President Donald Trump also placed hundreds of Chinese firms on the U.S. Commerce Department’s entity list, prohibiting American companies from exporting to these Chinese firms. The Biden administration has left in place many Trump era policies toward China and has deepened cooperation with key allies and partners, heightening perceptions in Beijing that the United States and its partners are hostile to China’s economic interests.

Faced with an increasingly turbulent and unpredictable external environment, Beijing has become acutely concerned about China’s reliance on other countries for critical goods. Chinese officials have highlighted a few areas of particular concern, including high-technology goods like microchips (also known as semiconductors and integrated circuits), as well as more basic resources like food and energy.

Despite decades of efforts to build a globally competitive semiconductor manufacturing industry, China remains well behind industry leaders. Particularly concerning for Beijing, China remains heavily reliant on chips designed and fabricated by industry leaders such as the United States, Taiwan, South Korea, Japan, Germany, and the Netherlands—all of which harbor growing concerns about China and its global ambitions. China’s reliance on foreign chips is only getting worse. Worldwide demand for semiconductors has surged in recent months, and chipmakers have struggled to keep up, leading to ballooning prices. Official customs data shows that China spent nearly $434 billion on imports of integrated circuits in 2021—a 24 percent increase over 2020 and a 43 percent rise over 2019. Other countries are experiencing their own spikes. US chip imports were up 32 percent through the first three quarters of 2021; however, US imports totaled $29.4 billion, a small fraction of what China imported.

Recent developments have also highlighted basic Chinese vulnerabilities in the areas of food security and energy security. China’s growing demand for meat has led to a surge in imports of corn and soybeans, which are increasingly used as livestock feed in China. From 2000 to 2020, Chinese soybean imports grew nearly tenfold from 10.4 million metric tons to 100.3 million metric tons, making China the world’s largest importer of the legume by a wide margin. Amid US-China trade tensions, Chinese imports of US soybeans halved from 32.9 billion metric tons in 2017 to just 16.6 million metric tons in 2018. China turned to Brazil to help fill the gap, but China’s appetite for soybeans exceeds the production capacity of Brazil and most of the world combined, leaving China reliant on the United States.

On the energy security front, China’s growing imports of crude oil have left it reliant on foreign countries and exposed to supply chain bottlenecks and price fluctuations. China surpassed the United States as the world’s largest importer of crude oil in 2017, and the gap between China’s oil consumption and domestic production continues to widen. China has sought to diversify its sources of foreign oil, but China still relies heavily on countries in the Middle East and Africa, where instability poses a threat to Chinese energy security. Additionally, according to the US Department of Defense, about 84 percent of China’s oil imports and 61 percent of its natural gas imports reach China by transiting the South China Sea and Strait of Malacca—areas that could become strategic chokepoints in the event of a military conflict.

Together, these developments have contributed to a growing sense in Beijing that China’s economic security faces significant threats. For China’s leaders, the solution to these challenges is greater “self-reliance”—a concept at the core of China’s new economic strategy.

Executing the Dual Circulation Strategy

In pursuit of economic security and self-reliance, China has formulated a “new development pattern” that, among other elements, features the “Dual Circulation Strategy.” Chinese President Xi Jinping first publicly articulated a vision for the DCS in May 2020 at a meeting of the CCP Politburo Standing Committee, in a session focused on managing the Covid-19 pandemic.¹ The strategy was later incorporated into China’s central economic blueprint, the 14^th Five Year Plan in March 2021, cementing its high-level status. 

The DCS comprises two main components: the internal (domestic) circulation and external (international) circulation. The overarching goal of the DCS is to enable the internal and external markets to reinforce and sustain the other, with a focus on establishing the domestic market as the primary driver of economic development.

The DCS remains a nebulous collection of several high-level goals, but four key objectives form the core of the strategy:

1. Reduce external demand as a driver of economic growth by boosting domestic consumption;
2. Position China as a global manufacturing powerhouse in high value-added products;
3. Attain higher levels of self-sufficiency in key areas by enhancing innovation; and
4. Ensure access to critical inputs by diversifying supply chains and funneling investment into specific sectors.

The goals of the DCS are complex and sometimes contradictory, but they ultimately amount to a plan for “hedged integration” wherein Beijing seeks to engage with the world on its terms. The DCS is not an entirely new model, but a refinement of Beijing’s existing approach to ensure that the Chinese economy can withstand heightened global uncertainty and volatility.

The DCS is also not the only new element of China’s broader economic policy framework. Xi Jinping and other officials have increasingly voiced the need to pursue “common prosperity” to reverse the social and economic divides that have emerged among individuals and across regions as the Chinese economy has grown. The common prosperity campaign could potentially contribute to achieving some of the goals of the DCS, but details about the new program are still emerging and it is unclear how impactful it will ultimately be in the long-term.

The following analysis focuses specifically on the DCS. It includes assessments on the steps China is taking—or not taking—to achieve the strategy’s goals, and identifies some of the key structural and immediate challenges that Beijing faces in pursuing the strategy.

Boosting Domestic Consumption

The DCS aims first and foremost to pivot China away from export-led growth toward an economy fueled by domestic consumption. Beijing hopes that by relying more on China’s domestic market to drive demand, the Chinese economy will be less exposed to external volatility. At present, however, China is moving in the opposite direction needed to accomplish these goals. The pandemic is exacerbating China’s reliance on exports to achieve growth, and Beijing failed to design its pandemic recovery measures in ways that enhance domestic consumption.

Amid the pandemic, booming exports have been both a blessing and a curse for China. Economic recoveries in the United States and elsewhere have led to growing demand for Chinese products. While this has benefited China’s short-term recovery, it has propelled China back toward its old model of export-led growth and away from the consumption-led model desired by the DCS. In 2020, net exports accounted for 25.3 percent of the growth in Chinese GDP—the highest level since 1997. This trend continued into 2021, with net exports driving 20.9 percent of China's GDP growth that year—the second highest level since 1997. Notably, surging exports have not generated a sizable increase in productivity in China, as much of the growth in the value of exports in 2021 is due to higher input costs.

While exports have surged, Chinese domestic consumption has stagnated. In the runup to the Covid-19 pandemic, China was making some progress toward increasing household consumption. According to data from China’s National Bureau of Statistics, household consumption accounted for 39.1 percent of GDP in 2019, the highest level since 2005. Amid the pandemic, however, household consumption fell to 37.7 percent of GDP in 2020, wiping out five years of progress.

This was largely due to falling incomes coupled with higher savings as families cut back on spending. In the first quarter of 2020, during the height of the Covid-19 outbreak, Chinese per capita disposable income fell 3.9 percent. Retail sales took a much more dramatic hit, cratering 21 percent in January and February 2020, and they have not fully recovered.² In the second half of 2021, retail sales grew at a pace well below pre-pandemic levels, and in March 2022, retail sales fell 3.5 percent year-over-year.

China’s economic policies during the pandemic likely contributed to lagging retail sales and household consumption. Through July 2021, China’s discretionary fiscal spending in response to the pandemic totaled RMB 4.9 trillion (roughly $770 billion), or about 4.7 percent of GDP. Much of this spending went toward boosting production and providing relief to businesses, with less going toward to households. By comparison, the US government dispensed more than $5.7 trillion in fiscal stimulus (more than 25 percent of its GDP), including multiple rounds of direct stimulus payments to households.

Beijing’s decision to provide limited assistance to its population of roughly 286 million migrant workers likely had a particularly significant chilling effect on retail sales. Many migrant workers not only lost their jobs but were also harmed by pandemic-related restrictions on the flow of people between cities and provinces.

Positioning China as a Global Manufacturing Powerhouse

While the DCS seeks to reduce China’s dependence on exports to fuel economic growth, it simultaneously holds the contradictory goal of maintaining or expanding China’s share of global exports in key areas. Specifically, Beijing is intently focused on positioning China as an exporter of high value-added, high-technology goods, which will require scaling up the nation’s advanced manufacturing capabilities.

China is undertaking significant efforts to broaden and institutionalize its access to foreign markets. In November 2020, China and 14 other Indo-Pacific countries signed the world’s largest trade agreement, the Regional Comprehensive Economic Partnership (RCEP). The trade pact, which went into effect in January 2022, promises to increase China’s trade with four regional economic powerhouses—Australia, Japan, New Zealand, and South Korea—as well as the ten member countries of the Association of Southeast Asian Nations (ASEAN), which includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam.

China also announced its intent to join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), a trade grouping once spearheaded by the United States until the Trump administration’s withdrawal. China’s prospects of being admitted to the CPTPP are low due to growing tensions with some members countries, but in applying for membership, Beijing intends to contrast itself with Washington and indicate its willingness to engage on trade.

Is China the world’s top trader? Who are China's largest trading partners? How big is China's trade surplus with the United States? Find out the answer to these questions in our feature on China’s trade relations.

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Yet signing trade deals will not alone accomplish Beijing’s goals of being a leader in exporting high valued-added goods. China will also need to significantly enhance its capabilities in advanced manufacturing. The Chinese government doubled down on efforts to advance China’s manufacturing sector in 2015 with the release of the “Made in China [MIC] 2025” industrial strategy. MIC 2025 called for a broader upscaling in manufacturing capabilities, but it prioritized making strides in 10 key industries: 1) information technology; 2) automated machine tools and robotics; 3) aerospace and aeronautical equipment; 4) maritime equipment and high-tech shipping; 5) modern rail transport equipment; 6) new-energy vehicles and equipment; 7) power equipment; 8) agricultural equipment; 9) new materials; and 10) biopharma and advanced medical products.

China’s 14^th Five Year Plan echoes many of the goals put forward in the MIC 2025 strategy, and it specifically sets a target of having these strategic industries contribute 17 percent of China’s GDP by 2025. It also sets an ambitious goal of “ensur[ing] that the share of manufacturing in the economy remains stable” while also calling for “enhance[ing] the competitive advantages of the manufacturing sector with a focus on quality improvement.”

China will face an uphill battle in accomplishing these goals. In 2020, the value added from the manufacturing sector as a percentage of China’s GDP stood at 26.2 percent—down markedly from 32.5 percent in 2006. While the manufacturing sector in China remains more prominent than in other major economies, its contributions to economic growth have fallen swiftly as the country has been increasingly driven by an emergent services sector.

It is worth noting that Beijing’s manufacturing goals expose another major contradiction within the Dual Circulation Strategy. The relative decline of the manufacturing sector (and the rise of the services sector) has helped to slow the pace of growth in China’s demand for energy and raw materials. Reversing this trend will drive up China’s need for manufacturing inputs and thereby increase the exposure of the Chinese economy to supply chain bottlenecks and trade friction.

Enhancing Innovation

Embodied deep in the core of the Dual Circulation Strategy is a belief by Beijing that China can innovate its way out of many of the challenges it faces. For example, if China can improve its efficiency in utilizing energy, food, and other raw materials, it can produce more finished goods without the need to increase imports. Chinese leaders frequently extol the importance of “indigenous innovation” as crucial to becoming self-reliant. In a major 2018 speech on the importance of innovation, Xi Jinping stated, “Self-reliance is the foundation of the struggle for the Chinese nation to stand on its own among the nations of the world, and indigenous innovation is the only way for us to climb the world's technological peaks.“

China has made rapid progress toward becoming a global leader in innovation. This has largely been driven by increased spending on research and development (R&D). China’s R&D expenditure skyrocketed 42-fold between 1991 and 2020, from $13 billion to over $563 billion. In 2020, China spent significantly more on R&D than the next five countries—Japan, Germany, South Korea, France, and the United Kingdom—combined. Chinese R&D spending still lags that of the United States, but the gap between the two countries is narrowing. Yet Beijing’s efforts have faced difficulties. The 13^th Five Year Plan set a target of spending 2.5 percent of GDP on R&D by 2020, and China narrowly missed this, reaching 2.4 percent of GDP.

Further increasing spending on R&D will be a key element of the DCS going forward. China’s 14^th Five Year Plan set a goal of increasing R&D spending by seven percent each year in the 2021–2025 period. It specifically calls for focusing on boosting spending on basic research—an area where China has historically lagged—and highlights artificial intelligence, biotechnology, blockchain, neuroscience, quantum computing, and robotics as areas for prioritization.

As part of the DCS, the Chinese government is pushing to scale up China’s innovative capacity by bringing in foreign capital and know-how in the form of foreign direct investment (FDI). Beijing has steadily pared down its Foreign Investment Negative List, allowing greater opportunities for foreigners to invest in sectors such as finance, downstream manufacturing, transportation, and infrastructure. In 2020, China also concluded an agreement in principle on the China-EU Comprehensive Agreement on Investment (CAI), which could help to facilitate an influx of European investment into China, especially in electric vehicles and health services.

However, success in attracting FDI into China is far from certain. After Beijing put in place economic sanctions on European politicians and organizations in March 2021, the European Parliament halted progress on ratifying the CAI, leaving its prospects in question. The Chinese government also expects continued pushback in the coming years from the United States and its allies. In October 2021, the Chinese Ministry of Commerce released a five year plan on investment which warned of a “complex and grim” external environment and predicted modest increases in FDI into China through 2025.

Ensuring Access to Critical Inputs

Since it will likely take several years for investments in innovation to materialize into major advances toward self-reliance, Beijing is taking other measures to ensure access to the resources needed to feed its domestic industries. As part of the DCS, China is aiming to diversify its imports of energy, food, and other raw materials, and, where possible, localize supply chains. Chinese companies are also aiming to make targeted investments in foreign suppliers of such goods, but they face significant obstacles.

In the case of some high-value inputs, such as semiconductors and aerospace components, China has no short-term alternatives to relying on a few key foreign suppliers. In other areas, however, China is making some progress toward trade diversification or reshoring supply chains. China now sources its crude oil from more than 40 countries, many of which are “stable autocratic regimes” that are more willing to cooperate with, or tolerate, Beijing. In 2020, for example, roughly 15 percent of China’s crude oil imports came from Russia, a stable autocracy with which China shares a land border and increasingly close political ties. More fundamentally, China is making steady progress toward producing renewable energy at home. As of 2020, about 15.9 percent of China’s energy consumption was powered by renewable energies—compared to just 9.4 percent a decade earlier.

China is likewise moving to diversify its supplies of natural resources such as iron ore. Amid souring China-Australia relations and improving ties between Canberra and Washington, Chinese economic policymakers have called for diversifying imports of iron ore away from Australia, which supplies about 60 percent of China’s imports of the metal. China is currently eyeing the African country of Guinea as a potential new source of iron ore, but it will likely take years before investments there can begin offsetting reliance on Australia.

In addition to diversifying trade, the DCS would also see China push to acquire resources through targeted overseas investments and acquisitions. This has been a tried-and-true approach for China in years past. Since 2005, Chinese companies have invested roughly $1.3 trillion in foreign companies, with the energy and metals sectors attracting the greatest share of Chinese FDI. Under the auspices of Xi Jinping’s signature foreign policy, the Belt and Road Initiative, Chinese outbound FDI ballooned from $79 billion in 2013 to nearly $173 billion in 2017.

However, this approach may not be as successful as in years past. Chinese investors now face an increasingly complicated and uncertain environment. The global economic fallout of the Covid-19 pandemic led Chinese outbound FDI to plummet in 2020 to the lowest level since 2007. Prior to the pandemic, Chinese FDI was already falling rapidly amid fraying ties and heightened government scrutiny of Chinese investments in the United States and other countries.

Major Challenges to Implementing the Dual Circulation Strategy

Beijing faces major structural and immediate challenges to putting China on a sounder economic footing to achieve the goals of the DCS. First and foremost, Beijing faces an uphill battle in putting in place the necessary measures to fuel domestic consumption. On top of that, China’s zero-tolerance approach to Covid-19 continues to produce self-inflicted economic wounds, and a major real estate market slowdown threatens to stifle economic growth in the coming years.

Much of the long-term success of the DCS depends on boosting domestic consumption; yet the Chinese government has not put in place the necessary tools to accomplish this. China lacks important fiscal tools for transferring wealth from high-income households to low-income households. China also lacks a sophisticated welfare system—like those found in many advanced economies—capable of protecting low and middle-income households from economic hardships. Without these mechanisms in place, Beijing will find it difficult to unlock higher levels of consumption that would result from a larger and more robust middle class.

China’s new common prosperity campaign could aid in putting in place some protections and raising the wages of some low-income individuals. As currently envisioned, however, common prosperity will not entail the development of a more robust welfare system characterized by transfers of wealth from the government to low-income households. It instead appears more focused on transferring wealth from businesses to households, in the form of donations, meaning that it is likely to generate only marginal progress toward achieving the goals of the DCS.

In addition to long-term structural obstacles, China also faces several pressing challenges. Repeated Covid-19 outbreaks within China dampened Chinese economic growth throughout 2021. The number of cases associated with these outbreaks was low (by official counts) compared to the number of cases reported in many other countries, but Beijing’s “zero-Covid” approach led to sudden lockdowns for even small outbreaks. In October 2021, for example, China locked down the northwestern city of Lanzhou and its population of roughly 4 million people after 39 cases were reported there in a week.

The Chinese government’s strict Covid-19 containment policies largely helped to contain the virus within China until a major outbreak erupted in Shanghai in March 2022. The outbreak there led China’s daily new Covid-19 case totals to surge well past the official case counts during China’s initial outbreak in Wuhan in 2020. The Shanghai government responded by locking down millions of residents in their homes, dispatching thousands of workers, and setting up makeshift hospitals, which resulted in food shortages and growing criticism of China’s “zero-Covid” strategy.

China’s efforts to stop the virus have come at a significant economic cost. In August 2021, Chinese officials acknowledged that Covid-19 spikes during the summer contributed to a slowdown in typical vacation travels and slumping retail sales, and the Shanghai outbreak coincided with a 3.5 percent decline in retail sales in March 2022. China’s draconian border restrictions have also reduced the normal torrent of international travelers into China to a slow trickle, cutting off a major source of economic activity. In 2019, travel and tourism contributed nearly $1.7 trillion to China’s economy (11.6 percent of GDP) and supported the employment of roughly 82.2 million jobs. In 2020, travel and tourism contributed just $667 billion to China’s economy, amounting to a 60 percent decline from 2019. The United States and Europe saw a less severe decline in 2020, down 40 percent and 51 percent, respectively.

The Chinese economy also faces a bevy of challenges not directly related to the pandemic. The second half of 2021 witnessed the near collapse of one of China’s largest real estate companies, Evergrande Group, as well as a broader slowdown in the housing market. Official government figures show that real estate investment declined 13.9 percent year-over-year in December 2021, nearly matching the dramatic downturn during the Covid-19 outbreak in Wuhan.

These trends are not entirely unwelcome news for China. Beijing has long sought to rein in speculative investment in real estate that has caused home prices to skyrocket in recent years. Nevertheless, a continued slowdown in the real estate market would significantly inhibit China’s ability to sustain even moderate GDP growth rates. According to some estimates, the real estate and construction industries amounted to 29 percent of China’s GDP in 2016—a far higher level than in most other economies.

A prolonged real estate slump would also upend a key source of local government revenue: land sales. In October 2021, government land sales declined 13.1 percent year-over-year, following an 11.2 percent decline the month before. In the absence of sophisticated property tax schemes like those found in many other countries, declining land sales will force cash-strapped local governments to take on debt to pay for needed investments.

Chinese leaders acknowledged many of these challenges in December 2021 at the Central Economic Work Conference, an important annual convening of top officials. At the conference, Xi Jinping forecasted three main economic pressures facing China in the year ahead, including demand contraction, supply shocks, and weakening expectations among producers, and he stressed that “the external environment is becoming increasingly complicated, grim and uncertain.” The meeting also included discussions of the challenges facing the Chinese real estate market.

These developments all pose major obstacles to implementing the Dual Circulation Strategy, and, if left unchecked, they threaten to derail China’s economic growth in the coming years. Chinese leaders may still succeed at achieving the goals of the DCS and putting China down a stabler development path, but the challenges before them are daunting.

The post Will the Dual Circulation Strategy Enable China to Compete in a Post-Pandemic World? appeared first on ChinaPower Project.

Proposition 1

The Covid-19 pandemic has accelerated the timeline by which China will surpass the United States to become the world’s leading economic power. 

Friday, November 19, 2021, 9:00 am – 10:15 am ET

FOR: Dr. Yao Yang
Professor, China Center for Economic Research and the National School of Development
Peking University

AGAINST: Mr. Gerard DiPippo
Senior Fellow, Economics Program
Center for Strategic and International Studies

Watch the event here.

Keynote Remarks

Keynote Remarks by the Hon. Christine Wormuth, Secretary of the U.S. Army

Wednesday, December 1, 2021, 9:30 am – 10:15 am ET

Watch the event here.

Proposition 2

Beijing’s crackdown on tech firms will significantly stifle Chinese technological and scientific innovation.

Monday, December 6, 2021, 4:00 pm – 5:15 pm ET

FOR: Mr. Matt Sheehan
Fellow, Asia Program
Carnegie Endowment for International Peace

AGAINST: Ms. Rui Ma
China Tech Analyst; Main Writer and Co-Host
Tech Buzz China

Watch the event here.

Proposition 3 and Keynote Remarks

Within the next two years, China will establish itself as the most influential external power within Afghanistan. 

Tuesday, December 14, 2021, 8:45 am – 10:00 am ET

FOR: Sr. Col. Zhou Bo
Senior Fellow, Center of Strategy and Security
Tsinghua University

AGAINST: Dr. Seth Jones
Senior Vice President; Harold Brown Chair; and Director, International Security Program
Center for Strategic and International Studies

Keynote Remarks by U.S. Senator Steve Daines (R-Montana), Commissioner, Congressional-Executive Commission on China; Co-Chair, Senate U.S.-China Working Group

Tuesday, December 14, 2021, 10:15 am – 10:45 am

Watch the event here.

Proposition 4

Given China’s growing power, China will have a sphere of influence in the Indo-Pacific by 2027. 

Friday, December 17, 2021, 1:00 pm – 2:15 pm ET

FOR: Dr. Graham Allison
Douglas Dillon Professor of Government
Harvard University

AGAINST: Hon. David Stilwell
Former Assistant Secretary of State, East Asian and Pacific Affairs, US Department of State

Watch the event here.

The post China’s Power: Up for Debate 2021 appeared first on ChinaPower Project.

China’s World-Leading Ports

The rapid rise of China’s economy on the world stage has largely been fueled by decades of surging exports. With roughly 80 percent of global trade moving by sea, tapping into maritime shipping networks has been central to China’s strategy of export-led economic development.

To facilitate the flow of goods in and out of the country, China has developed some of the world’s largest and busiest ports. According to the Liner Shipping Connectivity Index (LSCI), which scores countries and their respective container ports based on their level of integration into established liner shipping routes, several of China’s container ports rank among the most connected in the world.

As of the first quarter (Q1) of 2021, China possesses 10 of the top 100 ports in the LSCI. That figure rises to 11 ports when including Hong Kong. Only the United States, with nine ports in the top 100, comes close to matching China. However, China’s 11 ports boast an average connectivity score of 60.6, which is significantly higher than the average score of US ports (44.5).

China’s lead in maritime connectivity is even more pronounced at the national level, where the LSCI assigns an overall connectivity score for each country.¹ In Q1 2021, China’s LSCI country score stood at 164, well ahead of other top countries, including Singapore (113), South Korea (108), the United States (106), and Malaysia (100).

Notably, China’s lead has grown over time. Its LSCI score surged nearly 64 percent from Q1 2006 to Q1 2021, while other top-five countries saw their scores grow at a slower clip (a collective average of 46 percent). The United States’ score grew the slowest – just 33 percent, or about half as fast as China’s.

Critical to China’s strong performance in the LSCI is its capacity to handle high container throughput, which is a measure of the amount of containerized goods processed by a port. In 2019, Chinese ports handled 242 million TEUs (twenty-foot equivalent units) worth of goods. This is considerably more than all other East Asia and Pacific countries combined (212.1 million TEUs) and more than four times higher than US throughput (55.5 million TEUs). Additionally, China’s share of global throughput rose steadily from 24.3 percent in 2010 to 29.8 percent in 2019.

The Port of Shanghai alone handled 16.6 percent of China’s total container throughput in 2019. In addition to being China’s top port, it has also reigned as the world’s busiest container port since 2010, when it eclipsed the Port of Singapore. Besides Shanghai, six other Chinese ports ranked among the 10 most-active container ports in the world in 2019, including Ningbo-Zhoushan (3rd), Shenzhen (4th), Guangzhou (5th), Qingdao (7th), Hong Kong (8th), and Tianjin (9th). The only non-Chinese ports to make it into the top 10 were Singapore (2nd), Busan (6th), and Rotterdam (10th). Unsurprisingly, all of these ports score highly in the LSCI.

The prominence of China’s ports is not simply the result of their size. They are also more efficient than their counterparts. According to data from UNCTAD, the median time spent at Chinese ports by container vessels was 0.62 days in 2020. While that is slower than some countries, such as Japan (0.34) and Denmark (0.45), it is faster than other competitors such as Singapore (0.80) and the US (1.03). However, the size of a ship significantly determines the speed at which containers can be loaded and unloaded. Factoring in the larger size of the ships calling in China, Chinese ports are considerably more efficient than their competitors.

Taken together, data on global port activity reveals that China stands a head above the rest when it comes to maritime shipping connectivity. Chinese ports are busier and more efficient than most of their competitors, and their lead over the rest of the world continues to widen year after year.

China’s Pursuit of Commercial Maritime Power

The success of China’s ports is founded on natural geographic advantages, but Chinese leaders have played a crucial role in developing the country’s port infrastructure.

Major maritime powers share one thing in common: access to the sea. At 14,500 kilometers (km) in length, China’s ocean shoreline is the 10th longest in the world. While countries like Canada and Russia have significantly longer shorelines (202,080 km and 37,653 km, respectively), the vast majority of China’s shoreline has the advantage of being accessible year-round. More importantly, many of China’s largest and wealthiest population centers lie along its eastern coast, which makes it more logistically and economically feasible to construct large ports.

While geography is important, the Chinese government is largely responsible for spurring the growth of Chinese ports. Leaders in Beijing have long sought to develop ports capable of feeding China’s ever-growing demand for raw materials and facilitating export-led economic growth. For example, China’s Sixth Five-Year Plan (FYP), launched in 1981, called for scaling up the capacity of major coastal and inland ports, with special attention paid to coal transport.

“Economic powers must be maritime powers and shipping powers.”

Xi Jinping

In recent years, Chinese leaders have articulated a grander vision aimed at transforming China into a global maritime power capable of advancing the nation’s military and commercial interests at sea. At the Chinese Communist Party’s (CCP’s) 12^th Party Congress in November 2012, then-President Hu Jintao laid out the CCP’s goal for China to become a “maritime power” (haiyang qiangguo), and he called for “enhancing [China’s] capacity for exploiting marine resources” and “developing the marine economy.” President Xi Jinping has repeatedly echoed this call, emphasizing that “economic powers must be maritime powers and shipping powers.”

Beijing has backed these ambitions with heavy investments. From 2012 to 2019, the Chinese government devoted an estimated RMB 1 trillion (around $153 billion) to constructing new port facilities and upgrading existing port infrastructure. By comparison, the US government spent less than $110 billion on all water transportation infrastructure over the same period.²

These investments, coupled with continued Chinese economic and trade growth, have contributed to skyrocketing activity at major Chinese ports. From 2000 to 2019, the combined freight processed by the top five Chinese ports increased nearly sixfold, from 613.3 million metric tons to almost 3.5 billion metric tons. The Port of Ningbo-Zhoushan experienced the most impressive growth. It eclipsed Shanghai in 2008 to become the world’s busiest port in terms of total freight volume, which encompasses not just containerized goods but also bulk goods (like coal and steel), liquid natural gas, and oil.³ Since then, Ningbo-Zhoushan’s freight volume more than doubled, from 520.5 million metric tons in 2008 to 1.12 billion metric tons in 2019.

Yet growing freight volumes among the top ports belie the fact than many Chinese ports are underutilized due to poor planning. In the mid-1980s, the central government devolved responsibilities for constructing and managing ports to provincial and municipal governments, leading to a frenzy of disorderly development. Spurred by a desire to prop up local GDP growth, many officials eagerly pushed through large port construction projects in the absence of adequate commercial demand.

These problems have put pressure on Chinese authorities to integrate ports and administer them at a regional level to reduce inefficiency and wasteful construction. China’s 13^th FYP, which kicked off in 2016, called for establishing “a new model of coordinated oversight over maritime affairs.” In particular, the 13^th FYP sought to establish “port clusters” that would be better integrated into the overall development of three critically important economic regions: the Beijing-Tianjin-Hebei area in China’s northeast, the Yangtze River Delta in the east, and the Pearl River Delta in the southeast. China’s 14^th FYP, issued in March 2021, echoed similar calls.

In February 2021, the CCP Central Committee and State Council also released the “National Comprehensive Three-Dimensional Transportation Network Plan,” which outlines goals to make China’s infrastructure system safer, smarter, and greener through 2035. The plan highlights the need to apply innovations like artificial intelligence and the “Internet of Things” to increase efficiency at China’s ports. It ultimately sets out the goal for China to possess 27 major coastal ports and 36 major inland river ports by 2035.

Scaling Up Global Connectivity

Beijing’s efforts to shape global maritime connectivity do not end at China’s borders. Under Xi, Chinese state-owned enterprises (SOEs) have been engaging in investment and construction projects at dozens of ports around the world. The scale of China’s activities has raised questions about the potential impacts on recipient countries and the broader implications of Beijing’s growing economic influence.

At the center of many Chinese overseas port projects is the Maritime Silk Road (MSR). Launched in 2013, the MSR forms the maritime component of the broader Belt and Road Initiative – Beijing’s ambitious agenda for shoring up its global economic and political clout by enhancing connectivity between China and other countries.

As of 2020, China’s Belt and Road Initiative includes 138 countries with a combined GDP of $29 trillion and some 4.6 billion people. Learn more about the BRI and how it will advance China’s interests.

Explore More.

According to one estimate, Chinese companies – primarily SOEs like China COSCO Shipping Corporation and China Merchants Group – invested nearly $11 billion into overseas ports between 2010 and 2019. Another study conducted by a team of Chinese researchers found that Chinese companies had signed deals on more than 80 port projects during the same period, including foreign direct investments, acquisitions, leasing, and construction contracts. The total value of these deals, including those not yet delivered, reached almost $70 billion.

However, many Chinese-backed projects have not taken off as planned. In Pakistan, China hailed its ongoing investments at Gwadar Port as a key component of the China-Pakistan Economic Corridor – a flagship project of the BRI. Yet Gwadar Port remains heavily underutilized, forcing the Pakistani government to pursue desperate measures in early 2021 to revive the port and attract tourism to the surrounding area. The failure of Gwadar Port to meet lofty ambitions tracks with its performance in the LSCI, where the port’s score has dropped from an already low 6.1 in Q1 2019 to 4.6 in Q1 2021.

Other major projects have entirely failed to materialize. In 2013, China Merchants Holdings International signed a framework agreement with Tanzania to construct Bagamoyo Port and an accompanying special economic zone. The project, valued at $10 billion, aimed to transform Tanzania into a major East African transportation and logistics hub, but the Tanzanian government has pushed back on Chinese plans, and no construction has started as of early 2021.

In Sri Lanka, the government’s leasing of the Port of Hambantota to Chinese SOEs set off alarm bells around the world. Sri Lanka racked up more than $8 billion in total debt to Chinese SOEs over the years, including $1.1 billion to construct Hambantota Port. When the Sri Lankan government struggled to repay its debts, it agreed in 2017 to lease the port to China for 99 years in exchange for debt reduction. The move sparked concerns about Chinese economic influence and the potential risks for smaller countries of signing costly infrastructure development deals with China.

There are also persistent concerns that Chinese-built ports such as Hambantota and Gwadar could someday house facilities to support the Chinese People’s Liberation Army (PLA). That has already happened in Djibouti, where China has constructed military facilities directly adjacent to the commercial Port of Doraleh, which China is also helping to construct. The PLA Support Base in Djibouti – China’s first overseas military base – has undergone significant improvements in recent years, which US military officials warn will allow Chinese aircraft carriers to dock there.

Other major players are engaged in port projects in the region, offering a potential counterweight to China. In March 2021, the Sri Lankan cabinet approved a deal that will allow Indian and Japanese companies to develop and operate the West Container Terminal at Colombo Port in Sri Lanka’s capital. Japan is also involved in a major project to develop new container terminals at Kenya’s Mombasa Port, the second stage of which is valued at roughly $300 million and set for completion in late 2021. While these projects could help to somewhat stave off China’s economic influence, the scale and breadth of China’s port development abroad will continue to play a major role in shaping maritime connectivity across the Indo-Pacific region and East Africa.

The post How Is China Influencing Global Maritime Connectivity? appeared first on ChinaPower Project.

Patterns of Global Cities

The employment opportunities brought by Chinese economic reforms launched in the late 1970s led to a surge of people moving out of rural areas and into cities. In 1979, only 18.6 percent of the Chinese population resided in urban areas. In 2011, more than half of all Chinese citizens lived in cities for the first time in history, and by 2020 the urbanization rate in China stood at 61.4 percent.

In addition to domestic population movements, the growth of Chinese cities has drawn travelers, students, and workers from other countries. International companies have also set up offices in different cities to better access China’s vast market. As a result, cities have become one of the main gateways through which China interacts with the world.

The global influence of Chinese cities has expanded over the past decades. International consultancy Kearney ranks cities around the world in its annual Global Cities Index (GCI). Based on 29 indicators, Kearney evaluates each city’s performance in five areas: business activities, human capital, information exchange, cultural experience, and political engagement.¹ The composite ranking reflects the relative influence of a city on the world.

As countries with larger populations typically boast a higher number of urban centers, it is unsurprising that the most populous countries – China, India, and the US – have the greatest number of global cities. In Kearney’s 2020 GCI, 18 Chinese cities ranked among the top 125 global cities.² The US came in second with 14 cities and India came in third with seven. While there are more global cities in China, on average a global city in China ranks lower (82) compared to those in other countries (31 in the US or 33 in Germany).

Notwithstanding the lower ranking, the global influence of Chinese cities has trended upward over the past six years. In 2015, the average ranking of a Chinese global city was 93. Among the five countries with the largest number of global cities, only Germany showed similar improvement (from 38 in 2015 to 33 in 2020). The average ranking of cities in other top-five countries declined to different extents between 2015 and 2020 (from 28 to 31 in the US; 81 to 91 in India; and 78 to 98 in Brazil).  

Chinese cities owe much of their global influence to high levels of business activity. Some of China’s global cities, such as Beijing, Shanghai, and Hong Kong, have traditionally served as hubs of economic activities, and they remain dominant today. Over 43 percent of the 124 Chinese companies included in the 2020 Fortune Global 500 are headquartered in Beijing. Shanghai and Shenzhen are each home to another 7 percent of Chinese Fortune Global 500 companies. Additionally, Shanghai and Hong Kong are global leaders in sea and air freight respectively, and Hong Kong ranks first in the world in terms of Initial Public Offering (IPO) proceedings, many of which are for mainland Chinese companies.

Outside of big cities, lesser-known cities, such as Shenzhen, Guangzhou, Hangzhou, Ningbo, and Suzhou, have considerably grown their global influence given their roles in the Chinese and world markets. India, which also experienced tremendous economic growth over the past few decades and is roughly as populous as China, saw fewer new global cities emerge. There has also been a downward trajectory in their rankings from 2015-2020. New Delhi, which improved slightly from 57 in 2015 to 56 in 2020, is the exception.

While top Chinese global cities attract significant business activities, they score lower in political engagement relative to their counterparts in North America and Europe. Few influential international organizations are located in Chinese cities compared to Washington, D.C. (home to the World Bank and International Monetary Fund), Brussels (where the European Union and NATO are headquartered), Geneva (where the World Health Organization and World Trade Organization are located), and New York (home to the United Nations). The international political center of gravity could shift toward Beijing as China builds more international institutions, such as the Asian Infrastructure Investment Bank and the Shanghai Cooperation Organization, but for now the US and Europe remain dominant.

The Cultivation of Global Cities in China  

Over the last several decades, the Chinese government has pursued efforts to develop its cities into key centers of trade, investment, and commerce within the world economy. More recently, China’s leaders have also sought to transform Chinese cities into global innovation hubs.

While cities like Beijing and Shanghai have been prominent historically, the growth in cities such as Shenzhen is the product of deliberate government policies. When economic reforms began to take place in the late 1970s, the Chinese government designated four areas – Shenzhen, Zhuhai, Shantou, and Xiamen – as “Special Economic Zones” (SEZs). SEZs were permitted to experiment with economic policies not allowed in other parts of China, including accepting foreign direct investment and relaxing price controls. More and more coastal areas were granted SEZ status in subsequent years. By 2019, China established 2,543 SEZs, almost half (47.2 percent) of all SEZs in the world. By comparison, India had just 373 SEZs.

For decades, China’s cities largely functioned as manufacturing hubs for low-cost goods, such as clothing and textiles, but this has changed in recent years as their industrial capacity has expanded and matured. Many Chinese cities are now home to manufacturers of more advanced products, such as electronics and petrochemicals. Shenzhen’s Hi-Tech Industrial Park, for instance, is home to Chinese tech giants like Huawei, ZTE, Tencent, Alibaba, and Baidu. This has earned Shenzhen the nickname “China’s Silicon Valley.”

Fortune’s Global 500 ranking included 124 Chinese companies in 2020. Together they took in combined revenue of $8.3 trillion – nearly a quarter of the $33.3 trillion in revenue generated by all 500 companies on the list. Learn more about China’s companies and how they are competing on the world stage.

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The central government, and later municipal governments, also made efforts to attract multinational corporations to expand their presence in Chinese cities since the late 1990s. They introduced incentives such as reduced taxes, rent subsidies, and preferential policies for employees of large international corporations that were willing to set up regional headquarters and offices in mainland China.

While Hong Kong and Singapore remain more popular locations for international brands to manage their Asia-Pacific businesses, mainland Chinese cities have become attractive options. Shanghai alone was home to 730 regional headquarters of foreign companies as of March 2020, including Ford, GE, and Kraft. In Beijing, PricewaterhouseCoopers and Volkswagen established regional headquarters. IBM moved its global procurement headquarter to Shenzhen in 2006, and Google opened its third China office there in 2018.

This influx of business activity has dramatically increased the economic size of Chinese cities. In 2019, Shanghai had a gross regional product (GRP) of $552.3 billion – slightly higher than the entire GDP of Thailand. Similarly, Beijing’s GRP reached $512 billion, making it nearly as large as Belgium’s economy. Shenzhen (GRP of $389.8 billion), Hong Kong ($365.7 billion), and Guangzhou ($342.1 billion) rounded out the top-five largest cities in China by economic output. While China’s largest cities are immense in their economic scale, a few cities are larger still. The New York City metropolitan area had a GRP of over $1.86 trillion in 2019, which is slightly larger than Brazil, the world’s ninth-largest economy.³

Beyond just economic clout, Chinese cities are emerging as global leaders in science and technology (S&T) innovation. According to the 2020 Global Innovation Index, which ranks city clusters based on their output of patents and scientific publications, two of the world’s top-five S&T innovation clusters are located in China. In the rankings, China’s Shenzhen-Hong Kong-Guangzhou cluster comes in second behind Japan’s Tokyo-Yokohama cluster, and ahead of Seoul, South Korea. Meanwhile, Beijing ranks fourth, ahead of the San Jose-San Francisco area in the US and the Osaka-Kobe-Kyoto region in Japan.

Research and development (R&D) – the backbone of innovation – is highly concentrated in a few cities in China. Just three cities – Beijing, Shanghai, and Shenzhen – accounted for 23 percent of China’s total spending on R&D in 2019. These cities also have higher levels of R&D intensity, a measure of spending on R&D as a percentage of economic output. At 6.31 percent of GRP in 2019, Beijing’s R&D intensity was nearly three times the national average (2.23 percent). Shenzhen’s R&D intensity was more than twice the national average and Shanghai’s was about 1.8 times the national average.

Unsurprisingly, China’s top cities are home to the majority of the country’s higher education institutions, which perform over seven percent of the country’s total R&D. Of the top 50 Chinese universities in the 2020 Times Higher Education rankings, 12 are located in Beijing. Several are also located in Nanjing (7 universities), Shanghai (5 universities), and Wuhan (4 universities). These universities train many of China’s top students, many of whom go on to work in science and engineering fields. They also train many international students. According to China’s Ministry of Education, 492,185 foreign students studied in China in 2018, with roughly 28.8 percent of them studying in Beijing and Shanghai alone.

Fierce Competition on the Global Stage

Despite their growing clout, China’s major cities face fierce competition on the world stage. Rapid urbanization has also generated a number of social and environmental challenges in some of the country’s most important cities.

While Chinese cities are making advances toward becoming global hubs for innovation, they face serious competition when it comes to attracting global talent in key industries. In the field of artificial intelligence (AI), for example, many of China’s top talents leave China to pursue employment or additional study. According to analysis by MacroPolo, only 31.6 percent of AI researchers who received undergraduate degrees in China pursued graduate studies in China. Instead, 58.3 percent of Chinese AI researchers pursued a graduate degree in the US, and of these, 32.6 percent remained in the US to work after graduation. This suggests a limited ability of China and its cities to retain the necessary talent to compete in the global innovation race – at least in the short-run.

Recent global economic and geopolitical developments represent another potential threat to the competitiveness of Chinese cities. After years of tense trade relations between the US and China, a May 2019 survey by the American Chamber of Commerce in Shanghai found that 33.2 percent of US companies were considering cancelling or delaying investments, and 39.7 percent of respondents were considering relocating manufacturing facilities outside of China (or had already done so). Months into the Covid-19 pandemic, a June 2020 survey of 200 companies found that 95 percent of US respondents planned to change their suppliers away from China. The movement of US supply chains out of China, and broader decoupling of the two economies, could pose a serious challenge to the international influence and economic competitiveness of Chinese cities.

Chinese cities have also experienced growing pains stemming from rapid population increase. Over the 1990-2015 period, the world’s three fastest-growing large cities (populations above 10 million) were in China. The largest growth occurred in Shenzhen, which saw its population skyrocket nearly 1,200 percent from 875,000 in 1990 to nearly 11.3 million people in 2015. The two other cities – Guangzhou and Chongqing – saw their populations increase by 260 percent and 233 percent, respectively. These cities have seen their population growth slow in recent years, but Chongqing remained the world’s fifth fastest-growing large city during the 2015-2020 period, behind Kinshasa (Dem. Rep. of the Congo), Lahore (Pakistan), Bangalore (India), and Dhaka (Bangladesh).

Rapid urbanization has created a range of social problems. Higher population density has led to high property prices and costs of living. In Shanghai and Beijing, home prices ranged from 15 to 20 times the average household income in 2018 compared to a housing price-to-income ratio of 9.2 in San Francisco and 5.4 in New York City in 2017. Some cities have also seen steep rises in home prices in a short period of time. In Shenzhen, for example, the average price of second-hand home sales jumped 82 percent between January 2015 and September 2020.

Burgeoning populations have also led to greater resource usage and higher pollution emissions. In Beijing, the availability of water declined from 1,000 cubic meters per capita in 1949 to less than 230 cubic meters in 2007, leaving the city facing “extremely high” water scarcity. Up to 80 percent of Hong Kong’s water is imported from Dongjiang in Guangdong, and Shanghai increasingly relies on diverted Yangtze River water because the Huangpu River has become too polluted. Inhabitants of many cities also suffer health and economic costs from air pollution. In 2019, air pollution from small particulate matter (known as PM 2.5) led to 1.42 million premature deaths in China. During the first half of 2020 alone, air pollution in Beijing and Shanghai led to an estimated 49,000 premature deaths and $23 billion in economic damages.

The central government is taking a number of steps to promote more even urban development. China’s two most populous cities, Shanghai and Beijing, will see their populations capped at 25 million and 23 million people, respectively. The Chinese government has also embraced the idea of “city clusters.” The government’s 13th Five-Year Plan called for setting up 19 city clusters, each of which would be made up of a central hub surrounded by smaller satellite cities. The largest of these are the southern Pearl River Delta (with Hong Kong as the hub), the eastern Yangtze River Delta (with Shanghai as the center) and the northern Jing-Jin-Ji Metropolitan Region (anchored by Beijing). In all, China’s 19 city clusters are expected to host 90 percent of future Chinese economic activities.

The post How Globally Competitive Are China’s Cities? appeared first on ChinaPower Project.

Chinese Rail Goes Global

China’s presence in railway construction projects abroad is rooted in the rapid expansion of China’s own domestic rail network. Between 2008 and 2019, China built an average of 5,464 kilometers (km) of railway track per year, which is nearly equivalent to the distance between New York City and London. Roughly half of the new track added was high-speed rail. At 35,388 km, China’s high-speed rail network is the largest in the world.¹ Combined with non-high speed railways, China’s entire rail system stretched 139,800 km in 2019, making it the second-largest in the world after the US’ rail system, which spanned 202,600 km.

China’s rail system is the product of a patchwork of state-owned enterprises (SOEs). Massive conglomerates, such as China Railway Construction Corporation and China Railway Engineering Corporation, have constructed much of the tracks and other physical infrastructure that make up China’s rail network. Meanwhile, companies like China Railway Rolling Stock Corporation – the largest rolling stock manufacturer in the world by revenue – have produced the locomotives and rail cars that run on those tracks.

These SOEs (and others) gained significant industrial capacity and know-how through the construction of China’s rail network, and they have increasingly sought to export this capacity abroad. According to the China Global Investment Tracker (CGIT), Chinese companies signed $61.6 billion worth of rail construction contracts from 2013 to 2019 – more than double the value of the previous seven-year period (2006-2012).² This uptick coincided with the launch of China’s Belt and Road Initiative in 2013.³ Of the 34 countries that signed rail construction contracts with China, 29 are involved in the BRI.

Middle income countries have attracted most of China’s rail construction contracts since 2013. Lower middle-income countries took in 41.7 percent (or $25.7 billion) of all contracts, while upper middle-income countries took in 29.1 percent (or $17.9 billion). The remainder was split among other economies.⁴

Disaggregated by regions, about 46.9 percent ($28.8 billion) of China’s rail construction contracts were concentrated in Asia. Within the region, the lion’s share (61.1 percent) of contracts went to nine Southeast Asian countries. In Malaysia, the top recipient in the region, China is constructing the East Coast Rail Link, which will stretch some 640 km and cost a total of $10.6 billion.

Africa received the second-highest amount of rail contracts from 2013-2019. At $20.8 billion, this accounted for 33.8 percent of the total. Similar to Asia, the largest contracts in Africa are concentrated in a few countries. About $7.5 billion worth of rail-related construction contracts (36.1 percent of the amount in Africa) were signed with Nigeria, where China is constructing a series of lines that comprise the 1,300 km-long Lagos-Kano Railway Modernization Project. This massive undertaking has made Nigeria the world’s top recipient of Chinese rail construction contracts during the 2013-2019 period.

China is not the only country helping to construct rail infrastructure abroad. Japan has been an important player in building infrastructure in Southeast Asia for decades. In 2017, Japan won a bid to upgrade a 750 km route connecting Indonesia’s two largest cities, Jakarta and Surabaya. In 2020, Indonesian officials expressed interest in merging that with an ongoing Chinese project. The combined project would be constructed by a consortium of Chinese and Japanese companies.

In Africa, France inked a 2 billion euro ($2.3 billion) deal with Kenya in 2019 to construct various infrastructure projects, including a railway line from the capital Nairobi to Jomo Kenyatta International Airport. The move came as part of a broader push by French President Emmanuel Macron to boost France’s economic, military, and cultural ties with East Africa.

Rail Construction Projects as a Key Element of the Belt and Road Initiative

Chinese leaders have made rail projects an important element of the BRI. In a 2014 speech, Chinese President Xi Jinping stated, “China attaches great importance to the railway and highway projects linking China to… neighboring countries,” and added, “These projects will enjoy priority consideration in the planning and implementation of the ‘Belt and Road’ Initiative.”

China attaches great importance to the railway and highway projects linking China to… neighboring countries. These projects will enjoy priority consideration in the planning and implementation of the ‘Belt and Road’ initiative.

Xi Jinping

Initially styled as “One Belt, One Road,” the BRI is President Xi Jinping’s signature foreign policy aimed at strengthening China’s economic, political, and cultural linkages with partner countries around the world. As of 2020, the BRI includes 138 countries with a combined GDP of some $29 trillion and 4.6 billion people.

The BRI specifically emphasizes the importance of enhancing connectivity through the expansion of hard infrastructure like railways, roads, and ports. In much of the developing world, existing rail networks were historically built by European powers for the purpose of transporting extracted resources back to Europe. Over time, these rail networks have aged and failed to keep up with demand. Through the BRI, China is pushing to address these gaps by upgrading existing rail networks and building new rail lines.

As of 2020, China’s Belt and Road Initiative includes 138 countries with a combined GDP of $29 trillion and some 4.6 billion people. Learn more about the BRI and how it will advance China’s interests.

Explore More.

In Pakistan, China is poised to significantly revamp the country’s rail network as part of the China-Pakistan Economic Corridor, a flagship project of the BRI. In August 2020, the Pakistani government approved a $6.8 billion project to upgrade 2,655 km of the country’s existing railway lines. Reports indicate the project would double the maximum speed of trains to 165 km per hour and nearly quintuple the capacity of the lines from 34 trains (each way) per day to over 150.

In Southeast Asia, China is pursuing one of its most ambitious BRI projects, the Kunming–Singapore Railway (also known as the Pan-Asian Railway). If completed, the railway would consist of three major corridors extending some 3,000 km from the southern Chinese province of Kunming down to Singapore, passing through Laos, Thailand, and Malaysia.

Successful completion of these and other rail construction projects would significantly deepen connectivity between China and its neighbors, potentially boosting Beijing’s geopolitical and geoeconomic clout while shoring up China’s domestic economy. For example, once completed, the Kunming-Singapore line is expected to increase two-way trade and tourism flows between southern China and mainland Southeast Asia. This would leave Southeast Asian countries more economically reliant on China, providing Beijing with additional leverage in the region. At the same time, increased cross-border activity would promote economic growth in China’s less-developed border regions – a key goal of the BRI.

Importantly, railway construction projects also help to open up new markets for Chinese companies. According to CGIT data, two Chinese SOEs in particular have benefited from rail construction projects abroad. China Railway Construction Corporation signed 21 rail construction contracts worth $19.3 billion, accounting for nearly one-third of the global total during the 2013-2019 period. China Railway Engineering Corporation signed 19 contracts worth $12.9 billion, amounting to roughly one-fifth of the value of all contracts.

Challenges and Mixed Responses

While rail construction projects could benefit Beijing politically and economically, some projects have faced setbacks and criticism. Surveys indicate that rail and other infrastructure projects have had mixed impacts on China’s international image. Beijing appears to be taking steps to fend off criticism.

During the 2013-2019 period, several Chinese rail projects hit insurmountable problems. The CGIT lists seven Chinese rail projects from this period in its database of “troubled transactions.” This includes projects that have been cancelled or put on hold indefinitely due to serious political or economic problems. Together these seven projects were worth nearly $15.1 billion. The largest was a $7.5 billion contract with Venezuela to construct the 468 km Tinaco-Anaco high-speed railway. Work on the project was started but eventually trickled to a stop as Venezuela’s economic condition declined rapidly over the past decade.

Other rail projects have come close to cancellation due to concerns about a lack of transparency. In Malaysia, the East Coast Rail Link (ECRL) has been linked to a major corruption scandal. In 2015, then-Prime Minister of Malaysia Najib Razak was charged with embezzling money from 1Malaysia Development Berhad (1MDB), a state-run development fund. Najib was accused of seeking major investments at inflated costs from China, including the ECRL, to pay off 1MDB’s debts. Najib’s successor Prime Minister Mahathir Mohamad had planned to cancel the ECRL and only reversed the decision when China agreed to lower the cost from roughly $16 billion down to $10.6 billion.

Several rail projects have also been criticized as instruments of “debt-trap diplomacy,” wherein China purportedly seeks to gain leverage over developing countries by burdening them with unsustainable debt. The China-Laos Railway, which is currently under construction, has faced such accusations. In total, the project is slated to cost $6.2 billion, with the Chinese government paying about 70 percent of the total, and Laos paying the remaining 30 percent with loans from Chinese financial institutions. At $1.9 billion, this amounts to about 10.6 percent of the country’s entire GDP (in 2019).

Other developing countries, including Zambia, Mali, Sudan, and Senegal, have likewise signed rail contracts that are substantial relative to their respective economies. However, there is no conclusive evidence indicating China is intentionally engaging in “debt-trap diplomacy.”

The multitude of issues surrounding China’s international infrastructure construction appears to have had mixed impacts on China’s international image. In Nigeria, there is evidence that completion of segments of the Lagos-Kano Railway – a major BRI project – has increased favorable perceptions of China. A Pew Research Center study found that, among people living within 150 km of a Chinese-built rail line, the share of people with positive views toward China increased from 62 percent during construction to 72 percent after construction was completed.

Nevertheless, concerns about indebtedness appear to be negatively impacting views of China. A 2019-2020 survey by Afrobarometer found that a majority of African respondents who were aware of Chinese loans and development assistance to their countries were concerned about indebtedness to China. Notably, when respondents were asked to evaluate the influence of Chinese economic activities in their country, the proportion of people saying Chinese activities have “some” or “a lot” of influence declined in 17 of 18 countries surveyed, relative to the previous 2014-2015 survey.

China appears to be trying to address some of these concerns – especially those relating to debt. At the 2018 Beijing Summit of the Forum on China-Africa Cooperation, Xi announced that all intergovernmental zero-interest loans would be forgiven for least-developed African countries that have diplomatic relations with China. Amid the Covid-19 pandemic, China joined other G-20 countries in April 2020 in suspending debt payments through the end of 2020 for the world’s poorest countries. One month later, Xi announced China would forgive African countries’ interest-free loans. While interest-free loans account for less than 5 percent of Africa’s debt to China, the move was seen as an important signal of support.

The post How Are Foreign Rail Construction Projects Advancing China’s Interests? appeared first on ChinaPower Project.

Proposition 1

The U.S.-China relationship can best be described as a “new Cold War.”

November 19, 3:00 pm – 4:15 pm EST

FOR: Hal Brands
Henry A. Kissinger Distinguished Professor of Global Affairs
Johns Hopkins School of Advanced International Studies (SAIS)

AGAINST: Melvyn Leffler 
Edward Stettinius Professor of History Emeritus 
University of Virginia

Watch the debate here.

Proposition 2

“One country, two systems” in Hong Kong is dead.

November 24, 9:00 am – 10:15 am EST

FOR: Daniel Russel
Vice President, International Security and Diplomacy, Asia Society Policy Institute (ASPI); former Assistant Secretary of State for East Asian and Pacific Affairs

AGAINST: Regina Ip
Legislator and Member of Hong Kong’s Executive Council

Watch the debate here.

Proposition 3

China will exploit the COVID-19 pandemic to shift the geopolitical balance of power in its favor.

December 3, 9:00 am – 10:15 am EST

FOR: Yan Xuetong
Dean, Institute of Modern International Relations
Tsinghua University

AGAINST: Aaron Friedberg
Professor of Politics and International Affairs
Princeton University

Watch the debate here.

Proposition 4

Within the next five years, China will use significant military force against a country on its periphery.

December 9, 4:00 pm – 5:15 pm EST

FOR: Oriana Skylar Mastro
Center Fellow, Freeman Spogli Institute for International Studies, Stanford University
Foreign and Defense Policy Fellow, American Enterprise Institute (AEI)

AGAINST: M. Taylor Fravel
Arthur and Ruth Sloan Professor of Political Science, and Director, Security Studies Program
Massachusetts Institute of Technology

Watch the debate here.

Keynote Remarks and Proposition 5

Keynote Remarks by Rep. Rick Larsen

December 15, 10:30 am – 11:00 am EST

Proposition 5: Selective U.S.-China economic decoupling will set back China’s emergence as a global high-tech leader.

December 15, 11:00 am – 12:15 pm EST

FOR: Matthew Turpin
Visiting Fellow
The Hoover Institution

AGAINST: Rebecca Fannin
Founder
Silicon Dragon Ventures

Watch the keynote remarks and debate here.

The post China’s Power: Up for Debate 2020 appeared first on ChinaPower Project.