China's International Projection in the Xi Jinping Era: An Economic Perspective [1st ed.] 9783030542115, 9783030542122

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SPRINGER BRIEFS IN ECONOMICS

Lorenzo Bencivelli · Flavia Tonelli

China’s International Projection in the Xi Jinping Era An Economic Perspective

SpringerBriefs in Economics

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Lorenzo Bencivelli • Flavia Tonelli

China’s International Projection in the Xi Jinping Era An Economic Perspective

Lorenzo Bencivelli Bank of Italy Rome, Italy

Flavia Tonelli Bank of Italy Rome, Italy

ISSN 2191-5504 ISSN 2191-5512 (electronic) SpringerBriefs in Economics ISBN 978-3-030-54211-5 ISBN 978-3-030-54212-2 (eBook) https://doi.org/10.1007/978-3-030-54212-2 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2020 This work is subject to copyright. All rights are solely and exclusively licenced by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Abstract

Since the beginning of his presidency, Xi Jinping has gradually reoriented foreign policy in order to further Chinese interests worldwide. Beijing has significantly increased its international presence on various fronts, often alternating an assertive approach with a more cooperative one associated with the proposal for an “alternative model” of world economic cooperation. The external projection of the economy has steadily grown and diversified—witness China’s share of world exports, its export composition (now with greater value added), and the volume of foreign investment and international credit lines granted by Chinese financial institutions. This evolution, however, must contend with China’s incomplete transformation into a market economy, evident in the continuing role of the state in economic decisions (including the leveraging of public companies and banks), which represents a source of tension with China’s major trading partners.

v

Contributors

A. Coco Bank of Italy, at the time of the preparation of this work, financial attaché seconded to the Embassy of Italy in Pretoria. R. De Marchi Bank of Italy, at the time of the preparation of this work, deputy delegate seconded to the Delegation of Italy in Tokyo. A. Furgeri Bank of Italy, at the time of the preparation of this work, financial attaché seconded to the Embassy of Italy in New Delhi. M. Ghirga Bank of Italy, International Economics and Relations Department. Formerly Managing Director at the Asian Development Bank representing the European Constituency. P. Ginefra Bank of Italy, at the time of the preparation of this work, financial attaché seconded to the Embassy of Italy in Singapore. A. Giraudo Institut Supérieur de Gestion—Paris. S. Iezzi Bank of Italy, at the time of the preparation of this work, financial attaché seconded to the Embassy of Italy in Cairo. S. Longoni Bank of Italy, at the time of the preparation of this work, financial attaché seconded to the Embassy of Italy in Abu Dhabi. G. Majnoni d’Intignano Bank of Italy, at the time of the preparation of this work, delegate seconded to the Bank of Italy Delegation in New York. D. Marconi Bank of Italy, International Economics and Relations Department. A. Marra Bank of Italy, at the time of the preparation of this work, delegate seconded to Bank of Italy Delegations in London. I. Musu University of Venice Ca ‘Foscari. E. Sales Bank of Italy, at the time of the preparation of this work, financial attaché seconded to the Embassy of Italy in Beijing. R. Tartaglia Polcini Bank of Italy, at the time of the preparation of this work, financial attaché seconded to the Embassy of Italy in Berlin. G. Trebeschi Bank of Italy, at the time of the preparation of this work, delegate seconded to the Italian General Consulate in San Paolo.

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Contributors

A. Zanotti Bank of Italy, at the time of the preparation of this work, delegate seconded to the Italian General Consulate in Istanbul. A. Zucchini Bank of Italy, at the time of the preparation of this work, financial attaché seconded to the Embassy of Italy in Moscow.

Contents

1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 4

2

China Before Xi Jinping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5 8

3

China in the Global Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 The Current Economic Strategy . . . . . . . . . . . . . . . . . . . . . . . 3.2 The Belt and Road Initiative . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 The Internationalization of the Renminbi . . . . . . . . . . . . . . . . 3.4 China and the COVID-19 Outbreak . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . .

9 9 23 28 31 33

4

US–China Relations Under the Trump Presidency . . . . . . . . . . . . 4.1 The Origin of the Trade Tensions Between Beijing and Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 US Requests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 Private Sector Positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

.

37

. . . . .

37 41 42 44 46

Economic and Political Equilibria in East and South Asia . . . . . . . . 5.1 South-East Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 China’s Growing Influence in East Asia: The Implications for Japan’s Economy and the Policy Responses . . . . . . . . . . . . . 5.3 India’s Impatience with Chinese Activism . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

47 47 50 55 60

Central: Western Asia and the Middle East . . . . . . . . . . . . . . . . . . 6.1 Russia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 Iran, Turkey, and the Third BRI Corridor . . . . . . . . . . . . . . . . .

61 61 63

5

6

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Contents

6.3 The Middle East . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 The Southern Mediterranean . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

65 67 70

7

China in Sub-Saharan Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

71 78

8

Investments in Latin America . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

79

9

China and the UK: End of the Golden Era? . . . . . . . . . . . . . . . . . .

83

10

Europe’s Position: The Desire for Cooperation and the Need for Protection of Sensitive Sectors . . . . . . . . . . . . . . . . . . . . . . . . . . 10.1 Relations Between Germany and China . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

87 93 96

11

Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

Abbreviations

ADB AIIB APEC ASEAN ASEM BIA BoC BRI BRICS CBRC CCP CDB CEA CEE CELAC CFIUS CHEC CM2025 COSCO CPEC CPTTP CSCEC CSIS DAC SDR EAEU ECCC EFTA EU EXIM

Asian Development Bank Asian Infrastructure Investment Bank Asian Pacific Economic Cooperation Association of Southeast Asian Nations Asia–Europe Meeting Bilateral Investment Agreement Bank of China Belt and Road Initiative Brazil, Russia, India, China, and South Africa China Banking Regulatory Commission Chinese Communist Party China Development Bank Council of Economic Advisers Central and Eastern Europe Comunidad de Estados Latinoamericanos y Caribeños Committee for Foreign Investment in the United States China Harbour Engineering Company China Manufacturing 2025 Key Area Technology Roadmap China Ocean Shipping Company China–Pakistan Economic Corridor Comprehensive and Progressive Trans Pacific Partnership China State Construction Engineering Corporation Center for Strategic and International Studies Development Assistance Committee of the OECD Special Drawing Right Eurasian Economic Union European Chamber of Commerce in China European Free Trade Association European Union Export–Import Bank of China xi

xii

FDI FGC FIRRMA FoCAC GCC ICBC ICT IMF ITIC JBIC JOIN KUKA MIC2025 MIIT MoF National IC Fund OECD PBoC QUAD RCEP RCIF PRC R-QFII SAARC SCO SOE SSA SWIFT TANAP TAP TFEU TPP UN UNCTAD USTR WTO

Abbreviations

Foreign Direct Investment Fujian Grand Chip Investment Fund Foreign Investment Risk Review Modernization Act Forum on China–Africa Cooperation Gulf Cooperation Council Industrial and Commercial Bank of China Information and Communication Technologies International Monetary Fund Information Technology Industry Council Japan Bank for International Cooperation Japan Overseas Infrastructure Investment Corporation for Transport and Urban Development Keller Und Knappich Augsburg Made in China 2025 Ministry of Industry and Information Technology Ministry of Finance National Integrated Circuit Investment Fund Organization for Economic Cooperation and Development People’s Bank of China Quadrilateral Security Dialogue Regional Comprehensive Economic Partnership Russia–China Investment Fund People’s Republic of China Renminbi Qualified Foreign Institutional Investor Program South Asian Association for Regional Cooperation Shanghai Cooperation Organization State Owned Enterprise Sub-Saharan Africa Society for Worldwide Interbank Financial Telecommunications Trans Anatolian Gas Pipeline Trans Adriatic Pipeline Treaty on the Functioning of the European Union Trans Pacific Partnership United Nations United Nations Conference on Trade and Development United States Trade Representative World Trade Organization

Chapter 1

Introduction

Since the beginning of his presidency, Xi Jinping has gradually reoriented Chinese foreign policy to complement the country’s economic initiatives with more effective diplomatic action. This offers a way to read both China’s strengthened global projection, which combines an assertive approach1 with a more cooperative one, and the proposal for an “alternative model” of international cooperation centering on infrastructures, economic development, and controlled market liberalism. At the same time, China is now the largest contributor of human and financial resources to UN peacekeeping missions. It has also mounted an extensive diplomatic effort to attain positions of power in international agencies, effectively gaining the top spots in four United Nations organizations2 plus institutions in many different fields, including financial intelligence and money laundering. Miller (2005) defines “superpower” as a country capable of projecting its influence all over the world, possibly in multiple regions at once, so that it can legitimately aspire to the status of global hegemon. In explaining China’s real intentions, Skylar Mastro (2019) argues that although well equipped, the Chinese ruling class has no such ambition. Unlike established superpowers past and present, China has made only limited use of a global military presence,3 preferring economic and

We thank G. Andornino, P. Catte, G. Gabusi, G. Parigi, and G. Veronese for invaluable comments and P. Paiano for help with the graphics. All remaining errors are our own. The opinions expressed do not necessarily reflect those of the institutions with which the authors are affiliated. 1 For example, in the case of the South China Sea, where China has taken a particularly hard-nosed stance in sovereignty disputes over islets and territorial waters (Hass 2017). 2 Chinese citizens currently head the International Telecommunication Union, the International Civil Aviation Organization, the U.N. Industrial Development Organization, and the Food and Agriculture Organization. 3 Nevertheless, the drive to modernize the military arsenal, including missile systems, has been significantly stepped up under the Xi presidency (Lague and Kang Lim 2019).

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2020 L. Bencivelli, F. Tonelli, China’s International Projection in the Xi Jinping Era, SpringerBriefs in Economics, https://doi.org/10.1007/978-3-030-54212-2_1

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1 Introduction

financial means, comprising among other things significant central government influence over trade flows and outward foreign direct investment. The external projection of the Chinese economy has increased steadily and become ever more diversified, as can be seen from the trend in the portion of world trade consisting in Chinese exports, the improvement in their composition in terms of value added (Hallward-Driemeier and Nayyar 2018), and the volume of foreign direct investment and of international credit lines granted by Chinese financial institutions. These developments are set against the backdrop of only partial transformation into a market economy. It is no coincidence that the “contradiction” between the growing weight of China in global markets and the continuing role of the state in directing economic decisions (in part through the leveraging of public companies and banks) has given rise to growing tensions with business partners. In Europe, the increase in Chinese direct investment has prompted debate on the desirability of subjecting foreign acquisitions, especially those from non-likeminded countries and in sensitive sectors, to prior screening. The emergence of China as a global power calls the balances created after the Cold War into question. The USA, following the slogan “America first,” has adopted a more confrontational stance toward China, questioning trade agreements and imposing import tariffs. Nor has the truce resulting from the “Phase One Deal” dissipated Washington’s concern that China may catch up with the USA in the domain of technology. Many observers in Washington believe that Chinese hightech firms have already taken the lead in artificial intelligence, quantum computing, and other cutting-edge sectors. This has moved American policy makers to increase spending on research and development in order to improve high-tech capability. It has also induced a less accommodating stance on commercial and trade policies, which has widened the distance between the two technological superpowers and could very likely lead to a significant decoupling in terms of international standards and value or supply chains. These initiatives have been accompanied by a retreat from some areas of traditional American influence, such as the defense of globalization, multilateralism, and market liberalism. At the same time, China has presented itself as a strong supporter of the globalized economy, as is demonstrated by Xi's participation in the Davos World Economic Forum in January 2017. The Chinese projection in the Asian region is viewed with increasing concern by the other Asian powers. Up to now, however, the countries on the South China Sea and the Indian Ocean have offered differentiated, uncoordinated responses. Japan has tried to restore bilateral relations within a set of shared rules, while India has oscillated between impatience with the erosion of its own sphere of influence and recognition of the need to cooperate. For the countries of Southeast Asia in general, the challenge is to achieve an elusive balance between defense of national interests and increasingly marked commercial integration with China. Building the so-called new silk road—formally the Belt and Road Initiative (BRI)—certainly responds to the real need to enhance the still insufficient infrastructure of Eurasia and East Africa, with potentially positive effects on trade flows and economic development in those regions. At the same time, the BRI also represents one of the main tools for furthering China’s international affirmation,

1 Introduction

3

and it is increasingly read as such even by China’s partners in the undertaking. In a work on global perceptions of the BRI, Garcia-Herrero and Xu (2019) highlight a generally positive reception, although negative feelings prevail in some countries.4 In particular, the initial enthusiasm aroused by the initiative has given way in a number of cases to a certain skepticism about the risks of submitting to China’s excessively onerous requests. Particularly worrying are vulnerabilities that international institutions like the International Monetary Fund have sometimes highlighted, involving the financial and environmental sustainability of the investments planned, as well as possible noncompliance with international standards and best practices. The international relations ushered in by the BRI involve stronger trade and investment ties, but China's partners perceive the situation as highly asymmetric: centralized management and strong state support for the Chinese companies involved is combined with severe restrictions on foreign investors in China. The European Commission, for instance, has described China not only as a cooperation partner with negotiating objectives aligned with those of the EU but also as an economic competitor and, more than that, a “systemic rival that promotes alternative governance models” (EC 2019). In this context, the most advanced industrial countries have emphasized the possible transfer of technological know-how and the substantial lack of a level playing field, which in the long term could jeopardize their competitive position. On the other hand, the transition of China toward a model that is driven by consumption and technological innovation will open up extraordinary commercial opportunities for multinational corporations. Finding a balance between the advantages and the risks that derive from these transformations is now the main challenge in diplomatic, financial, and commercial relations with the People's Republic of China. This work presents the results of an extensive survey involving Bank of Italy delegates and financial attachés posted to general consulates, Italian embassies, and Bank of Italy delegations in thirteen different countries. The idea is to illustrate the state of China’s economic and trade relations from the perspective of those countries. The work is structured as follows. The first section traces the development of the Chinese economy starting with the economic reforms of the 1980s. The second section notes some distinctive elements of China’s positioning in the global economy. The third section describes the state of relations between the USA and China under the Trump presidency. Then, in the fourth section, there is an account of diplomatic and economic equilibria in East Asia, Central and Southern Asia, the Middle East, Africa, and Latin America. The last section focuses on relations between China and the main European countries.

4 The study is based on the content of articles drawn from an international database that includes the national press of 132 countries but not social media.

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1 Introduction

References EC (European Commission) and High Representative of the Union for Foreign Affairs and Security Policy (2019) EU-China – A strategic outlook, Joint Communication to the European Parliament, the European Council and the Council, Mar 2019 Garcia-Herrero A, Xu J (2019) Countries’ perceptions of China’s belt and road initiative: a big data analysis. SSRN Electronic Journal Hallward-Driemeier M, Nayyar G (2018) Trouble in the making? The future of manufacturing-led development. The World Bank Group, Washington, DC Hass R (2017) The trajectory of Chinese foreign policy: from reactive assertiveness to opportunistic activism. The Asan Forum, 4 Nov 2017. http://www.theasanforum.org/the-trajectory-of-chi nese-foreign-policy-from-reactive-assertiveness-to-opportunistic-activism/ Lague D, Kang Lim B (2019) New missile gap leaves U.S. scrambling to counter China, Reuters, April. https://www.reuters.com/investigates/special-report/china-army-rockets/ Miller L (2005) China an emerging superpower? Stanford J Int Relat 6(1), Winter Skylar Mastro O (2019) The Stealth Superpower - how China hid its global ambitions. Foreign Affairs, Jan/Feb

Chapter 2

China Before Xi Jinping

Data from the Chinese statistical institute show that per capita income grew at an average annual rate of 3.7% from 1952 to 1977 and more than twice that fast over the next 40 years. The surge came thanks to the economic reform program initiated in the 1980s by Deng Xiaoping, who would be China’s most powerful leader for 20 years.1 According to Zhu (2012), in the earlier period economic growth was driven primarily by the accumulation of physical and human capital and not by increases in their productivity (Table 2.1); in the 30 years after 1978 the opposite was true, efficiency gains now explaining more than three-quarters of the growth in output. The first economic reforms of the Deng era were in agriculture with two fundamental interventions. One was intended to increase food prices (previously held artificially low), and the other allowed farmers to manage their plots independently, thus bypassing the rural municipalities. In the new system, each farmer was assigned a production quota to be delivered to the state at an “official” price but could sell any surplus at market prices. The effect on agricultural productivity was extraordinary: over 5 years, Zhu estimates that the sector grew at an average annual rate of 5.6%; above all, the market made its appearance in China without calling the socialist system into question.2 The gradual introduction of elements typical of the capitalist

With the contribution of I. Musu 1 Deng Xiaoping was never secretary general of the Chinese Communist Party (CCP) or president of the People’s Republic; his power derived from his chairmanship of the Central Military Commission. The first CCP secretary general who did not owe his appointment to Deng’s influence is Xi Jinping, who was named to head the party at the end of 2012. 2 The reforms were introduced gradually, with the experimental establishment of special zones for their application. In the case of the dual price system, the test province was Anhui, a rural area northwest of Shanghai.

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2020 L. Bencivelli, F. Tonelli, China’s International Projection in the Xi Jinping Era, SpringerBriefs in Economics, https://doi.org/10.1007/978-3-030-54212-2_2

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Table 2.1 Chinese economic growth and its determinants

Period 1952– 1978 1978– 2007 1952– 1978 1978– 2007

Average annual growth (%) Per capita Labor force GDP participation rate 2.97 0.11 8.12

0.57

Capital/ output ratio 3.45

Average human capital 1.55

Total factor productivity 1.07

0.04

1.18

3.16

Contributions to per capita GDP growth 100 3.63 116.15

52.25

72.03

100

14.55

77.89

7.05

0.51

Source: Zhu (2012)

economy has always been interpreted as a sort of modernization, not the abandonment, of the ideology of “socialism with Chinese characteristics.” Efficiency gains in the primary sector allowed for a substantial increase in food production (almost 50% in 5 years) and a progressive transfer of resources to the secondary sector, triggering the real industrialization of China. Meanwhile, the gradual opening of the coastal cities in the special economic zones to foreign investment resulted in an influx of capital, technology, and entrepreneurship that laid the foundations for China’s subsequent industrial takeoff. During the 1990s, after the collapse of the Soviet bloc and the clashes in Tiananmen Square,3 a second wave of reforms was enacted under the political leadership of Secretary General Jiang Zemin and his premier and right-hand man, Zhu Rongji. In order to reallocate resources to the more productive sectors, the government began the reform of public companies, or state-owned enterprises (SOEs). Between 1995 and 2000, about 40% of SOE employees were dismissed without any social safety net: their reabsorption was delegated to the private sector. However, the reduction of the state presence came only in the sectors that the CCP deemed not strategic for the management of the economy; the process of rationalization did not concern the industries toward the top of the value chain (energy, metallurgy, iron and steel, chemicals, and the like). In 2001, China joined the World Trade Organization (WTO). At the end of this second wave, many Western analysts began to believe that China had definitively set off on the path to “Western” capitalism. But this thesis stemmed from a confusion between the CCP as a political organization and its ideology, communism. That is, the loosening of the meshes of the latter did not necessarily imply a decline in the power of the former (Coase and Wang 2012). The party’s growing recognition of the importance of private entrepreneurship did not diminish the leading role of the state and the party in setting social, economic, and 3 The protest movement that culminated at Tiananmen actually touched many Chinese cities; the reference to Tiananmen is only for simplicity.

2 China Before Xi Jinping

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ideological priorities. The relationship between the party and the private sector was thus defined as “subordinate closeness” and codified in the theory of the “Three Represents,” whereby the CCP must support the most advanced productive social forces (first represent), and among them specifically entrepreneurs; the most advanced forces of culture (second represent); and the fundamental interests of the majority of the population (third represent).4 Jiang Zemin was succeeded by Hu Jintao as secretary general from 2002 to 2012, flanked by Wen Jiabao as premier. In today’s dominant if perhaps misleading narrative, that decade is described as a time of growing imbalances due to government inaction and the progressive erosion of the party’s economic and social leadership.5 Outside China, however, the decade was increasingly seen as the period in which the liberal social reforms of Hu’s predecessors gradually came to be accompanied by a more socialist approach to economic policy, with greater attention to the needs of the population through more substantial use of the SOEs (Holbig 2009). Yet, both judgments fail to take account of the context in which Hu and Wen governed. The “liberalizing” policies of the late 1990s had heavy social consequences which the Chinese welfare system was unable to cope with. In 1994, tax collection was centralized, while public services continued to be provided mainly by local governments, generating enormous financial imbalances for local authorities. Further, at the turn of the century the banking system began to show signs of suffering from impaired assets and uncollectable credits, mostly in connection with inefficient management of SOEs. Finally, environmental problems could no longer be ignored after years of sustained industrial growth in the absence of any framework of territorial protection. All of this was compounded, in 2008–2009, by the global financial crisis, which required extraordinary economic policy measures. During the decade the pension system was extended to rural areas, compulsory education was instituted, and the health coverage of the population was expanded (OECD 2017). In 2008, the State Environmental Protection Agency was elevated to ministerial rank, bringing its director into the Council of State (i.e., the cabinet). The consequences for governmental action were immediate, with the promulgation of a series of laws and regulations and legislative adoption of the concept of “circular economy.”6 Between 1999 and 2006, the Chinese government also took steps to recapitalize the overburdened banking system by 40–50% of total assets (Ma 2006), transferring uncollectable loans at face value to some management companies capitalized with funds from the central government, thus charging the entire 4

First set forth by Jiang Zemin and endorsed by the CCP at the 16th Congress in 2002. Among Chinese bloggers and intellectuals, Hu Jintao is often referred to as 无为 (wuwei, “do not”) and his two 5-year terms as the “lost decade” (失落的十年, shiluo de shi nian). For further information, see Li and Cary (2011). 6 Article 4 of the Clean Production Promotion Act that came into force in 2003 provides that all state administrations (from the county to the State Council) include environmental protection and rational use of resources in their economic planning. The Circular Economy Promotion Act of 2008 came into force in January 2009. 5

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operation to general taxation at a cost estimated at around 30% of GDP. Finally, given China’s now heavy dependence on international trade, in the wake of the financial crisis the GDP growth rate fell by four percentage points in 2009, causing 23 million migrant workers to exit the labor market.7 According to Musu (2018), slogans on “scientific development” and “harmonious society” notwithstanding, Hu failed to produce a long-term program capable of winning the support of the people. Rather, the weakness of the program was blamed for the spread of corruption and economic imbalances; his leadership gave way to attempts at the ideological restoration of Maoism, manifested in an explicitly critical attitude on the part of some party leaders.

References Coase R, Wang N (2012) How China became capitalist. Macmillan Holbig H (2009) Remaking the CCP’s ideology: determinants, progress and limits under Hu Jintao. J Curr Chin Affairs 38(3):35–61 Li C, Cary E (2011) The last year of Hu’s leadership: Hu’s to blame? China Brief, 11(23). The Jamestown Foundation, Dec 2011 Ma G (2006) Sharing China’s bank restructuring bill. China World Econ 14(3):19–37 Musu I (2018) Eredi di Mao, Economia, società, politica nella Cina di Xi Jinping, Donzelli editore OECD (Organization for Economic Cooperation and Development) (2017) Sharing the benefits of growth by providing opportunities to all. OECD Economic Survey: China, Thematic Chapter 2, pp 100–130 Zhu X (2012) Understanding China’s growth: past, present, and future. J Econ Perspect 26 (4):103–124, Autumn

7 Press conference of then Minister of Human Resources Yin Weiming, on the occasion of the Chinese People’s Political Consultative Conference in March 2009.

Chapter 3

China in the Global Economy

The political message conveyed by the 19th Congress of the Chinese Communist Party in 2017 was that if Mao Zedong was the helmsman who had enabled China to rise again after the century of humiliation and Deng Xiaoping the leader who had started the country’s economic development, Xi Jinping is the chairman who will assert its role in the world. As former Australian prime minister and prominent sinologist Kevin Rudd has observed, Xi’s worldview can be read through a schema consisting of 7 concentric rings: (1) the centrality of the CCP, (2) the integrity of the nation, (3) the search for a model of sustainable economic development, (4) the maintenance of border security, (5) regional hegemony, (6) the use of economic power to enlarge China’s sphere of influence, and (7) partial reform of the global order (Rudd 2018). This reading interprets the consolidation of the central role of the CCP (and of the secretary general at its helm) as an instrument for the attainment of China’s policy objectives, both internal (2–4) and international (5–7).

3.1

The Current Economic Strategy1

As the 2010s got under way, the development model instituted by the economic policies of previous years was beginning to lose its propulsive force and accumulating significant environmental, social, and financial risks. With the global financial crisis, exports, the main engine of growth along with investment since the turn of the century, were quickly supplanted in this role by still faster physical capital formation. The period up to 2009, in fact, had been characterized by an excess of domestic savings, reflected in a growing current account surplus that peaked in 2007 at 10% of GDP. There were several contributing factors, such as the undervaluation of the

1

With the contribution of E. Sales.

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2020 L. Bencivelli, F. Tonelli, China’s International Projection in the Xi Jinping Era, SpringerBriefs in Economics, https://doi.org/10.1007/978-3-030-54212-2_3

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renminbi, distortions in the prices of goods and productive factors, and financial repression.2 Private consumption fell from 47% of total expenditure in 2000 to 36% in 2007 (Zhang 2016). The second period, which began with the global financial crisis leading to the collapse of world trade, saw a sharp correction of the Chinese trade balance. In the wake of the macroeconomic stimulus introduced to counter the collapse in foreign demand for Chinese products, investment rose from 39% to 45% of total expenditure. Many of China’s inherited financial weaknesses were aggravated precisely as a result of this policy: at the end of 2008, the Chinese government had committed funds amounting to 12.5% of GDP (4000 billion renminbi, equivalent at that time to $587 billion), to be spent in 27 months and earmarked above all to strengthening infrastructure (Box 3.1). Box 3.1 The Maxi-Stimulus of 2009 The fiscal stimulus of 2008–2009 was designed to offset the decline in foreign demand by expanding domestic demand. Just over a quarter of the resources employed can be traced back to central government funding, mostly for the extension of the railway network (in particular, high-speed trains) and for reconstruction in the areas hit by the Sichuan earthquake of 2008; the rest was disbursed through local governments, SOEs, and the banking system. Thanks to significant relaxation of the rules for approving infrastructure development plans, local governments acted aggressively, owing in part to the sense of urgency expressed by Secretary General Hu.3 Given their own limited fiscal capacity, provinces and municipalities took advantage of the RMB200 billion raised by a Ministry of Finance bond issue in March 2009, while the People’s Bank of China (PBoC) and the China Banking Regulatory Commission (CBRC) encouraged specific financial vehicles. In the general process of simplification of the regulations for bond issuance, the proceeds of building permits and some other items, such as forecast tax revenue, were admitted as collateral. While the former were reflected in powerful expansion of activity in the real estate sector, the latter favored a rapid increase in local administration debt, which (including indirect liabilities and guarantees) soared from RMB10,720 billion at the end of 2010 to RMB17,880 billion in 2013 and RMB24,000 billion in 2014 (26%, 30%, and 37% of GDP, (continued)

2 Financial repression is defined as a situation in which the economic policy stance and regulations push the return on savings below the rate of inflation, enabling financial intermediaries to lend to government and companies at subsidized rates and easing their repayment burden. 3 The financing of infrastructure is based on partnership between central government and local authorities, which must demonstrate sufficient financial capacity but also compete for the pool of central resources. Over the years, this mechanism has served to guarantee screening of the profitability of the initiatives financed both by central and by local government.

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Box 3.1 (continued) respectively).4 There was also a maturity mismatch, as assets intended to remunerate long-term capital were funded by short- and medium-term liabilities. Monetary policy supported this process throughout the period of fiscal stimulus. Bank credit increased by over RMB21,700 billion in the three years starting in 2008, and bond issues by RMB972 billion. According to our calculations, these figures come to about 10,700 and 1000 billion in excess of what they would have been following the pre-crisis trend.5 Over the same period, the M2 monetary aggregate expanded at an annual rate of 17%. This policy made it possible to maintain an economic growth rate near 10%, despite the negative contribution of around 4 percentage points from net exports (Fig. 3.1). The economy created 12 million jobs in 2009 and 13.6 million the following year. According to some estimates, the fiscal stimulus generated financing of the economy for 27% of GDP from 2009 to 2011 (a quarter of it concentrated in the infrastructure sector) and increased investment to 47.3% of total expenditure (Wong 2011). From a perspective different from national accounting, however, fiscal policy produced some financial distortions. One was the emergence of vehicles for local government financing that accounted for some 30% of bank credit in 2009 and 40% in 2010 (when they were banned, in 2014, it was estimated that China had over 10,000 financial companies of this type). Typically, their assets consist of shares in public companies, building permits, and preemptive rights to future tax revenue. Capital is used as collateral for bank loans (often from local banks whose executives are emanations of the local section of the CCP) to finance infrastructure (Fig. 3.2; Lu and Sun 2013). Aside from the maturity mismatch (and the resulting liquidity strains on the originating banks), another unwanted effect is the overvaluation of building permits, their prices kept artificially high in order to contain the leverage ratio and reduce—at least apparently—the overall indebtedness of local administrations and their financial vehicles. Combined with the particular Chinese land ownership regime,6 this triggered frenzied real estate development in many cities, especially those in the third and fourth tiers. (continued)

4

In August 2015, the State Council set a ceiling of RMB16,000 billion on local government debt (the sum of existing direct liabilities, RMB15,400 billion, plus the share guaranteed under the current budget law, RMB600 million). The rest was considered contingent, i.e., the debt of SOEs for which no direct guarantee is provided by local governments, although they are quite likely to have to intervene to cover possible losses. 5 Simple interpolation, log-linear for bank credit and quadratic for bond issuance, assuming continuation of the dynamics of the pre-crisis period. 6 In China, the land is owned by the state, and no legal act can transfer ownership to private individuals. Agricultural land can be inherited for the cultivation or construction of a residence as

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Box 3.1 (continued) The off-balance-sheet activity of the local authorities was accompanied by the development of an informal credit sector, which prospered initially by financing entities whose access to credit was rationed but then turned into one of the main tools for circumventing the regulatory constraints on banking (IMF 2014). Trust funds and other entities outside the regulatory framework made loans to a few productive sectors (mostly in heavy industry), sharply limiting the diversification of their portfolios, which are typically covered by a low level of capitalization. The explosion of off-balance-sheet activity is reflected in the statistics on Total Social Financing7 (Fig. 3.3), which shot up by roughly 20 percentage points of GDP per year in 2008 and 2009 thanks first to the expansion of bank debt, gradually replaced by off-balance-sheet financing (shadow banking). A central role in aggravating vulnerability is still played today by the system of implicit guarantees, which has allowed many intermediaries to distribute financial products among savers thanks to the widespread belief that the central government and its local branches would not allow the borrowers to fail. The fiscal stimulus exacerbated the problem of excess capacity in many sectors, especially heavy industry and other sectors dominated by SOEs, which were traditionally also used as a system of social protection. Not only does this overcapacity eat into the profitability of investments and the ability to generate sufficient cash flow to repay the loans (hence producing bad debts for banks); it also impacts on environmental and market conditions, favoring deflationary dynamics. In the past, the Chinese government alleviated the negative effects by stimulating exports, thanks in part to entry into the WTO at the turn of the century. Nowadays, this role is also played by the Belt and Road Initiative launched by Xi Jinping in 2013, which will also serve to use excess production. There is no precise measure of the extent of overcapacity, but various symptoms have been observed, such as the uninterrupted fall in producer prices from 2012 to 2016 and widespread under-utilization of production facilities. The Asian Development Bank (ADB) estimates that in 2013 capacity utilization in the steel, agrochemical, cement, and road transport sectors fell below 75% (Biliang and Zhuang 2015).

long as there are resident family members. The plots adjacent to urban agglomerations can be declared buildable; in that case, the local government cedes, against payment, sixty-year usage rights, on the basis of which residential or commercial construction is carried out. Only recently did some twenty-year leases, in Ningbo prefecture, expire, being renewed after payment of a premium equal to 20% of the market value of the properties. 7 This is broken down into bank credit (including foreign credit), off-balance-sheet financing (by trust funds, loans from the non-financial sector and guarantees), and other financing.

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15.0 12.5 10.0 7.5 5.0 2.5 0.0 -2.5 -5.0 00

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Consumpon Net exports

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Investments GDP y-o-y growth

Fig. 3.1 GDP growth and contributions to growth (percentage points). Source: authors ‘elaboration on National Bureau of Statistics and CEIC data

Fig. 3.2 Financial vehicles of local governments. Source: authors’ elaboration based on Lu and Sun (2013)

The 12th five-year plan (2011–2016) made rebalancing a major element of economic programs. The authorities specified that growth would have to be led increasingly by domestic consumption and technological innovation, gradually supplanting investment and exports. Although private consumption made the largest contribution to output growth already in 2014, its share of total expenditure has recovered only a third of the fall registered in the early 2000s. The high private saving rate (22–25% of gross national product between 2007 and 2017) made it easy to finance an excess of physical capital, whose yield declined progressively.

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Total inancing to the economy: stocks (percentage points) Total inancing to the economy: lows (percentage points) 240

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Bank credi t Off-balance-sheet financing Bond financing Capital markets

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Bank credit Off-balance-sheet financing Bond financing Capital markets

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Fig. 3.3 (a) Total financing to the economy: stocks (percentage points); (b) Total financing to the economy: flows (percentage points). Note: Stocks and flows in relation to nominal GDP; offbalance-sheet financing includes letters of guarantee, loans between non-financial entities brokered by a bank (entrusted loans), and loans disbursed by trust funds. Source: authors ‘elaboration on People’s Bank of China and CEIC data

The inefficient allocation of resources was accompanied by the slowdown in economic growth and a massive increase in the debt of the SOEs, which is ultimately guaranteed by the public budget (at the end of 2017, total debt in China came to 256% of GDP, 100 percentage points more than in 2007) (Lund et al. 2018). The decline in the return to investment has heightened the risks to financial stability. Reduction of overall debt and prevention and containment of financial risks were made national priorities at the end of 2016. The result was a regulatory clampdown that has had a considerable impact on the major financial operators and on China’s financial structure generally. However, no reforms have been enacted to alter the factors underlying the buildup of risk (SOEs’ governance, fiscal transfers between central and local governments, system of incentives for public officials, transparency and protection for savings and investment, etc.). In the Chinese model of governance, the system of incentives for local governments to develop their economies continues to play a decisive role. This, together with highly problematic regulation of the financial sector, has led local and provincial officials to take decisions based on short-term considerations (Xiong 2018). Since the end of 2018, the Chinese government has progressively adjusted its economic policy orientation, somewhat deemphasizing the need to control financial vulnerabilities. In a less favorable international context, deleveraging would have caused a significant slowdown in capital accumulation and GDP growth. Instead, the government adopted a more expansive fiscal policy with an increase in infrastructural investment and a moderate easing of the tax burden on households. A key element in the rebalancing process is the program Made in China 2025 (MIC2025; see Box 3.2), which is intended to spur the production system to achieve technological supremacy in ten crucial sectors by 2050. This ambitious program is highly detailed, specifying the progress to be made in each individual sector. The functions connected with its execution are distributed among the various

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government bodies in very close detail, involving five ministries and a series of specialized agencies and all under the supervision of the State Council. SOEs and the state banks are also involved, provided with a range of financial instruments and tax benefits. To speed up the formation of an independent Chinese system of research and development capable of producing the required innovation in the sectors identified, the authorities have incentivized the acquisition of foreign technology by China’s major industrial entities. The centralized nature of the MIC2025 program could have a significant impact on the degree of competition in domestic and global markets, both through a tendency to impose inadequately remunerated technology transfers and through its effect on international value chains. Further, the concentrated allocation of resources to the industries targeted by the plan could lead to situations of excess capacity, favoring new frictions with China’s economic partners and exacerbating already existing commercial tensions. Finally—and this is perhaps of greatest concern to many Western governments—there is the concrete possibility that over the course of a few decades the global economy will be faced with a substantially self-sufficient Chinese technological system that has its own standards. On the other hand, the current trade tensions with the USA have only heightened the Chinese sense of urgency in the drive for technological selfsufficiency. Box 3.2 Made in China 2025 Launched in 2015, “Made in China 2025” is a ten-year plan to strengthen manufacturing in high-value-added sectors. The government intends to reduce China’s dependence on foreign technology and, in a second stage, make the country a technology leader on international markets by mid-century. Thanks to strong top-down policy, the Chinese government seeks to integrate big data, cloud computing, and other technologies that characterize the fourth industrial revolution into global value chains and to direct national companies’ priorities more markedly toward quality, efficiency, sustainability, and R&D capacity. The plan lists a number of key objectives for the restructuring of the manufacturing sector, including manufacturing innovation and IT industry integration; the strengthening of the industrial base through the integration of production processes; the promotion of Chinese brands and the internationalization of production; and the development of environmentally sustainable production systems. The plan also aims at technological success in the ten key sectors of the economy: (1) information technology, (2) robotics and high-end numeric control machines, (3) aerospace, (4) maritime engineering, (5) railway engineering, (6) energy-efficient vehicles, (7) electrical equipment, (8) agricultural mechanization, (9) semiconductors and new materials, and (10) biopharmaceuticals and high-performance biomedical devices. (continued)

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Box 3.2 (continued) The MIC2025 plan differs from previous industrial modernization plans in the specific nature of its objectives, spelled out in documents such as the China Manufacturing 2025 Key Area Technology Roadmap (CM2025), published in 2015 by academics, technicians, and representatives of the industrial sector. The CM2025 affirms the objective of national selfsufficiency and indicates the shares of the domestic market that Chinese suppliers will have to reach in the years to come.8 The project, then, appears to be for import substitution as regards high-tech products and the establishment of state control of the industries operating in key sectors. If the central goal is to bridge the technology gap with the most advanced countries and maintain China’s competitive advantage over other emerging countries through automation, Chinese policies have been criticized by the industrial actors and governments affected.9 The top-down approach, substantial state subsidies, and restrictions on foreign investors typify an asymmetric economic environment, impervious to market forces. This jeopardizes China’s credibility with respect to the demand for reciprocity from many Western governments, including those of the EU.10 According to Wübbeke et al. (2016), in the initial phase of MIC2025, given the technology gap and Chinese dependence on foreign products, international industrial actors could even benefit from this drive for innovation; at a later stage, however, there is likely to be a narrowing of market opportunities for non-Chinese companies, due to the nationalistic imprint of the PRC’s economic policy. Support for domestic producers compounds the authorities’ traditional protectionist orientation (China has yet to present its draft regulation in accordance with the requirements of the WTO Agreement on Government Procurement). Developments in the medical equipment sector are emblematic: in addition to the usual difficulties faced by foreign producers in competing for public procurement, the government has compiled a list of domestic products to be promoted (which contains, among (continued) 8 One of the objectives is domestic production of 40% of the chips for mobile phones on the local market by 2025. The percentage set for industrial robotics is higher at 70%, and for renewable energy equipment 80%. 9 See, among others, ECCC (2017) and Wübbeke et al. (2016). 10 “China’s proactive and state-driven industrial and economic policies such as ‘Made in China 2025’ aim at developing domestic champions and helping them to become global leaders in strategic high-tech sectors. China preserves its domestic markets for its champions, shielding them from competition through selective market opening, licensing and other investment restrictions; heavy subsidies to both state-owned and private sector companies; closure of its procurement market; localisation requirements, including for data; the favouring of domestic operators in the protection and enforcement of intellectual property rights and other domestic laws; and limiting access to government-funded programmes for foreign companies” EC (2019).

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Box 3.2 (continued) others, X-ray and biochemical analysis equipment). Of the 218 products presented by 57 companies for inclusion in this list, 95 were selected, produced by 27 companies, all with solely Chinese capital11 (similar developments appear to have marked other sectors as well, including telecommunications, car batteries and electrical systems, and supplies for metro systems). The authorities also support Chinese companies through equity financing and subsidized loans, while domestic investment funds—such as the National Integrated Circuit Investment Fund (National IC Fund)—fund local companies directly. In addition, Wübbeke et al. (2016) contend that China has put in place a dual policy for international technical standards, which are apparently not to be adopted for some of the key MIC2025 technologies in order to hinder the presence of foreign operators in the domestic markets. In less strategic sectors or those where domestic producers already have technological leadership (such as 5G), China should be more open to the development of shared standards. The adoption of international standards ranges from 70% in basic technology down to 50% in the key sectors of the MIC2025. In the case of cloud computing and big data, compatibility is close to zero.12 Another complaint raised by foreign investors is the forced transfer of technology, know-how, and intellectual property in exchange for access to the Chinese market. The government’s tight control of cyberspace also affects the use of corporate digital applications, hinders data transfer, and exposes commercial information to government surveillance. Not only must the encryption codes used for companies’ sensitive data be disclosed, but the data themselves must be processed and stored on Chinese soil. The MIC2025 has channeled massive capital flows into industrial areas of primary interest and the development of smart technologies, through funds financed both centrally and locally. The National Emerging Industry Investment Guidance Fund, for example, is a government fund of RMB40 billion (€5.4 billion), while the National IC Fund reaches RMB139 billion (€19 billion). While the central government lays down the guidelines and sets the policy priorities, the concrete development of the plan is left to the local governments, which in order to benefit from the central subsidies mobilize additional resources for pilot projects of their own. This race to meet the targets set by the central administration could cause distortions in resource allocation and result in overcapacity compared to national objectives. In the (continued)

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All the products selected are Chinese-owned brands (ECCC 2017). In these two sectors, in addition to industrial considerations, a major factor is national security matters linked to the control of information flows. 12

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Box 3.2 (continued) field of robotics, for example, the German think tank Merics estimates that the provincial targets for 2020 already amount to something like six times the expected domestic demand. Furthermore, the Chinese companies to which these products should be addressed are often unprepared to apply advanced technology and have a largely unskilled workforce. These factors point to an industrial policy that depends chiefly on quantitative incentives, with little attention paid to the profitability of investments.13 Foreign direct investment (FDI), mainly in the form of acquisitions, is one of the instruments designed to accelerate China’s technological catch-up, through the appropriation of technologies and knowledge. Acquisitions of European companies in the key MIC2025 sectors have increased in recent years,14 stoking concerns on the part of Western governments that these operations are guided by political choices rather than by market rationale. Investment funds, often publicly owned, play an increasingly important role in the high-tech sector. These entities often present themselves as private companies, the state role being concealed behind an opaque corporate network that makes it difficult to identify the ultimate owner.15 The competitiveness of Chinese investors in Europe is also enhanced by subsidized loans from state banks. The systematic Chinese acquisition of technological know-how has prompted fears that in the long term the commercial position of leading European companies, particularly those operating in high tech, may be jeopardized. Publicly, the Chinese authorities have somewhat narrowed the scope of the MIC2025: according to Reuters, in the first five months of 2018 the Xinhua news agency reported more than 140 items relating to Made in China, but this number dropped to 0 in the period from 2 to 25 June.16 In October 2016, at a meeting between the European Chamber of Commerce in China (ECCC) and the Chinese Ministry of Industry and Information Technology (MIIT), the (continued) 13 An emblematic case of such distortion is the production of electric buses, global demand for which is estimated at 20,000 units a year, according to Oyuang Mingao, an expert in the sector for the Chinese People’s Consultative Conference. Substantial subsidies, fully covering production costs, brought the capacity of the Chinese bus industry to 20,000 vehicles a month (ECCC 2017). 14 According to the European Chamber of Commerce in China, over a third of Chinese investment in Europe in 2016 was in advanced industrial sectors, many of them included in the MIC2025 (ECCC 2017). 15 For example, Beijing Jianguang AM, which has acquired a Dutch technology company, is apparently headed by persons who answer directly to the Chinese State Council (Wübbeke et al. 2016). 16 Martina et al. (2018). Further, keying the literal translation of Made in China 2025 (中国 制造 2025) into the Xinhua agency’s search engine, for example, we get 74 occurrences in the first 5 months of 2018 and just 4 in the remaining 7 months.

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Box 3.2 (continued) importance of the CM2025 roadmap was minimized and the work was presented as an academic study with no real influence on central or local government decision making (ECCC 2017). According to the Wall Street Journal (Davis and Wei 2018), following the meeting between Trump and Xi at the G20 summit in Buenos Aires the Chinese government began preparations to replace the MIC2025 with an alternative, less protectionist plan more open to international investors. In a global scenario of burgeoning protectionism, the main tool available to Chinese economic diplomacy is the strong influence that the central government can exert on trade flows and FDI. This context highlights the difficulty of striking the right balance between state intervention in the domestic markets—keeping them protected from international competition and dominated by the SOEs—and the recurrent requests of economic and commercial partners for greater opening. Given the persistent inflow of FDI,17 China’s net international investment position is in surplus, with massive accumulation of foreign exchange reserves, which amounted to over $3.2 trillion at mid-year 2018 (Fig. 3.4a). Thanks to the greater openness to foreign financial investors, the share of portfolio investment in China has doubled since 2014, from around 10% to 20% of total liabilities. On the asset side, the official reserves diminished from nearly two-thirds of the stock of foreign assets in 2007 to less than half in 2017.18 Over the same period, the share of Chinese FDI in foreign assets (net of the official reserves) approximately tripled, reflecting the internationalization of Chinese companies (Fig. 3.4b). By international standards, the stock of Chinese foreign investment in relation to GDP is much lower than that of the major advanced economies, suggesting that there is ample room for growth in the flow.19 The data from the China Global Investment Tracker (Scissors 2020) show that Chinese FDI abroad rose from $21 billion in 2005 to $278 billion in 2017, down slightly from the peak of $283 billion in 2016. The sectoral composition has changed over time owing to the emergence of new needs and with the advance of the BRI, both of which have shifted investment to retail services and transport, while there has been a constant reduction (in relative terms) in investment in the energy sector. By geographical destination, inflows to Europe have intensified, partly owing to greater openness to foreign investors in some segments increasingly important to the Chinese agenda (transport, technology, tourism: Fig. 3.5). The decline of the

17 Between 2004 and 2011, the stock of FDI grew at annual average rate of 23% per year, then slowing to 8% between 2012 and 2014 and 2.5% in the following three years. 18 Reserves rose to 70% of total foreign assets in 2009–2010, before a sharp correction in the subsequent years. 19 The global stock of Chinese foreign investment equals 10% of China’s GDP, against some 50% for France and the UK, 40% for Germany, and 34% for the USA (Seaman et al. 2017).

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a 8,000 6,000 A - Direct Inv. A - Portofolio Inv. A - Other A - Reserves L - Other L - Porolio Inv. L - Direct Inv. Balance

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Fig. 3.4 Net international investment position (a, USD billion) and composition of foreign assets net of official reserves (b, percent). Source: authors’ elaboration on State Administration of Foreign Exchange and CEIC data

investment flow in 2017 reflects the intention of the Chinese authorities to concentrate investment in the sectors and areas of greatest interest and curtail the less strategic operations. Underlying this tightening is increased concern about a possible flight of capital, which could put the currency under significant pressure. In 2014, the Chinese government promoted the foundation of the Asian Infrastructure Investment Bank (AIIB), a multinational institution based in Beijing. While its articles of agreement authorize the AIIB to finance projects in all the member countries, regional and non-regional alike, priority is accorded to investment in the Asian area. Extra-regional projects are subjected to additional scrutiny. With China as the main shareholder, the AIIB became effectively operational at the beginning of 2016, with the participation of 56 founding members and initial capital of 100 billion US dollars (20% paid-in). The Bank’s staff is relatively small,20 and the management

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According to the Bank’s president, Jin Liqun, the staff should number 500–600 and the AIIB will be able to provide some $15 billion a year in new funding. By comparison, the Asian Development Bank employs 3,000 people for a comparable turnover (Gabusi 2017).

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a 280 240 200 160 120 80 40 0 05

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Fig. 3.5 Chinese investment in the world, sectoral distribution (a) and geographical distribution (b); billions of US dollars. Source: authors’ elaboration on China Global Investment Tracker— American Enterprise Institute data

has considerable autonomy in selecting projects for funding, which should be reflected in a shortening of the time needed to evaluate and approve the loans. By the end of 2019, the AIIB had financed 69 projects, a relevant share of which is co-financed with other multinational development banks, for a total outlay close to $11 billion (see Fig. 3.6 for the distribution of the projects by country and value). The AIIB has earned the top rating of all three leading international rating agencies. India has received the lion share of the Bank’s financing, 19%, and is set to increase further as pipelined projects are being approved.

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Fig. 3.6 Geographical distribution of projects funded by AIIB by number (a) and value (b, percent) in December 14, 2018. Source: authors’ elaboration on AIIB data

While the Chinese imprint on the AIIB is quiet strong, China has stressed that the top management has found the way “to avoid becoming a tool of Chinese foreign policy” (Chin 2019). Andornino (2019) argues that in light of the more confrontational relations between China and the USA, the Chinese leadership has favored distancing the multinational institution from the Belt and Road Initiative. That is, the AIIB’s mandate is seen more as enhancing faster sustainable growth in the greater Asian region as an instrument for pushing back the American threat to Chinese national security. These considerations notwithstanding, the geographical coincidence between the BRI and the AIIB’s region of interest makes it likely that the AIIB will end up financing projects closely linked to the BRI, even in the absence of an explicit mandate. Although on the one hand 31% of the projects to date are directed to India, which has not joined the BRI, on the other hand Egypt, a non-regional member of AIIB but a strategic country for the BRI, has secured about 7% of the total funding.21 According to Gabusi (2017), describing the AIIB as a challenge to the Bretton Woods order is excessive. BRI and AIIB certainly signal a more active Chinese presence on the global scene, but the Bank is fully integrated into the international financial system, from which in fact it has drawn numerous members, not to mention procedures and human resources.

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Funding was granted for two projects in water management and solar power. The summary tables posted on the website fail to explain the actual advantage for the Asian economy that could justify AIIB funding.

3.2 The Belt and Road Initiative

3.2

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The Belt and Road Initiative22

The BRI, the China’s huge infrastructure investment project to strengthen the linkage between Asia and Europe, is currently the main driver of China’s international projection. The BRI consists of the Silk Road Economic Belt, announced by Xi Jinping in Astana in September 2013, and the 21st Century Maritime Silk Road, announced a month later at the Asia-Pacific Economic Cooperation meeting in Jakarta (see Fig. 3.7). Participation is open to all interested countries and international organizations. The term “initiative” emphasizes the desire not to force the BRI into predetermined routes and projects and instead to let it follow the progress of relations between the participating countries.23 The BRI should contribute not only to the opening of new commercial corridors but also to the affirmation of China as a cooperative, non-hegemonic power. This second aspect is crucial to a reading of the special attention that the Chinese government dedicates to the emerging economies touched by infrastructure development projects. The BRI has taken on increasing political value, given the expansion of the Chinese sphere of influence through forms of smart power24 in which finance plays a central role. The largest inflows of Chinese investment are associated with a more favorable perception of the influence of the PRC in the recipient country (O’Trakoun 2018). The BRI provides five forms of cooperation: (1) coordination of development policies, (2) infrastructure connectivity, (3) removal of obstacles to international trade, (4) financial integration, and (5) closer ties between people. According to the government, the purpose is not to extend Chinese geopolitical influence but to promote sustainable development in the countries involved. The initiative should also serve to build a fairer and more just international order and to reform global economic governance.25 To use official Chinese language, against the stalemate of the Washington Consensus following the global financial crisis, the BRI will establish itself by leveraging infrastructure, economic development, and controlled market liberalism. According to the Asian Development Bank, the infrastructural deficit in Asia requires investment of $1.7 trillion a year until 2030 to maintain the current pace of development, reduce the poverty rate, and overcome the challenges of climate 22

With the contribution of M. Ghirga. The lack of criteria for determining which projects fall within the scope of the BRI means that the list of projects and of countries is constantly lengthening. According to some Chinese representatives, today the BRI even extends to the Arctic and cyberspace (Hillman 2018a). 24 “Smart power” combines hard power (military and economic instruments to influence the behavior of other entities) and soft power (the ability to attract and shape the preferences of another entity). This requires both a widespread economic and military presence and a dense network of alliances and the ability to establish the legitimacy of one’s presence and action. 25 Interview with the Chinese vice minister for foreign affairs, Le Yucheng (Anderlini 2018). For an examination of the opportunities and risks associated with the BRI, see The Economist (2018) and Hillman (2018d). 23

Fig. 3.7 Map of the six Belt and Road Initiative corridors. Source: authors’ elaboration based on GISreportsonline graphic

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3.2 The Belt and Road Initiative

25

change (ADB 2017). For the BRI alone, the Chinese authorities envisage total investment of between $1 trillion and $8 trillion: the great breadth of this range testifies to the vagueness of the initiative. In March 2018, the China Development Bank had over RMB162 billion (about $20 billion) allocated to BRI-related projects, or 65% of the year’s target of RMB250 billion in direct financing and guarantees. At the same time, the Exim Bank reported declared loans linked to the initiative for over RMB830 billion, almost 30% of its total assets. China’s largest commercial banks and state-owned companies too are heavily involved: the Industrial and Commercial Bank of China (ICBC), the world’s largest bank by assets, has declared its intention to allocate at least 10% of its assets to BRI-related projects, and declarations of similar tenor have been made by the heads of the three sister banks, namely the Bank of China, China Construction Bank, and Agricultural Bank of China. According to data released by the Chinese Academy of International Trade and Economic Cooperation (Ministry of Commerce), Chinese investment in the BRI countries amounted to almost $65 billion at the end of 2017, after average annual growth of 6.9% over four years. The Reconnecting Asia Database of the Center for Strategic and International Studies (CSIS), a US think tank, estimates that Chinese entities funded 173 infrastructure projects in 45 countries in the Euro-Asian area between 2013 and 2017. Andornino (2018), finally, estimates that as of December 31, 2017, $375 billion had been allocated to ongoing projects along the BRI. An additional $500 billion should be invested by 2025, again by state-controlled financial institutions. On top of the lenders already mentioned, two ad hoc institutions have been created for the project (the Silk Road Fund and the Asian Infrastructure Investment Bank). After a first phase concentrating on hard infrastructure projects (roads, railways, ports, energy plants, etc.), investment should also be directed to “soft” infrastructures, tourism, and linking people (such as education and cultural exchanges) and should also attract private capital (BRI 2.0). The initiative has caused concern in the international community for three reasons: (1) the pursuit of political, economic, and cultural hegemony, (2) uncertain financial sustainability, and (3) failure to comply with international best practices for safeguarding the socio-ecological environment and market discipline. In an introductory statement to the BRI hearing of the US-China Economic and Security Review Commission of the US Congress, Democratic Senator K.C. Tobin said: “Perhaps more concerning, Chinese economic engagement could give way to dangerously lopsided bilateral relationships and create opportunities for Beijing to employ greater economic coercion against smaller partner countries” (Tobin 2018). In the absence of a multilateral political framework, Chinese diplomacy has forged a dense network of bilateral negotiations for the signature of Memorandums of Understanding on the BRI. To a large extent, the MoUs are broad documents identifying areas of collaboration between China and other countries along the Silk Road. Among the G7 countries, in March 2019 Italy signed an MoU on collaboration in the “Economic Silk Road” and the “21st Century Maritime Silk Road” initiatives. The agreement does not require Italy to disconnect with its traditional alliances and, further, explicitly reaffirms “the importance of open, transparent, and

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non-discriminatory procurement procedures” and the commitment of governments to integrate the initiatives taken as part of the BRI with those of the EU (in particular the TEN-T project for Trans European Transport Networks). In a speech in Beijing in April 2018, Christine Lagarde, then managing director of the IMF, observed that the main critical issues were the difficulty of assessing the actual need for the projects and gauging their sustainability, financial impact, and possible effects on the balance of payments and macroeconomic stability of the participating countries. As to the real need for the projects, the evidence is still patchy. De Soyres et al. (2018) estimate that, if completed, the BRI would reduce commercial costs by between 2.8% and 3.5% and transport times by between 3.2% and 4%. As to financial sustainability, Hurley et al. (2018) identify eight countries at high risk of excessive debt because of the BRI: Mongolia, Laos, Tajikistan, Kyrgyzstan, Pakistan, Montenegro, Djibouti, and the Maldives. The most important economically is Pakistan, with its GDP of almost $300 billion and an external debt of $60 billion (see Box 3.3).26 For some observers, the precarious financial state of these countries threatens to turn Chinese cooperation into a neo-colonial relationship.27 Along the Eurasian route, India fears that the BRI will erode its sphere of influence (Small 2018). The prime minister of Malaysia, during a visit to Beijing, said explicitly that the BRI threatens to become “a new version of colonialism” and questioned the real benefits of the infrastructure projects agreed to by the previous Malaysian government.28 According to Hillman (2018b, c), for example, 89% of BRI infrastructure projects have been assigned to Chinese companies, compared with 30% of those financed by the World Bank in cooperation with the ADB; this means that the BRI’s employment impact on local markets may be relatively limited. According to a recent study by the consulting firm Rhodium Group, the risks due to financial unsustainability of some projects along the BRI have been overstated (Kratz et al. 2019). Overall, restructured loans amount to some $50 billion, but the seizure of the collateral has apparently occurred on only two occasions (the Hambantota port in Sri Lanka and the sale to China of some territories disputed with Tajikistan). In general, credit renegotiations have produced balanced results, thanks to the availability of alternative sources of international finance. In about a third of the cases, the debt was canceled, often as a consequence of China’s desire to strengthen diplomatic ties with countries considered strategic. The large volume of restructured debt suggests limited capability on the part of Chinese credit institutions to assess the effective creditworthiness of their counterparties and possibly also the 26 The serious financial situation led the Pakistani government formed after the elections of August 2018 to initiate negotiations with the IMF for a possible salvage operation. 27 See, among others, Chellaney (2017). 28 The investment programs agreed by China and Malaysia under the government of Najib Razak were seriously suspected of corruption, leading to the suspension of projects worth $20 billion and the outright cancelation of others worth $3 billion. In the summer of 2019, the two countries agreed to go ahead with the BRI projects after intensive renegotiation of the contracts that lowered costs by about a third (Sipalan 2019).

3.2 The Belt and Road Initiative

27

need to respond primarily to the national political agenda rather than to financial fundamentals as such (Hancock 2019). At the second Belt and Road Forum (April 2019), Xi’s intervention sought to reassure the international community about these problematic elements.29 In particular, he reaffirmed the importance of multilateralism and the need to safeguard the BRI’s financial and environmental sustainability. He further stressed China’s intention to enhance protections for intellectual property rights and to step up the fight against corruption in the BRI. A handbook for analysis of the financial sustainability of the BRI projects was prepared, with the assistance of the IMF and the World Bank (MoF 2019). On this occasion, Lagarde displayed a much more favorable attitude than she had just a year earlier. She held that the adoption of the manual and the greater attention devoted to environmental sustainability were important steps forward. Box 3.3 The China–Pakistan Economic Corridor30 Pakistan hosts what is probably the most significant BRI project approved to date: the China–Pakistan Economic Corridor (CPEC). The project constitutes a test bench for the entire BRI program, owing to a series of factors of fragility: questionable financial sustainability, pervasive corruption in the public administration, terrorism, and insufficient infrastructure networks. The CPEC is a broad-spectrum project to link Kashgar, in the western Chinese province of Xinjiang, with the Pakistani port of Gwadar over 2000 km away, which itself should be expanded considerably. The project calls for investment totaling about $62 billion in plants for energy generation and transmission (coal, hydroelectric, wind, solar),31 motorways, high-speed railways, fiber optic connections, and special economic areas. The investment is to come from numerous public entities (state companies, financial companies, development banks). It is estimated that BRI-related loans will increase the annual cost of Pakistani foreign debt by $3.5 billion (Venkatachalam 2017). While some projects, in fact, are financed at a concessional rate of 2–2.5% (in some cases even interest-free), for about three-quarters of the projects the (continued)

29

Since the Forum was instituted, the Chinese government has been much less aggressive in its communication concerning the BRI. The China Daily, an English-language newspaper published by the Chinese Communist Party, has sharply reduced coverage of the project: from the special issue on the occasion of the 2017 Forum to just a handful of articles in the paper’s ordinary pages in 2019 (Bloomberg 2019). 30 With the contribution of M. Ghirga. 31 Pakistan has an annual energy deficit of around 4,000 MW out of the total of 15,000 MW in the grid (Shaik and Tunio 2017), with an estimated cost of over 2% of GDP (Naviwala 2017). Chinese investment was planned to supply 6,000 MW by the end of 2018 and another 10,000 MW over a medium-term horizon. About three-quarters of this increase is to be generated by coal-fired plants built using old-generation technologies, raising fears for environmental sustainability.

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Box 3.3 (continued) return on principal is at the market rate of 5–8%. In addition, Chinese regulations call for an initial payment of 7% of the total value of the project as insurance against early termination of the works. The new Pakistani government has expressed its intention to renegotiate the BRI agreements already signed, which it says accord unjustified advantages to Chinese companies and are too burdensome for Pakistan. An ad hoc committee instituted by Prime Minister Imran Khan will evaluate the CPEC projects. However, at the second Belt and Road Forum in April 2019, Kahn softened his position, observing that the corridor could represent an important source of development for Pakistan. While the concern over corruption has led to the cancelation or questioning of some projects, the rules for contract awards are particularly disadvantageous for the government and the Pakistani population. Although official statements indicated that only 20% of the funding goes to projects for which the client can choose only between Chinese companies, in practice that share is about 90% (Kynge 2018). What is more, the contracting companies import machinery, materials, and workers from China, limiting the impact on the Pakistani economy. In addition, five years after its launch the CPEC appears to be significantly behind schedule, most of the individual projects blocked by lack of funding and corruption (Prasso 2020).

3.3

The Internationalization of the Renminbi32

A currency can be called “international” if it is used as a means for the settlement of commercial and financial transactions, as a store of value, and as a unit of account when the parties are not directly linked with its issuing country. A fundamental prerequisite is that the currency be freely exchanged on sufficiently liquid markets. For China, the internationalization of the renminbi is a primary objective with a view to augmenting the country’s global political and economic role. In 2009, the government resolved to take all measures necessary to complete this process. Since then, it has actively encouraged the international use of the currency, limited initially to transactions within the current account of the balance of payments but subsequently extended also to the financial account, including direct and portfolio investment, within set limits. The internationalization of a currency is articulated in several dimensions. The determining elements are the type of transaction settled (commercial or financial), the number and liquidity of the markets on which the currency is traded, and the types of financial asset denominated in it. Thus, there is no single indicator of the

32

With the contribution of D. Marconi.

3.3 The Internationalization of the Renminbi

29

Fig. 3.8 Geographical distribution of international payment volumes in RMB. Sources: authors’ elaboration based on SWIFT, RMB Tracker, January 2018 data. Notes: Asia-Pacific excludes mainland China. Continental Europe is defined as Germany, France, Luxembourg, the Netherlands, and Belgium

stage reached at any given time. The use of the RMB in China’s international transactions grew rapidly in the five years to the first half of 2015, when around 30% of the country’s cross-border trade was settled in RMB (up from zero in 2010), mainly at the expense of the US dollar, the main reference currency for the emerging economies of Asia. The use of the RMB then suffered a setback, reflecting fears of a sharp slowdown in the Chinese economy, in connection with pressures on China to revalue the currency. In SWIFT’s ranking of the currencies most widely used for the execution of payments at the end of 2017, the RMB was in fifth place (after the dollar, the euro, sterling, and the yen), covering about 2.1% of global transactions. This extremely modest use, by comparison with the size of the Chinese economy, is due not only to inertia in the use of currencies, but also to China’s limited financial integration with the rest of the world.33 The RMB has increased its role as a means of payment above all in China’s trade with Asia-Pacific countries. Some 60% of the country’s international trade and over 80% of cross-border RMB payments are within this region (Fig. 3.8). Looking ahead, the renminbi is likely to acquire an increasingly important regional function. This is reflected also in market exchange rates and the exchange rate policies of Asian countries: the evidence indicates that since 2005, with the increase in the 33

China is now the world’s largest economy, with 17.7% of global GDP (at purchasing power parity), compared with 15.5% for the USA and 11.7% for the euro area. China accounts for 11% of global exports of goods and services, on a par with the USA but less than the euro area’s 26%. Nevertheless, the latest SWIFT data show that the dollar is used in 40% of global transactions, the euro in 33%, and the RMB in not even 2%.

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flexibility of the exchange rate, the currencies of the region have shown growing synchrony with the RMB as against the dollar (Marconi 2018). To further the internationalization of the RMB, the Chinese authorities have encouraged the creation of various offshore centers—currently a score or so, Hong Kong being the principal one—in which RMBs held by non-residents are freely tradable at a flexible exchange rate, and investable in RMB-denominated financial products issued in those markets.34 The constraints on capital movements imposed by China have resulted in segmentation between the offshore and domestic markets, preventing full arbitrage on exchange rates and interest rates. Liquidity on the offshore markets is guaranteed by three factors: (a) the designation of a Chinese commercial bank as a clearing bank to offset interbank positions in RMB and ensure the settlement of transactions between the offshore and onshore markets; (b) swap lines, i.e., bilateral agreements between the PBoC and the host countries’ central bank for the exchange of their respective currencies; and (c) access to the Chinese onshore financial market up to a quota set in RMB (the Renminbi Qualified Foreign Institutional Investor Program, R-QFII), assignable to qualified institutional investors upon request. The PBoC has signed at least 35 bilateral swap agreements with other central banks, including the ECB, for a total value in excess of $500 billion. The internationalization of the RMB has been accompanied by a gradual if incomplete liberalization of capital movements, measures to open the financial system, and greater exchange rate flexibility. This strategy was intensified in 2015, in accord with the Chinese authorities’ effort to obtain the inclusion of the RMB in the IMF’s Special Drawing Rights basket. At the last five-yearly revision of the basket that year, the IMF recognized the RMB as a “freely usable” currency internationally and announced that it would be included starting October 2016 as an official reserve currency. The composition of the SDR had not been changed since 1999, when the French franc and the German mark were replaced by the euro. The basket is now composed of five currencies: US dollar (41.73%), euro (30.93%), Chinese renminbi (10.92%), Japanese yen (8.33%), and British pound (8.09%). Since then, several countries have declared their intention to bring the RMB into their official foreign exchange reserves. The ECB has modified the composition of its own official reserves by including the RMB and marginally reducing the share of the dollar. Apart from the desire for portfolio diversification, this reflects China’s importance as a trading partner for the euro area. The revision was completed in June 2017 with the purchase of €500 million worth of RMB (1.2% of the ECB’s official

34 Offshore centers for trading and clearing in RMB constitute a growing source of business for the large Chinese state-owned banks, the only ones authorized so far by the PBoC for currency clearing. The main offshore RMB markets are Hong Kong and Singapore, in Asia; Toronto (2015) and New York (2016) in North America; London, Frankfurt, Luxembourg, Paris, Zurich, and Budapest, in Europe (beginning in 2014 or 2015). These markets, still modest in the RMB segment, compete to attract a larger volume of business in RMB, exploiting their comparative advantages. London exploits its specialization in foreign exchange trading; Paris, the role and positioning of large French banks in Africa; and Frankfurt, payment infrastructures and securities transactions.

3.4 China and the COVID-19 Outbreak

31

Table 3.1 Composition of official foreign currency reserves (in % of those allocated) Claims in U.S. dollars Claims in Euro Claims in Chinese renminbi Claims in Japanese yen Claims in Pounds sterling Claims in Australian dollars Claims in Canadian dollars Claims in Swiss francs Claims in Other currencies

2015 65.7 19.1 3.8 4.7 1.8 1.8 0.3 2.8

2016 65.4 19.1 1.1 4.0 4.3 1.7 1.9 0.2 2.3

2017 62.7 20.2 1.2 4.9 4.5 1.8 2.0 0.2 2.4

2018 61.7 20.7 1.9 5.2 4.4 1.6 1.8 0.1 2.5

2019 60.9 20.5 2.0 5.7 4.6 1.7 1.9 0.2 2.6

Source: authors’ elaboration based on IMF-COFER data

reserves). The IMF estimates that at the end of 2019 approximately 2.0% of the world’s official foreign exchange reserves were denominated in RMB, about two times the share in 2016 (Table 3.1). The relatively restricted diffusion of the RMB as a reserve currency reflects limits to convertibility; only since the end of 2015 have foreign central banks holding onshore deposits with Chinese banks been allowed to convert them freely into other currencies on the Chinese currency market. The further progress of internationalization of the RMB, its affirmation as a global reserve currency, will depend ultimately on the timing and results of the complete removal of restrictions on capital movements. The recent episodes of instability on the Chinese financial markets have highlighted the risks of greater responsiveness of the domestic market to changes in the climate of confidence among foreign investors. It is likely, therefore, that the Chinese authorities will proceed with caution and that the offshore markets will continue to play an important role in the financial integration of China with the rest of the world.

3.4

China and the COVID-19 Outbreak

A SARS-like virus, COVID-19 (formally known as 2019-nCoV), has spread dramatically, worldwide, since its outbreak in the city of Wuhan in December 2019. The outbreak was officially declared a public health emergency of international concern on January 30, 2020. On May 15, 2020, the World Health Organization officially declared the novel coronavirus a pandemic. The numbers change daily: on 17 June, the number of people tested positive for the virus exceeded 7,940,000 globally and 80,000 in China, with nearly 6000 deaths. COVID-19, that is, erupted in China but spread rapidly around the globe (Fig. 3.9).

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Fig. 3.9 Weekly number of new positive cases. Sources: authors’ elaboration based on WHO and CEIC data

China’s response to the critical situation was draconian. The central government imposed a lockdown on Wuhan and other cities in Hubei province, strictly limiting all movements between provinces.35 This resulted in a prolonged shutdown of many Chinese firms and workshops, weighing heavily on industrial activity in general, including technology and pharmaceuticals. According to the National Bureau of Statistics, in January–February 2020 industrial output was down by 13.5% compared with the same period of 2019, and the bulk of this decline came in February— an estimated 12-month drop of 26.6%. In the same period, exports fell by 17.2% and retail sales by 20.5%. The resumption of economic activity was somewhat sluggish, and the effects of the lockdown were felt long after the epidemic could be considered to be under control. The long wave of COVID-19 has been felt all around the globe in terms of supply-chain disruption. All production depending on Chinese suppliers, especially for intermediate and capital goods, has experienced considerable delays and difficulties. This effect was magnified by the substantial role of China and the province of Hubei in particular in global value chains. As a measure, 200 of the Fortune Global 500 firms are present in Wuhan. A survey conducted in the first half of March by the Institute for Supply Management (ISM-2020) found that 75% of a sample of 628 US

35 COVID-19 broke out during the Lunar New Year festival, a traditional holiday during which an estimated 385 million Chinese travel throughout the country to spend time with their families in their hometowns (the world’s biggest annual mass movement of people). This coincidence facilitated the spread of the disease; at the same time, the lockdown’s travel restrictions and mandatory quarantine prevented many workers from returning to their factories, causing serious labor shortages.

References

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industrial firms reported some supply disruption due to COVID-19-related transport restrictions, while 16% had to revise their revenue targets downward, by an average of 5.6%. COVID-19 will trigger a lasting reconfiguration of the global value chains with a view to increasing resilience. Companies will likely revisit their global strategy, adapting supply chains to avert the risk of disruption due to exogenous shocks, either through geographical diversification or through vertical integration. In the former case, we should observe a reshaping of the global value chains and in the latter their retrenchment. Whatever happens, in a context already marked by progressive decoupling between China and the USA, COVID-19 is prompting the reappraisal of reliance on a single country (Cerulus 2020). China’s response to COVID-19 has been criticized for lack of transparency; the government has been accused not only of bureaucratic slowness but also of censorship and an effort to hide the first wave of the epidemic. However, the drastic lockdown imposed, the impressive technology deployed, and the country’s success in containing the spread of the virus have led to a revaluation of how China met the health crisis. A WHO report states, “China’s bold approach to contain the rapid spread of this new respiratory pathogen has changed the course of a rapidly escalating and deadly epidemic.” National propaganda about the CCP and President Xi Jinping winning the battle against the virus and well-considered foreign policy actions, such as the dispatch of medical teams, equipment, and supplies to the worst-hit foreign countries, are undercutting the most severe criticisms of opponents, both internal and external, in an instance of China’s effective use of soft power. For the Chinese authorities, military assertiveness and the desire for cooperation are the fundamental elements for asserting regional influence and defending China’s interests in the world. The progressive disengagement of the USA on some historical fronts (in particular, declining American support for globalization and multilateralism) offers a potential opportunity for the Chinese government to exploit within a timeframe of uncertain duration. The drive for technological and qualitative development, combined with an investment strategy as a tool for broad-spectrum economic diplomacy, appears destined to strengthen China’s role in the global scenario.

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Bloomberg (2019) China’s Belt and Road gets a reboot to boost its image. 14 Aug 2019. https:// www.bloomberg.com/news/articles/2019-08-14/china-s-belt-and-road-is-getting-a-reboothere-s-why-quicktake Cerulus L (2020) Coronavirus forces Europe to confront China dependency. Politico.eu, Mar 2020. https://www.politico.eu/article/coronavirus-emboldens-europes-supply-chain-security-hawks/ Chellaney B (2017) China’s creditor imperialism. Project Syndicate, 23 Jan 2017 Chin GT (2019) The Asian Infrastructure Investment Bank – new multilateralism: early development, innovation and future agendas. Global Policy 10(4), Nov 2019 Davis B, Wei L (2018) China prepares policy to increase access for foreign companies. Wall Street Journal, 12 Dec 2018. https://www.wsj.com/articles/china-is-preparing-to-increase-access-forforeign-companies-11544622331?mod¼hp_lead_pos4 de Soyres F, Mulabdic A, Murray S, Rocha N, Ruta M (2018) How much will the Belt and Road Initiative reduce trade costs? World Bank Policy Research Working Paper, No. 8614, Oct 2018 EC (European Commission) and High Representative of the Union for Foreign Affairs and Security Policy (2019) EU-China – A strategic outlook, Joint Communication to the European Parliament, the European Council and the Council, Mar 2019 ECCC (European Chamber of Commerce in China) (2017) China manufacturing 2025 - putting industrial policy ahead of market forces Gabusi G (2017) ‘Crossing the river by feeling the gold’: The Asian Infrastructure Investment Bank and the financial support to the Belt and Road Initiative. China World Econ 25(5) Hancock T (2019) China renegotiated $50bn in loans to developing countries. Financial Times, 29 Apr 2019. https://www.ft.com/content/0b207552-6977-11e9-80c7-60ee53e6681d Hillman J (2018a) China’s Belt and Road is full of holes. CSIS Briefs, Sep 2018 Hillman J (2018b) The Belt and Road’s barriers to participation. Center for Strategic and International Studies, 7 Feb 2018. https://reconnectingasia.csis.org/analysis/entries/belt-and-road-bar riers-participation/ Hillman J (2018c) China must play fair over BRI contracts. NIKKEI Asia Review, 6 Feb 2018. https://asia.nikkei.com/Viewpoints/Jonathan-Hillman/China-must-play-fair-over-BRI-contracts Hillman J (2018d) China’s Belt and Road Initiative: five years later, Statement in Hearing on China’s Belt and Road Initiative: five years later, Hearing before the U.S. – China Economic and Security Review Commission, One Hundred Fifteenth Congress, 25 Jan 2018 Hurley J, Morris S, Portelance G (2018) Examining the debt implications of the Belt and Road Initiative from a policy perspective. Center for Global Development, CGD Policy Paper No. 21, Mar 2018 IMF (International Monetary Fund) (2014) China - 2014 Article IV Consultation. IMF Country Report, No. 14/235, Jul 2014 Kratz A, Feng A, Wright L (2019) New data on the “Debt Trap” question. China Macro, Rhodium Group, Apr 2019 Kynge J (2018) Chinese contractors grab lion’s share of Silk Road projects. Financial Times, 24 Jan 2018. https://www.ft.com/content/76b1be0c-0113-11e8-9650-9c0ad2d7c5b5 Lu, Y., Sun T (2013) Local government financing platforms in China: a fortune or misfortune? International Monetary Fund Working Paper 13-43, Oct 2013 Lund S, Woetzel J, Windhagen E, Dobbs R, Goldshtein D (2018) Rising corporate debt: peril or promise? McKinsey Global Institute Discussion Paper, Jun 2018 Marconi D (2018) Currency comovements in Asia-Pacific: the regional role of the Renminbi. Pac Econ Rev 23:150–163 Martina M, Yao K, Chen Y (2018) Exclusive: facing U.S. blowback, Beijing softens ‘Made in China 2025’ message. Reuters, 25 Jun 2018. https://www.reuters.com/article/us-usa-tradechina-madeinchina2025-exclu/exclusive-facing-u-s-blowback-beijing-softens-made-in-china2025-message-idUSKBN1JL12U MoF (Ministry of Finance of People’s Republic of China) (2019) Debt sustainability framework for participating countries of the Belt and Road Initiative, Apr 2019. http://m.mof.gov.cn/czxw/ 201904/P020190425513990982189.pdf

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Naviwala N (2017) Pakistan’s $100B deal with China: what does it amount to? Devex, 24 Aug 2017 O’Trakoun J (2018) China’s Belt and Road Initiative and regional perception of China. Bus Econ 53 (1) Prasso S (2020) One of China’s most ambitious projects becomes a corridor to nowhere. Bloomberg, 2 Mar 2020. https://www.bloomberg.com/news/features/2020-03-02/a-china-beltand-road-project-becomes-a-corridor-to-nowhere Rudd K (2018) How Xi Jinping views the world – the core interest that shape China’s behaviour. Speech delivered at the United States Military Academy at West Point, NY, Mar 2018 Scissors D (2020) China Global Investment Tracker. American Enterprise Institute. https://www. aei.org/china-global-investment-tracker/ Seaman J, Huotari M, Otero-Iglesias M (eds) (2017) Chinese Investment in Europe - a country-level approach, ETNC, Dec 2017 Shaik S, Tunio S (2017) Pakistan ramps up coal power with Chinese-backed plants. Reuters, 3 May 2017. https://www.reuters.com/article/us-pakistan-energy-coal/pakistan-ramps-up-coal-powerwith-chinese-backed-plants-idUSKBN17Z019 Sipalan J (2019) China, Malaysia restart massive ‘Belt and Road’ project after hiccups. Reuters, 25 Jul 2019. https://www.reuters.com/article/us-china-silkroad-malaysia/china-malaysiarestart-massive-belt-and-road-project-after-hiccups-idUSKCN1UK0DG Small A (2018) The backlash to Belt and Road. Foreign Affairs, 16 Feb The Economist (2018) China has a vastly ambitious plan to connect the world. The Economist, 26 Jul 2018. https://www.economist.com/briefing/2018/07/26/china-has-a-vastly-ambitiousplan-to-connect-the-world Tobin KC (2018) “Opening Statements”, in Hearing on China’s Belt and Road Initiative: five years later, Hearing before the U.S. – China Economic and Security Review Commission, One Hundred Fifteenth Congress, Second Session, 25 Jan 2018 Venkatachalam KS (2017) Can Pakistan afford CPEC? The Diplomat, 16 Jun 2017. https:// thediplomat.com/2017/06/can-pakistan-afford-cpec/ Wong C (2011) The fiscal stimulus programme and public governance issues in China. OECD J Budget 2011/33 Wübbeke J, Meissner M, Zenglein MJ, Ives J, Conrad B (2016) Made in China 2025 – The making of a high-tech superpower and consequences for industrial countries. MERICS, Dec 2016 Xiong W (2018) The Mandarin model of growth. NBER Working Paper No. 25296, Nov 2018 Zhang L (2016) Rebalancing in China–progress and prospects. IMF Working Paper No. 183, Sep 2016

Chapter 4

US–China Relations Under the Trump Presidency

Donald Trump’s election as President of the USA put an end to the Obama administration’s foreign policy known as “Pivot to Asia,” which called for strengthening the US military presence in the Pacific and building a system of commercial relations with the Trans-Pacific Partnership (TPP), from which China was excluded. The Trump administration has taken a more defensive stance, withdrawing from the TPP, cutting back the American commitment in Asia, and recasting its stance on trade with China, which has generated increasing tensions. Starting in January 2018, the US administration enacted four rounds of import tariffs. By November 2019, they applied to Chinese imports worth over $360 billion. On December 13, 2019, the two governments signed the Phase One Deal, barely preempting the entry into force of new tariffs that would have affected mass consumer goods, including popular electronics like smartphones and laptops. The deal blocked the tariff escalation and committed China to purchase, by the end of 2021, an additional $200 billion worth of American products.

4.1

The Origin of the Trade Tensions Between Beijing and Washington1

The Trump administration, in connection with its “Make America Great Again” slogan, has sought to encourage the repatriation of some manufacturing production delocalized in years past and, above all, to reduce the balance-of-trade deficit, which the president has blamed on the bargaining weakness of past administrations. Initially, within the Trump administration, there was substantial balance between the group that favored a negotiation-based approach with China and the group

1

With the contribution of G. Majnoni d’Intignano.

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2020 L. Bencivelli, F. Tonelli, China’s International Projection in the Xi Jinping Era, SpringerBriefs in Economics, https://doi.org/10.1007/978-3-030-54212-2_4

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4 US–China Relations Under the Trump Presidency

Fig. 4.1 Employment in the US manufacturing sector and “China shock.” Source: Refinitiv and Economic Report of the President (2018). Asterisk indicates Permanent Normal Trade Relations with China (15 May 2000), as per Trade Act 1974

favoring a more aggressive strategy. Over the months, however, the progressive strengthening of the mercantilist wing translated into a series of increasingly protectionist initiatives, mainly if not exclusively against China. This strategy concerned not only the bilateral trade deficit but also broader issues, from national security to technology transfer. The US administration has given three reasons for its stance: (1) the loss of jobs in manufacturing, which is claimed to stem from China’s entry into the WTO; (2) the unfavorable tariff system for US exports; and (3) China’s MIC2025 plan for technological advancement, which, according to the US government, is imposing unfair conditions on US companies operating in China.2 As to point (1) above, the Annual Report of the Council of Economic Advisers (CEA 2018) traces the decline in manufacturing employment to the introduction of the Permanent Normal Trade Relations (PNTR) with China in May 2000 and China’s entry into the WTO in December 2001 (Fig. 4.1). The document cites various studies (Acemoglu et al. 2016; Kimball and Scott 2014; Caliendo et al. 2015; Asquith et al. 2017) estimating US job losses due to the 2 In a speech at the Hudson Institute on October 4, 2018, Vice President Pence supplemented this view with three further points: (1) China is translating its economic strength into strategic dividends through the “debt trap” to the detriment of third countries; (2) China is developing military equipment that could jeopardize US supremacy; and (3) China is influencing other countries, seeking to shape an order based on values antithetical to America’s. The nearness of the mid-term elections led many commentators to link this assertiveness to the need to unify the Republican front around Trump’s leadership, but in any case Pence’s intervention helped sharpen the dispute between the two nations.

4.1 The Origin of the Trade Tensions Between Beijing and Washington

39

Table 4.1 Import and export duties in the USA, China, and Europe 2016

Export

USA China Europe

Import Agricultural goods US China _ 15.9 4.2 _ 6.8 15.8

Europe 13.8 12 _

Non-agricultural goods US China Europe _ 8.9 4.4 4 _ 4.5 3.9 9 _

Source: authors’ elaboration based on World Tariff Profiles 2018 data (WTO, ITC, and UNCTAD)

China shock at between 800,000 and 3.2 million. The CEA report further observes that not even the continuous economic growth of the seven years following the international financial crisis allowed for the recovery of previous employment levels, perhaps in part because those who have lost their jobs in the manufacturing sector are on average older and less well educated and so have greater difficulty in re-employment. On point (2) above, the argument for stiffening the US negotiating position concerns the imbalance in international tariffs (not necessarily limited to trade with China alone). According to the CEA, American exports are subject to higher tariff barriers in their outlet markets than the USA applies to foreign products. This is confirmed by WTO data (Table 4.1), which indicate an average tariff of 4% on US imports of Chinese products, against average Chinese duties of 15.9% on agricultural and 9% on non-agricultural products from the USA. The same disparity is found at disaggregated level as well: with the exception of dairy products and oil, the two trade flows are unevenly affected in every category of goods. The introduction of duties on solar panels and washing machines following inquiries pursuant to Section 201 of the 1974 Trade Act (global safeguards, initiated at the request of the industries concerned) can presumably be attributed to this finding. As to point (3), the third and most important reason given relates to the protection of intellectual property rights and, more generally, the desire to contain China’s emergence as a technological superpower. From this standpoint, the dispute bears not only on trade between China and the USA but also on matters relating to direct investment flows. Specifically, the USA disputes the legitimacy of the support offered by the government to Chinese companies under the MIC2025 plan and the theft of US intellectual property. The report of the United States Trade Representative (USTR 2018) on Chinese misappropriation of intellectual property, initiated pursuant to Section 301 of the Trade Act of 1974 (unfair trade practices), claims that the Chinese government (1) uses various tools—among them the discretionary application of administrative procedures and the obligation to operate in joint ventures with local partners—to favor the transfer of technologies and intellectual property rights in favor of national companies; (2) deliberately limits the bargaining power of American companies in negotiations on technology sales, effectively reducing their control and availability; and (3) guides and facilitates the action of Chinese companies that invest in the USA

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4 US–China Relations Under the Trump Presidency

to acquire cutting-edge technologies. Furthermore, the USTR reserves the right to recommend investigations into possible computer intrusions for the illegal acquisition of confidential information and industrial secrets.3 Finally, the document analyzes MIC2025 in detail, highlighting the great extent of planning involved and the role of technology acquisitions from abroad. These concerns compound those raised in a report by the US Department of Defense, namely that Chinese high-tech companies enjoy subsidized government funding and with their investments in Silicon Valley could gain access to military technologies (Brown and Singh 2018). A new front in the dispute between the two governments is communications security, an issue posed by the fifth-generation Internet technology (5G) of the Chinese company Huawei,4 which is said to have a competitive advantage over many Western competitors. According to the USA, Huawei’s products and services could be used for the acquisition of sensitive data, and their use has accordingly been prohibited.5 Of the “five eyes” intelligence alliance, Canada is the only country that still has to decide whether to bar Huawei from 5G. Australia and New Zealand, though largely dependent on Chinese trade, have adhered to the US ban, at least partially. Britain, by contrast, has rejected the US call for a ban but limited Huawei to 35% of the British telecommunications market and kept the Chinese firm outside the most sensitive areas, while promising regular testing to check for possible backdoors.6 In January 2020, the European Commission endorsed a toolbox on 5G technology for all EU member states. Though not binding, as decisions on specific security measures remain under national power, the toolbox offers guidelines for a common response to the security challenges that the technology raises. It addresses all risks, including those related to non-technical factors, such as interference from non-EU states or state-backed actors through the 5G supply chain, and it considers the possibility of significant restrictions for suppliers deemed to be high risk.7

3 On the other side, the Chinese cybersecurity Group Qihoo 360 discovered and revealed cyberattacks by the CIA hacking group (APT-C-39), targeting Chinese aviation organizations, scientific research institutions, petroleum industry, Internet companies, and government agencies. 4 Huawei is currently the only tech corporation fully integrated in the production of 5G equipment— from handsets to antennas to base stations to all data center hardware and software. Huawei’s prices for its goods and services are extremely competitive, and performance and quality are quite high (Kennedy 2020). 5 In May 2019, on the basis of these considerations, the US government decided to make sales of materials and components to Huawei subject to prior authorization. 6 A significant consideration is the substantial cost of changing suppliers and consequently retraining engineers and operators – the cost to British Telecom of replacing all the Huawei equipment in its network is estimated at anywhere from $1 billion to $10 billion (Kennedy 2020). The opposition to the adoption of Huawei technologies in the British Parliament is progressively shrinking. 7 https://ec.europa.eu/digital-single-market/en/news/cybersecurity-5g-networks-eu-toolbox-risk-mit igating-measures

4.2 US Requests

41

At the moment, France and Germany are leaning toward acceptance of Huawei’s participation in their 5G networks, although in Germany the debate is still not over: according to the international press, Chancellor Merkel favors the Chinese conglomerate, while a number of high-ranking officers in the security apparatus have emphasized the risks.8 For European countries, the debate is politically uncomfortable, as in the end, perforce, they will have to either back a major security partner at the expense of a major trading partner or the other way around.

4.2

US Requests9

In light of these arguments, the American negotiating strategy focuses on three requests to China formulated in the meeting between Trump and Xi at the G20 summit in Buenos Aires in November 2018: (1) decreasing the Chinese bilateral trade surplus by $200 billion by 2020; (2) ending China’s status as an emerging economy and consequently reducing the state protection of domestic industries permitted to these economies by the WTO; and (3) ending Chinese government support for high-tech industries. There are at least two major factors that tell against the restoration of a more equal balance of trade. First, the US administration opposes an increase in exports of hightech goods, which could put its industrial and military preeminence at risk. Second, reducing the trade deficit is hard to reconcile with the Trump administration’s expansive fiscal policy, which S&P Global estimates will widen the current account deficit from $465 billion in 2017 to $700 billion in 2020 (Bovino and Panday 2018). The drive to facilitate access to the Chinese market stems from the new status of China, which is no longer an emerging economy with nascent industries to be protected but a global economic power. The requests include, on the one hand, a reduction in import duties and, on the other hand, the removal of administrative barriers, such as the obligation to create joint ventures, and the streamlining of administrative processes. Here the Chinese government has shown greater openness, suggesting the lowering of numerous tariffs and the elimination of the Chinese majority requirement in foreign joint ventures in some sectors, such as the motor vehicle industry, which is particularly exposed to the risk of technology transfer, and the non-bank financial sector.10

8 Bruno Kahl, the head of the German foreign intelligence service, testified at a parliamentary committee hearing that Huawei should not be allowed to play a significant role in building the country’s 5G network. Mr. Kahl argued that “infrastructure is not a suitable area for a group that cannot be trusted fully” (Buck 2019). 9 With the contribution of G. Majnoni d’Intignano. 10 The National People’s Congress enacted a new Foreign Investment Law on March 15, 2019, effective as of January 1, 2020, to streamline the foreign investment framework and ease the administrative burden for foreign multinationals.

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Finally, the request for the termination of public support for high-tech industries and acquisitions of intellectual property appears to be aimed at hindering China’s drive for global technological supremacy. In fact, a good many high-tech products that the USA wants to subject to import duties have not been exported by Chinese producers to date. In other words, these are “deterrent” tariffs whereby the US government intends to protect the industry of the future.

4.3

Private Sector Positions

The exacerbation of trade tensions with China has met with the widespread approval from American corporations, in contrast with the past. Nevertheless, the businesses displayed a range of positions, depending on the sector and degree of exposure to foreign trade. The advocates of a more aggressive position include steel and aluminum producers, solar panel producers, and enterprises that have been the victims of intellectual property rights violations. Other sectors, such as trading companies and large-scale retailers, while endorsing the reasons behind the trade dispute, have instead repeatedly voiced their opposition to tariffs which not only penalize consumers but are likely to engender uncertainty in global procurement. US-based businesses with a fundamental market outlet in China have also opposed stricter trade policies. Boeing, for example, sells one in four of its aircraft to China for a forecast total of 7000 over the next 20 years, and imposing tariffs on the Boeing 737 would inevitably favor the European Airbus, and US soybean producers would risk being displaced by South American competitors. A separate discussion is in order for the major corporations in information and communications technology (ICT), for which China constitutes both a major base for production and assembly and an important outlet market. Although the highestvalue-added production stages are still in the USA, this sector is one of the most vulnerable to infringement of intellectual property rights. To date, the Information Technology Industry Council (ITIC), which brings together leading ICT companies such as Google, Apple, Facebook, and Amazon, has opposed both new duties, which could have a considerable impact on sales prices and on input supply, and the exclusion of Chinese citizens from research departments in American universities and companies (Swanson and Bradsher 2018). One of the sectors least exposed to damage from the trade dispute, instead, is the financial industry, owing to its limited presence in the Chinese market. However, a relaxation of regulations could result in increased penetration of Chinese market. The Trump administration’s assertive stance toward China was reflected in the Foreign Investment Risk Review Modernization Act (FIRRMA), the 2018 reform of the Committee for Foreign Investment in the USA (CFIUS) approved by a large and unusual bipartisan majority in Congress. The Act extends the scope of CFIUS scrutiny and prior authorization of foreign investments in the USA to include not only those that could put the ownership of American companies into foreign hands

4.3 Private Sector Positions

43

but also those that could give the investor access to sensitive information on infrastructures and critical technologies or personal data of US citizens.11 Any foreign investment in one of these sectors is now subject to a prior check by the CFIUS, which has 30 days to assess whether the transaction could enable the foreign investor to acquire sensitive information and accordingly request changes to the agreement or reject it outright. At the same time as FIRRMA, a law was passed authorizing the Department of Commerce to impose restrictive measures on exports of emerging and foundational technologies. Box 4.1 The Role of the WTO Over the last 20 years, the World Trade Organization has been the prime forum for discussion toward the development of the multilateral trading system and for dispute resolution. Yet it has proved difficult to overcome the deterioration of US-Chinese trade relations via the rules of the WTO, for at least two reasons. First, there is the clear preference of the Trump administration for bilateral negotiations, which by definition exclude multilateral institutions such as the WTO. US impatience with multilateral action against China has been manifested in multiple ways, putting the WTO in an uncomfortable position: (1) unilateral introduction of tariffs on steel and aluminum that exceed the limits set by the WTO; (2) bilateral negotiations with China, in violation of the commitment to seek multilateral solutions between member countries; (3) failure to appoint members of the Appellate Body,12 with the risk of its paralysis; and (4) American invocation of the national security clause to motivate new tariffs. This last point is a particularly delicate one: if the WTO were to decide in favor of the USA, this would set a precedent that could lead many other countries to seek to protect their domestic markets on the same grounds; if, on the other hand, the WTO were to condemn the US action, the administration might even decide to withdraw from the Organization. The second difficulty is that Chinese participation per se calls the current system of international trade regulation into question, as it was conceived for market economies and not for hybrid market-cum-planning economic systems (Wu 2016).13 When China’s accession to the WTO was negotiated, the (continued) 11

In September 2019, the US Treasury Department issued a regulation defining the scope and procedures of this screening process, while confirming the list of critical technologies, infrastructure, and sensitive data known as “TID-US Business.” 12 The seven-member Appellate Body hears appeals against the decisions of the Panels (the “lower courts” of the WTO). It can modify or overturn the provisions of the Panels, and its decisions are binding on the parties to the dispute. 13 The current scenario is not the first sign of the crisis of the multilateral system: in 2008, the Doha Development Round talks broke down, owing above all to contrasts between developed and developing economies.

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Box 4.1 (continued) prevailing idea was that after a sufficiently long stretch of time the Chinese economy would take on the connotations of a fully market economy. In the years after the collapse of the Soviet system, the predominance of the market economy system seemed inevitable (Fukuyama 1992). Instead, after China’s accession to the WTO its economy was preparing to take a different path from that of the other transition economies, a path possibly not foreseen even by the Chinese leadership at that time. It was starting to become a unique reality, combining market economy features with others characteristic of central planning. Under these circumstances, and contrary to the initial expectations, the USA and the EU have elected not to accord China recognition of market economy status. A related question, difficult to interpret under current WTO rules, is the definition of state intervention. It is often hard to determine which entities should be deemed direct extensions of the government or to define the precise relationship between the state and the corporations, given the dominant role of the party in both. In many instances, such relations give rise to informal control, which is hard to classify. China has accordingly become one of the causes for the weakening of the WTO, although it has always been careful to follow the WTO’s indications in the growing number of cases in which it was involved. It is hard to predict whether the WTO’s multilateralism can survive in the absence of broad consensus on a revision of its modus operandi. The alternative is an increasing number of treaties between just two or a few countries. In this context, US-China trade frictions could be seen simply as one example of the new global order.

4.4

Recent Developments

Since the USA first imposed tariffs on Chinese goods in March 2018, Washington and Beijing have gone through several cycles of escalation and deescalation. After nearly two years of trade war, the two economies had weakened more than the governments had expected. China’s slowdown was more severe than anticipated, although this was largely due to domestic factors relating to the rebalancing of the economy. Meanwhile, the widening of the China’s bilateral trade surplus in the first year of application of the tariffs highlighted the probable underestimation of the importance of the Chinese market for US producers, but in 2019 several factors (in particular, trade diversion and modifications of supply chains) produced an adjustment in the trade flows.14 14 According to Bown and Lovely (2020), one of the side effects was to undercut the US capacity to cope with COVID-19, owing to the reduction in purchases of Chinese medical equipment.

4.4 Recent Developments

45

On January 15, 2020, the USA and China sealed the “Phase 1 Trade Deal” to deescalate the clash. This represented an initial attempt to manage the conflict, whose start can be traced back to March 22, 2018, when the US government implemented the policy measures recommended after an inquiry into Chinese practices pursuant to Section 301 of the 1962 Trade Expansion Act. From then to November 2019, the US administration enacted three rounds of tariffs affecting in total $360 billion worth of imports from China.15 The rise in bilateral tariffs was substantial, triggering a tit-for-tat response that deteriorated the relations between the two countries. The Phase 1 deal instituted a reduction in the extra tariff on approximately $120 billion worth of US imports from China, from the 15% rate imposed on September 1, 2019, to 7.5%, and the cancelation of the further increase scheduled for 15 December (15% on $160 billion of imported goods). Nevertheless, the average duty on bilateral flows of goods remains around 20%, up from 3% on Chinese and 8% on US exports prior to the trade dispute. In exchange for this easing of tariff policy, China committed to increase its purchases of American goods by $200 billion over the next two years. The agreement calls for purchases of certain amounts of specified US goods and services. The Trump administration has claimed a major victory, calling the agreement “historic.” The Chinese side also views it positively, noting that it would promote high-quality growth and facilitate the necessary economic restructuring. But the accord is not a real breakthrough, and it largely fails to address the most critical issues for relations between the two countries. The US administration bases its rhetoric on several Chinese pledges presented as concessions achieved through the negotiating process. In reality, these “concessions” are either vague statements or extensions of policies already in place; they can be seen as the outcome of a process of internal reform already under way in China when the “trade war” began. One of the most significant features of the agreement is its focus on outcomes (correction of the trade imbalance between the USA and China) rather than the adoption of common rules. Even with the agreement in place, the clash between the two countries persists on nontariff issues, such as national security, IT leadership, geopolitical influence, the treatment of state-owned entities, and, more generally, the role of the state in the economy. China’s apparent concessions may, to a considerable extent, represent an effort to gain international recognition for a set of reforms that Beijing had already undertaken. Hence the deal could backfire on the USA, in that it might only lend added impetus to China’s drive toward the objective of becoming an innovation-led economy and a reliable trade partner. Bown and Lovely (2020) are skeptical of the success of the deal either in regulating the amount of Chinese imports or in limiting the role of SOEs in the Chinese economy, which the USA and other international actors would like to shrink. On the first point, capacity constraints on US manufacturing and farming could weigh on their ability to fully satisfy China’s increased demand. Further, the Chinese private sector has little interest in sourcing

A first round dated to January 2018, when the Trump administration imposed tariffs of 30–50% on solar panels and washing machines, citing “substantial injury to domestic manufacturers.”

15

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from the USA, as American food and agricultural products, automotive components, and other products on the list are more expensive than those produced by competitors. This will induce SOEs to step in to counter the lack of participation by Chinese private firms, thus increasing the state’s role in the markets. Finally, a number of products covered by the agreement are usually traded by state-owned enterprises, such as crude oil and other energy commodities, given the strategic role that Beijing assigns to these sectors. In the end, ironically, the deal effectively calls on China to become even more heavily state-directed. The WTO rules are not mentioned in this chapter of the agreement, despite its specification of numerical targets and a timetable. This might represent a violation of China’s commitment with the WTO not to set import quotas, as well as of the general most-favored-nation clause (GATT, Art. 1). On these grounds, the EU has expressed its intention to evaluate possible breaches of the multilateral trading rules and to appeal against the agreement.

References Acemoglu D, Dorn D, Hanson G, Price B (2016) Import competition and the great U.S. employment saga of the 2000s. J Labor Econ 34(S1 (Part 2, January)):S141–S198 Asquith B, Goswani S, Neumark D, Rodriguez-Lopez A (2017) U.S. job flows and the China shock. NBER Working Paper 24080, Nov 2017 Bovino BA, Panday S (2018) Twin deficit: mind the gap(s). S&P Global, May 2018. https://www. spglobal.com/our-insights/Twin-Deficits-Mind-the-Gaps.html Bown C, Lovely ME (2020) Trump’s phase one deal relies on China’s state-owned enterprises. The Peterson Institute for International Economics, Mar 2020. https://www.piie.com/blogs/tradeand-investment-policy-watch/trumps-phase-one-deal-relies-chinas-state-owned-enterprises Brown M, Singh P (2018) China’s Technology transfer strategy: how Chinese investments in emerging technology enable a strategic competitor to access the crown jewels of U.S. innovation. Defense Innovation Unit Experimental, Jan 2018. https://admin.govexec. com/media/diux_chinatechnologytransferstudy_jan_2018_(1).pdf Buck T (2019) Germany spy chief warns against 5G role for Huawei. Financial Times, 29 Oct 2019, https://www.ft.com/content/f97731da-fa6f-11e9-a354-36acbbb0d9b6? emailId¼5db8abe3082f6a0004a00b26&segmentId¼60a126e8-df3c-b524-c979-f90bde8a67cd Caliendo L, Dvorkin MA, Parro F (2015) The impact of trade on labor market dynamics. NBER Working Paper, No. 21149, May 2015 CEA (2018) 2018 Economic Report of the President. Washington, Feb 2018 Fukuyama F (1992) The end of history and the last man. Free Press, London Kennedy S (2020) China’s uneven high-tech drive. Center for Strategic and International Studies (CSIS), Feb 2020 Kimball W, Scott R (2014) China trade, outsourcing, and jobs. Economic Policy Institute Briefing Paper No. 385, Dec 2014 Swanson A, Bradsher K (2018) White House considers restricting Chinese researchers over espionage fears. New York Times, 30 Apr 2018. https://www.nytimes.com/2018/04/30/us/ politics/trump-china-researchers-espionage.html USTR (Office of the United States Trade Representative) (2018) The Trade Act of 1974, Mar 2018 WTO (World Trade Organization), ITC, and UNCTAD (2018) World tariff profiles 2018 Wu M (2016) The ‘China, Inc.’ challenge to global trade governance. Harv Int Law J 57:1001–1063; Harvard Public Law Working Paper, No. 16-35, May 2016. https://ssrn.com/ abstract¼2779781

Chapter 5

Economic and Political Equilibria in East and South Asia

The first element in China’s international projection under Xi Jinping is the political and economic equilibria in the Asian region. The Chinese government has devised a strategy that has led China, on several occasions, to defend its national interests, while at the same time developing a policy of international cooperation to design investment plans and increase intraregional trade. The countries of East and South Asia find themselves at quite different stages of economic development: advanced economies such as Japan, South Korea, Taiwan, and Singapore are flanked by some in the intermediate stage (Thailand, Malaysia, and China) and others that are still emerging (India, Indonesia, Myanmar, Pakistan, Bangladesh, Vietnam, Laos, Cambodia, and the Philippines). This variety is reflected in the absence of shared strategies of cooperation and development, save for some localized initiatives. South-east Asia, given its disunity, is an area of natural confrontation between regional powers.

5.1

South-East Asia1

After World War II, South-east Asia was the arena of a Cold War confrontation no less significant than that between Eastern Europe and the Western world, but with the substantial difference that the clash between the superpowers was not reflected in the establishment of clear spheres of influence with territorial continuity. The political dispute was grafted onto a jumble of ethnic, cultural, and religious factors that were crucial to the outcome. At present, fragmentation remains, both political

1

With the contribution of P. Ginefra.

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2020 L. Bencivelli, F. Tonelli, China’s International Projection in the Xi Jinping Era, SpringerBriefs in Economics, https://doi.org/10.1007/978-3-030-54212-2_5

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and economic, mitigated by the Association of Southeast Asian Nations (ASEAN),2 the ASEAN Free Trade Area, and a complex of other agreements that have come to be dubbed a South-east Asian “alphabet soup.”3 From the political standpoint, China, Vietnam, Cambodia, and Myanmar have traditionally constituted an area distinct from Singapore, Thailand, Malaysia, and Indonesia, although the evolution of political relations within each group has been anything but linear. Over the years, within the former group Myanmar has repeatedly emphasized its independence, while in the latter Indonesia, with the Bandung Conference of 1955, distinguished itself as a cofounder of the global movement of non-aligned countries. As to religion, Malaysia and Indonesia are Islamic, Thailand and Vietnam refer to the Buddhist tradition, the Philippines to Catholicism, and Singapore to Chinese Confucianism. Then there are the defense alliances that the USA wanted to maintain with Thailand, Singapore, and, albeit on a discontinuous basis, the Philippines. Finally, it must not be forgotten that emigration from China has affected the economic evolution not only of Singapore but also of Malaysia and Indonesia, where the overseas Chinese communities have roles of considerable economic importance. Despite this heterogeneity, South-east Asia is economically and commercially integrated, both internally and with China, Japan, and South Korea. For each of the major economies of the region, about 60% of exports goes to other East Asian countries (Fig. 5.1). China accounts for about a fifth of total exports. The EU and the USA take around 15% and 10%, respectively, thanks in part to the proliferation of free trade agreements (at the end of 2015, there were 18 bilateral agreements between East Asian economies and 42 with the countries of the Asia-Pacific region) (Dent 2017). Trade integration with China together with the Belt and Road Initiative projects means that none of the countries in the region really want to distance themselves too greatly from the Chinese government. This factor was central to the negotiations that led the PRC to be a founder member of the China-ASEAN Free Trade Area, which takes its place alongside free trade agreements already signed with Singapore and South Korea. Even before becoming a key element of Xi Jinping’s foreign policy, the economic affirmation of China in South-east Asia was the product of its relative size and its centrality in regional trade flows. For the BRI, South-east Asia is a focal point, both for its geographical position and for the large infrastructural deficit that the Chinese plan would overcome. And the Strait of Malacca, through which some 40% of global

2

ASEAN, established in 1967 at the initiative of Thailand, Malaysia, Singapore, Indonesia, and the Philippines, is a free trade area. The initial aim of containing Soviet and Chinese expansionism has gradually been supplanted by that of economic and commercial integration, most notably starting in the mid-1980s when Brunei, Vietnam, Myanmar, Laos, and Cambodia were admitted. 3 The interests covered by this complex of agreements are sometimes conflicting. Asian regionalism, which involves both northeastern Asia and southeastern Asia, the latter organized within ASEAN, is opposed to the broader concept of regionalism embracing the entire group of Pacific Rim countries (Ha 2018).

5.1 South-East Asia

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Fig. 5.1 Export shares of the major trading partners for the South-east Asian economies, 2010–2013 average. Notes: SE Asia refers to exports to all countries except the one indicated. Source: authors’ elaboration based on the Bank for International Settlements’ effective foreign exchange statistics data

commercial maritime traffic passes, represents both a logistical and a strategic bottleneck. China’s plan for two land corridors for trade through Pakistan and Myanmar must be read in the light of the need to find alternative solutions. The ASEAN Summit of 2011 launched the Regional Comprehensive Economic Partnership (RCEP), consequent to a discussion that had highlighted the need for an integrated economic space embracing East Asia and the Pacific. In addition to the ASEAN countries, the talks for the RCEP have involved China, Japan, South Korea, Australia, New Zealand, and India, which together account for almost half the world’s population and 40% of its GDP. In the framework of the equilibria formed in the Asia-Pacific region during the Obama presidency, the RCEP was perceived by many as the Chinese response to the Trans-Pacific Partnership. If the TPP had the objective of creating an economic free trade area based on shared standards for market, labor, environmental, and consumer protection, the RCEP is configured as a “traditional” agreement for negotiated multilateral reduction of trade barriers. The Chinese government welcomed the RCEP, particularly after the Trump administration’s withdrawal from the TPP, which in the Chinese view was an initial signal of American disengagement from the Asian region. With the strategic aim of containing Chinese expansion in the region, the USA, Japan, Australia, and India developed the concept of “Indo-Pacific confluence,” launching the Quadrilateral Security Dialogue (QUAD). The cohesion of the region bordering on the two oceans has been constantly reiterated in numerous forums among the countries involved, although the dialogue has never clearly defined the interests to be protected or been substantiated in formal agreements (Tang 2018). In the vision of Japanese Prime Minister Shinzo Abe, QUAD should create a

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geographical aggregate characterized by the rule of law and freedom of navigation, a concept made more urgent by Chinese activism in the South China Sea. Although some analysts argue that ASEAN and Indo-Pacific regionalism are complementary, the participation of the ASEAN countries in QUAD is more uncertain. Singapore, for example, contends that the concept is still too vague and devoid of definite objectives. Moreover, none of the ASEAN countries intend to build an organization that is clearly opposed to China. Finally, it remains to be seen whether the term “Indo” is construed to involve India alone or else—perhaps a bit overambitiously—all the countries bordering the Indian Ocean (13 in Africa, 11 in the Middle East, and 4 of the Indian subcontinent). Among the factors of uncertainty that weigh on the possibility of establishing an Indo-Pacific regional body is India’s participation in the Shanghai Cooperation Organization (SCO).4 The SCO is an initiative driven by the Sino-Russian axis; its prime purpose was combating terrorism in Central Asia, but over the years cooperation has been extended to other issues, such as economic and financial matters. Following the 1999 Dushanbe summit,5 the participants pledged not to interfere in the internal affairs of other members with regard to issues relating to humanitarian protection or civil and human rights. Although not explicitly opposed, SCO and QUAD certainly represent different and at least partially incompatible visions of the world, so India’s participation in both raises doubts concerning its strategic positioning (Dogar 2018).

5.2

China’s Growing Influence in East Asia: The Implications for Japan’s Economy and the Policy Responses6

The growing geo-economic influence of China, which has now taken the place of Japan as center of gravity and driving force for growth in East Asia, has altered the regional balance of power. Meanwhile, the reconstruction of a new regional economic balance is complicated by the uncertainty over the US commitment to multilateralism. The change in power relations is encapsulated in the evolution of the relative size of the two economies and their capacity for penetration of regional markets. In the mid-1990s, China’s GDP—at current prices and exchange rates—was less than a quarter of Japan’s, but by 2017, it was about 2.5 times greater. Calculated at purchasing power parity, the dynamic is even more pronounced: the ratio of Chinese to Japanese GDP increased from 70% to 400%. Consequently, the relative 4

China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, Uzbekistan, India, and Pakistan. At that time, the group was known as the “Shanghai Five” and did not yet include Uzbekistan (which joined in 2001), or India and Pakistan (members since 2017). 6 With the contribution of R. De Marchi. 5

5.2 China’s Growing Influence in East Asia: The Implications for Japan’s Economy. . .

51

importance of the Japanese economy globally, i.e., its share of world GDP, has been almost halved since the turn of the century. Sino-Japanese economic relations feature significant complementarities but also areas of intensifying competition. The close commercial and investment relations heighten the interdependency, to the point that the Japanese economy depends to a considerable extent on the success of the Chinese. Two factors reinforce this dependency still further: the aging of the Japanese population tends to compress domestic demand, while at the same time China’s transition toward a more consumption-oriented economy will continue to offer substantial opportunities for Japanese producers, given the sheer size of the Chinese market and the impetus that the growth of middle-income households is destined to impart to the demand for high quality. Together with the USA, China is already the main destination for Japanese exports, taking around 20% of the total. Before becoming an important market, however, China was long the primary locus of production in the internationalization strategies of Japanese corporations, with a stock of investment amounting to $108 billion at the end of 2016. Two-thirds of Japanese direct investment in China is in manufacturing, particularly machinery and transport equipment; half the stock of non-manufacturing direct investment is accounted for by trading activities. The data of the Japanese Ministry of the Economy show that the transformation of China’s economy was also reflected in the local market shares of Chinese subsidiaries of Japanese companies, which rose from about a third at the turn of the century to over 70% in 2017.7 At the same time, China’s tumultuous economic growth faces Japan with a formidable competitor. The steady progress of Chinese manufacturing in products with higher value added has led to the emergence of producers able to rival Japan even in areas traditionally mastered by Japanese industry, such as capital goods. China’s increasing economic influence has been accompanied by the growing presence of its products in the markets of the ASEAN countries and newly industrialized economies (NIEs).8 About 30% of these countries’ imports now come from China (up from just 10% in 2000; Fig. 5.2a). At the same time, Japan’s share has dropped from nearly 20% in 2000 to just 8%, owing in part, admittedly, to delocalization by Japanese industry but chiefly to Japan’s loss of competitiveness in some traditional leading export sectors (again, capital goods) (Fig. 5.2b). The twofold nature of relations between the two countries is what drives the Japanese government’s policy responses to the expanding Chinese presence in an area that Japan has always considered as its sphere of influence. One specific objective of the policy for economic revival (“Abenomics”) launched in 2013 is to support the international projection of the Japanese production system, especially in the high-growth markets of East Asia.

7 Ministry of Economy, Trade and Industry, Quarterly Survey of Overseas Subsidiaries http://www. meti.go.jp/english/statistics/tyo/genntihou/index.html 8 South Korea, Hong Kong, Macao, Singapore, and Taiwan.

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a 45 40 35 30 25 20 15 10 5

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Japan’s foreign economic policy has two main thrusts: export promotion (with particular regard to large infrastructure projects, more easily influenced by Japanese economic diplomacy) and a drive for trade liberalization agreements. On infrastructure, the Abe administration has set the target of tripling the value of foreign infrastructure contracts to the benefit of Japanese companies between 2010 and

5.2 China’s Growing Influence in East Asia: The Implications for Japan’s Economy. . .

53

2020 (bringing it to 30 trillion yen, or 250 billion €).9 In 2013, an interministerial committee for infrastructure export support, chaired by the chief cabinet secretary and composed of the relevant ministers, was formed to formulate strategy and coordinate the various initiatives. The main focus of this policy of infrastructure expansion is on the ASEAN countries, and on the Asian continent more generally. This emphasis also apparently reflects a desire to strengthen ties with the emerging countries of East Asia and contain the growing influence of China. Japan presumably wants to offer these countries a chance to hedge the risk of excessive economic dependence on Chinese support. In this context, a market-based policy focuses on the quality of the infrastructure, with the aim of presenting a more highly diversified range of offers than China, leveraging on Japan’s advantages in terms of technology, safety, reliability, environmental and financial sustainability, and cost measured over the entire life cycle of the projects.10 The promotion of infrastructure exports should rely on a more specifically targeted and synergic use of assistance tools for foreign countries and Japanese companies, through increased financial resources for the projects, the creation of new specialized agencies,11 and enhanced coordination between governmental institutions.12 This policy is accompanied by the strategic use of official development aid. The Development Cooperation Charter of 2015 (which includes “ensuring Japan’s national interest” among the objectives)13 focuses more closely on infrastructure projects and seeks to encourage the participation of Japanese companies in the initiatives.14 In 2013–2016, Japanese-financed infrastructure projects accounted for almost two-thirds of all development assistance in Asia from all the members of the OECD’s Development Assistance Committee (DAC), and for transport networks, the share rises to 80%.15 Bilateral aid is flanked by Japan’s continuing commitment within the ADB and the World Bank, of which Japan is a major financier.

9 The latest data released by the Japanese government, in 2017, show that infrastructural orders had risen to 23 trillion yen. 10 This is also the gist of the “Expanded Partnership for Quality Infrastructure” launched in 2016, which entails a commitment to finance high-standard infrastructure projects for about $200 billion over five years. 11 See, for example, the Japan Overseas Infrastructure Investment Corporation for Transport and Urban Development (JOIN), which supports the promotion of Japanese infrastructure systems abroad, among other things providing venture capital. Established in 2014, it has an investment capacity of about $1 billion. 12 Coordination is ensured by the interministerial committee. 13 Available at https://www.mofa.go.jp/files/000067701.pdf 14 This can be done by informing companies of existing opportunities, but also by selecting projects that favor the participation of domestic industry and, in some cases, through tied loans that offer the beneficiary countries advantageous financial conditions in projects where Japanese technology is used. 15 The DAC brings together the largest OECD providers of development assistance.

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The Abe government’s focus on the promotion of infrastructure exports also affected the operations of the Japan Bank for International Cooperation (JBIC), a public institution active in supporting corporate internationalization.16 In 2016, JBIC approved financial commitments (loans, guarantees, or equity investments) of around $18 billion in favor of over 200 infrastructure projects promoted abroad by Japanese companies. A recent revision of the JBIC Act expands its toolbox for backing infrastructure investments, introducing new types of operation to permit funding more countries and projects. Finally, these financial efforts have been accompanied by intensive economic diplomacy, with multiple promotional missions headed by high-ranking politicians. Confirming the strategic priority of the Asian region, in the first year of his mandate, Prime Minister Abe visited all 10 ASEAN countries, plus India and Mongolia. The second guideline for foreign economic policy is to foster Japanese access to foreign markets by extending the network of trade liberalization agreements, which would increase the share of foreign trade exempted from tariffs to 70%. This is the aim of Japan’s activism in the negotiations for new agreements.17 With reference to the Asia-Pacific area, Japan played a decisive role in relaunching the TPP, with the eventual signing of an agreement (renamed the Comprehensive and Progressive Trans-Pacific Partnership, CPTTP) among the 11 countries left after the withdrawal of the USA. The percentage of Japan’s foreign trade covered by free trade agreements (previously existing or newly signed) rose to 50% from 20% in 2012. At the same time, Japan continues to participate in talks on regional initiatives also involving China, such as the RCEP and a trilateral free trade agreement also embracing South Korea.18 The close economic relations between the two countries and the opportunities that Chinese economic growth and rebalancing will continue to offer to Japanese producers are major factors for Japanese cooperation with China. This is the direction indicated by recent declarations of prominent members of the Japanese government, which appear to embody an attitude of greater openness toward some Chinese initiatives (including, for example, the BRI). All of this within an overall strategy that is careful to ensure business opportunities for Japanese companies, while seeking to channel Chinese initiatives toward standards that are less deleterious to the trade and investment interests of Japanese business, in such areas as market opening, transparency, respect for the rule of law, and intellectual property.

16 The JBIC, wholly owned by the Japanese government, has capital of 1785 billion yen (about 15 billion €). The business consists substantially of lending, with loans which at the end of March 2019 amounted to 14,017 billion yen (about 115 billion €), plus guarantees for around 2500 billion yen (20 billion €). 17 Including the Economic Partnership Agreement signed in July 2018 with the EU, which came into force on February 1, 2019. 18 Japan has a trade agreement with ASEAN and a number of bilateral agreements with countries in the area (Singapore, Malaysia, Thailand, Indonesia, Brunei, Philippines, and Vietnam). Several observers hope that regional initiatives (RCEP, CPTPP) may in the future lead to a free trade agreement, with broad participation and high standards, covering the entire Asia-Pacific area.

5.3 India’s Impatience with Chinese Activism

5.3

55

India’s Impatience with Chinese Activism19

With evident national differences, in the last decade much of South Asia has come or is slowly coming into the Chinese sphere of influence. Economic diplomacy has long attracted Pakistan and Bangladesh, and more recently China has intensified relations with countries in southern Asia (Sri Lanka, Nepal, and Maldives) with which India has sought to maintain especially close bilateral relations. Lacking adequate resources to complement its diplomatic initiatives, India’s effort to counter China’s advance is inconsistent, alternating sudden closures with dialogue and proposals for greater cooperation. India’s GDP is one-fifth of China’s (or just over 40% per capita at purchasing power parity)20; this inferiority is obviously a source of frustration. In an effort to recover a global economic role, in 2015 the Indian premier, Narendra Modi, proposed India as a new, evidently anti-Chinese manufacturing hub, launching a program called “Make in India,” which has had only limited success to date. Although the Indian authorities are seeking preferential relations with China while recognizing that they cannot be equal, the engagement initiatives have been marked by lack of concreteness.21 Diplomatic relations between India and China were restored in 1988, when Prime Minister Rajiv Gandhi visited Beijing to discuss mutual borders. The never-ending discussion on Kashmir—disputed between India, China, and Pakistan—was compounded by additional elements of tension in connection with ongoing border disputes, such as the one that led in 2017 to a Chinese invasion of the Doklam Plateau in the Himalayas, territory pertaining to Bhutan (a country which India considers as a protectorate).22 Chinese “encroachment” on the Indian sphere of influence can also be seen in the recent crisis in Maldives,23 in February 2018, when Chinese warships sailed toward the archipelago in support of the then President Yameen, who had just declared a state of emergency. Finally, the BRI projects for trade corridors in Pakistan and Myanmar (both strategic for China to relieve its

19

With the contribution of A. Furgeri. China’s GDP in 2017 was $12,014 billion and India’s $2602 billion (respectively, at purchasing power parity, $23,208 billion and $9474 billion). Per capita income adjusted for purchasing power was $16,695 in China and $7194 in India. 21 India’s relations with the USA, Australia, and Japan in the QUAD are much closer, involving among other things intense military cooperation, including the “Malabar” joint naval exercises in the Indian Ocean. 22 India recognizes China’s sovereignty over Tibet, but India’s hosting of the Tibetan government in exile in Dharamsala, in Himachal Pradesh, since 1950 has been a source of Chinese irritation. 23 Until 2012, Maldives was in the Indian sphere of influence. Since then, especially under President Yameen, there has been a gradual rapprochement with China, which today manages more than fifteen atolls as part of an infrastructure development program. In 2017, the two countries signed a free trade agreement. 20

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dependence on traffic through the Strait of Malacca)24 have exacerbated Indian impatience. On top of all these sources of irritation for the Indian authorities, there is also the Chinese vote against India’s entry into the group of nuclear power producers.25 India has maintained solid diplomatic and economic ties with neighboring countries for decades, partly for historical and cultural reasons and partly owing simply to India’s relative size and importance. Migrants’ remittances are a clear reflection of this (Table 5.1): every year, workers send almost $6 billion from India, in large part to Bangladesh and Nepal (compared with just $120 million from China). Meanwhile, India is the main supplier of labor in the area, and receives remittances of about $9 billion a year,26 while China receives just over $1 billion, almost all from Bangladesh. Despite the migratory flows, commercial integration in South Asia is still poor, owing to insufficient infrastructure, numerous customs barriers, and India’s difficulty in assuming the leadership of any cohesive regional initiative. In this context, the bilateral trade deficits of all the area countries with China have increased: India’s deficit, for example, has exceeded $50 billion a year since 2014 (2.5% of GDP; Fig. 5.3b). UNCTAD’s data on FDI stock abroad refer only to 2012 but nevertheless provide a clear picture of bilateral financial relations in South Asia (Fig. 5.4). Pakistan and Sri Lanka are the clearest instances of China’s growing interest in the Indian Ocean, both playing strategic roles within the BRI. In Sri Lanka, China has invested in the construction of a port, an airport, and a cricket stadium in the eastern city of Hambantota. This Sinhalese city is a natural base for transshipment of goods for the Indian market, and control of the port constitutes a substantial vertical integration of logistic processes in the Indian Ocean. In 2013, China and Sri Lanka agreed to a strategic partnership entailing a financial commitment of $2.5 billion in the 3-year period 2013–2016 (against $660 million from India). Following the inauguration of the new Sinhalese president, Maithripala Sirisena, relations tensed, and China’s $1.4 billion project for the Colombo maritime cargo terminal was suspended, in consideration of Sri Lanka’s

24 Half of the world’s container traffic transits through the Indian Ocean, and 70% of the crude oil transported by sea and 80% of that imported annually by China. 25 In 2017, China voted against India’s accession in view of the latter’s refusal to sign the nonproliferation treaty. India countered by voting against China’s entry into the South Asian Association for Regional Cooperation (SAARC) established in 1985. Headquartered in Kathmandu, Nepal, and embracing Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka, the association has had a free trade agreement with Afghanistan since 2004. 26 With some 20 million workers abroad, India is the world leader in inflows of remittances, which came to about $70 billion, or 3% of GDP, in 2017. The inflow of primary income is greater than direct and portfolio investment and is essential to the sustainability of the current account of the balance of payments. The leading source, accounting for about 18% of this flow, is the USA, followed by the United Arab Emirates.

China 41 –

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Table 5.1 Remittances of primary income from China and India to South Asian countries in 2017 (USD billion) Sri Lanka 520 22

Total Region 5618 123

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5.3 India’s Impatience with Chinese Activism 57

58 Fig. 5.3 Bilateral trade with China; USD billion. Source: authors’ elaboration based on China Customs and CEIC data

5 Economic and Political Equilibria in East and South Asia

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5.3 India’s Impatience with Chinese Activism

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Fig. 5.4 Stock of foreign direct investment by India and China in the main South Asian countries (USD billion). Source: authors’ elaboration based on UNCTAD data

economic and financial conditions.27 The restructuring of the debt relative to the Hambantota project included the concession of the port infrastructure to the Chinese conglomerate China Merchants Port Holdings Company for 99 years. India’s irritation with Chinese initiatives in South Asia is directed in particular toward the BRI. While acknowledging the benefits, the Indian government has pointed to some basic defects of the Chinese plan, mostly bearing on finance, socio-environmental sustainability, and respect for territorial sovereignty. In detail, India has complained about the progressive militarization of the Indian Ocean (China recently opened a base in Djibouti) and the risk that the BRI will become a debt trap for many countries, as in Sri Lanka. These issues led the Indian government not to send a high-level delegation to the first Belt and Road Forum for Global Connectivity in Beijing in 2014. Overall, India’s response to Chinese initiatives has been slow and not always effective; a relatively lower level of development of the Indian economy limits resource availability and technical capacity. The way out for India is increasingly elusive, as is attested by the accession of Nepal (traditionally equidistant between the two Asian powers) to the BRI, despite India’s recent intensification of relations with Kathmandu. Other efforts—“space diplomacy” in connection with the launch of an SAARC satellite or “double-track military diplomacy” based on the intensification of QUAD cooperation and closer relations with Iran and Oman—are of uncertain efficacy. A different scenario could open with the start of a new season of relations with the PRC taking account of the balance of power between the two powers and leading to an open discussion on the India–Bangladesh–Myanmar–China trade corridor.

27 In 2017, growth slowed to 3.1%. Sri Lanka’s foreign debt rose to $75 billion (80% of GDP), half of it denominated in foreign currency, with interest payments amounting to 14.1% of GDP.

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References Dent CM (2017) East Asia integration towards an East Asian economic community. ADBI Working Paper Series, No. 665, Feb 2017 Dogar FE (2018) India, SCO and the QUAD. South Asia Program at Hudson Institute, 26 Jun 2018. http://www.southasiaathudson.org/blog/2018/6/26/india-sco-and-the-quad Ha TH (2018) Evolving regionalism in Asia-Pacific. ASEAN Focus, issue 3/2018 Tang SM (2018) ASEAN’s hard look at Indo-Pacific. ASEAN Focus, 3/2018

Chapter 6

Central: Western Asia and the Middle East

6.1

Russia1

The BRI has accelerated the advance of Sino-Russian relations. In 2001, diplomats had already begun to overcome the two countries’ long-standing mutual distrust with the “Treaty of Good-Neighborliness and Friendly Cooperation,” which settled some territorial disputes that had dragged on since World War II. According to Putin, relations with the PRC are now “the best . . . ever recorded.” The Russian government sees China as an essential ally in the modernization of its industrial sector, thanks to its wealth of capital and technology, while for the Chinese authorities Russia is a fundamental source of military procurement following the embargo imposed by the USA and the EU after following the events of Tiananmen Square in 1989.2 Russia and China display a number of strategic complementarities, Russia being a commodity exporter and China a manufacturing exporter. However, the new season of rapprochement would appear to be the product of a convergence dictated by contingent elements and anti-Western rhetoric. Indeed, some structural and contextual factors weigh on the situation and appear, at least for the moment, to be hard to overcome. For Russia, China poses major problems, with a population ten times as great, an economy about four times as large,3 and an industrial system much more powerfully projected on international markets. These factors threaten to relegate Russia to the status of junior partner.

1

With the contribution of A. Zucchini. Emblematic of this point of view is the participation of the People’s Liberation Army in the exercises of the Russian armed forces in September 2018. 3 At purchasing power parity, however, the Russian GDP per capita is about $10,000 higher than the Chinese (in 2017 dollars). 2

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2020 L. Bencivelli, F. Tonelli, China’s International Projection in the Xi Jinping Era, SpringerBriefs in Economics, https://doi.org/10.1007/978-3-030-54212-2_6

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Among the difficult issues is the potential conflict of interests in Central Asia, where Russia, with the Eurasian Economic Union (EAEU), intends to reassert its hegemony. Although in theory EAEU and BRI can be seen as potentially complementary, in practice the two projects are aimed at expanding their respective sponsors’ areas of influence in the same region, and so threaten to cause friction. In 2017, the sum of trade flows between Russia and China came to $87 billion, certainly not a large amount given the size of the two economies and in any case very far from the goal of $200 billion set for 2020 and much smaller than the bilateral trade flows between Russia and the EU ($246 billion in the same year; Fig. 6.1.). There is a marked asymmetry in market shares: China accounts for 25% of Russia’s total trade and Russia just 2% of China’s. Russia, however, is China’s leading oil supplier and is also set to become its largest supplier of natural gas once the 2200-km Power of Siberia pipeline opens at the end of 2019. China’s demand for raw materials is met not only through the traditional export channel but also, and increasingly, by means of Chinese

6.2 Iran, Turkey, and the Third BRI Corridor

63

investment in new projects in Russia.4 One of these is the Bystrinsky project, in the Trans-Baikal Territory, relatively close to the border with China. A plant for the extraction of copper and gold, with an estimated processing potential of 350 million tons, has been set up by the Russian mining giant Norilsk Nickel together with China’s Highland Fund, whose stake is greater than 13%. The BRI is physically transforming the economic geography of the two countries. Consider, for example, the bridge over the Amur River, under construction by a Russian-Chinese joint venture, which will improve transport between Russia and China and therefore also facilitate Chinese imports of raw materials from neighboring Siberia. Another important infrastructure initiative within the BRI is the China– Mongolia–Russia economic corridor: a road/rail line running northward, designed to intensify goods trade between China and the two neighboring countries. More generally, the BRI envisages the modernization of transport lines through Russia to Europe and to Russia’s ports in the east, particularly Vladivostok, and the construction of the so-called polar corridor,5 a line of communication perhaps even more ambitious than the BRI. As part of these projects, the two governments have promoted the creation of the Russia-China Investment Fund (RCIF). For the Russian authorities, the goal is to maintain some form of control over the financing of the works that will affect Central Asia. The rapprochement between the two governments has also had an impact on neighboring countries, which have felt freer to conduct their relations with China independently, without fear of annoying the Russian government. Among these, Kazakhstan has a special role, given both its geographical position as the main gateway of the BRI and its vast energy resources.6

6.2

Iran, Turkey, and the Third BRI Corridor7

The third economic corridor of the BRI runs through Iran and Turkey, two countries with different approaches to the Chinese initiative: the latter aims to intensify relations with the PRC in order to obtain the capital and technology that it

4

In the past, the Russian government had been extremely wary of joint ventures with China in the raw materials sector, considered strategic and therefore barred to international investors (especially from Asia). The altered international context has brought a reassessment and the opening up of the sector to Chinese investors. 5 On January 26, 2018, the Information Office of the State Council of the People’s Republic of China published a white paper, “Chinese Arctic Policy,” emphasizing China’s interests in the Arctic region and recommending the construction of a Polar Silk Road (State Council Information Office of the People’s Republic of China 2018). 6 According to China Global Investment Tracker data, since 2005 Chinese investments in Kazakhstan have exceeded $30 billion, of which $22 billion in the energy sector; acquisitions subsequent to the announcement of the BRI in 2013 and related to it are estimated at over $8 billion. 7 With the contribution of A. Zanotti.

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increasingly struggles to procure from the West, while the former seeks to reduce its already high degree of dependence on China, which, not applying the US sanctions, is Tehran’s leading customer and supplier. According to UNCTAD data, at the end of 2015 China ranked twenty-second among the countries investing in Turkey. Underlying the weak economic and financial relations between the two countries, despite the growing commercial and financial strength of the PRC, is Turkey’s historic opposition to the treatment of the Uyghurs, the Chinese-Turkic Muslim minority in the Xinjiang region. A turning point in relations between the two countries came in 2016, after the failed coup in Turkey, which signaled a break in relations between Ankara and the West and prompted Turkey to turn its gaze ever further to the east. Since the second half of 2016, Chinese investment in Turkey has taken off, and the foundations have been laid for a significant expansion of the presence of Chinese operators in three sectors: banking, energy, and infrastructure. With reference to banking, the ICBC and the Bank of China (BoC) have been enabled to operate in Turkey, the former by means of an acquisition8 and the latter thanks to a license to set up a new bank. In the energy and infrastructure sector, an agreement was signed for Chinese construction of the third nuclear power plant, to be built in the European part of Turkey, while some Chinese companies9 have signed contracts for the development of photovoltaic plants in Anatolia. The Chinese company Baosteel won the tender to participate in the construction of the Trans Anatolian Gas Pipeline (TANAP), Turkey’s most important geostrategic project in the energy sector, which will transport Azerbaijani gas to Europe via the Trans Adriatic Pipeline (TAP), whose designated outlet is located in Puglia. Within the third economic corridor (China, the Middle East, and South-East Asia) the development of two high-speed railway lines is planned: the first, called Baku– Tbilisi–Kars, will link Azerbaijan, Georgia, and Turkey; the second, entirely in Turkish territory, will run from Kars to Edirne, on Turkey’s border with Bulgaria and thus with the EU. If Turkish participation in the land routes is well established by now, the same cannot be said of the maritime part. The development of the port of Piraeus, the agreements with Egypt on Suez, and the presence of at least two Black Sea ports alternative to Istanbul—Analakia in Georgia and Constanta in Romania— are likely to exclude Turkey from maritime trade flows. In this context, the Chinese presence in the port of Kumport, located in the European part of Turkey about 22 miles from the Bosphorus, is strategic for Ankara. That facility is specialized in container handling and could be integrated with Piraeus, especially if the latter is unable to manage cargo ship arrivals efficiently.

8

ICBC acquired Tekstil, a retail bank, launching capital and strategic strengthening that has led to its territorial expansion and rebranding as “ICBC.” 9 Shanghai Aerospace Automobile Electromechanical Co. Ltd, Phono Solar Technology Co. Ltd, China Sunergy Co. Ltd, and AVIC International Holding Co. Ltd.

6.3 The Middle East

6.3

65

The Middle East10

The Chinese government considers the Gulf countries as natural partners in light of their geographical position and their role in ensuring energy security. Within the BRI, stabilizing the area is central to investment security, and Chinese diplomatic action in the region has intensified accordingly. China’s positioning (accompanied by huge investments and donations) is clearly welcome to the governments of the Gulf Cooperation Council (GCC). The Head of State of Kuwait has publicly emphasized China’s stabilizing role in regional crises (Palestine, Somalia, Yemen, Syria, and Libya) thanks to "its international weight and influence." The Chinese government described the key to interpreting Sino-Arab relations in its 2016 Arab Policy Paper. That document uses the formula “1 + 2 + 3”: (1) the hydrocarbons sector continues to be the backbone of diplomatic and commercial relations; (2) infrastructure and services (particularly commercial and financial services) should act as catalysts; and (3) high tech, alternative energy, and aerospace represent the turning point. Hydrocarbons In 2017, China became the world’s largest importer of crude oil, receiving 8.4 million barrels a day, up from 4.8 million in 2010 (Fig. 6.2.a). Although China’s sources of supply are numerous and geographically diversified (Fig. 6.2.b), in 2017 the Middle East (Gulf countries plus Iran) supplied 43% of its oil imports, with more than half of that portion extracted in the countries belonging to the Gulf Cooperation Council.11 Saudi Arabia, China’s second largest supplier after Russia, exported about a million barrels a day to China, or 12% of the latter’s total oil imports. Exports to China have become progressively more important for many countries in the region: for example, 77% of Oman’s hydrocarbon exports go to China. To guarantee the PRC’s energy security, the government is working to consolidate China’s positions both upstream and downstream. Upstream, Chinese companies are securing more and more contracts for oil exploitation and exploration throughout the region12 and have shown a keen interest in acquiring (including by private treaty) 5% of Saudi Aramco, the Saudi state oil company. Downstream, China’s Sinopec has just signed a cooperation agreement with Saudi Basic Industry Co., the Gulf's leading petrochemical company, to develop projects in the petrochemical sector in both countries.

10

With the contribution of S. Longoni. China is one of eight countries that the USA has exempted from sanctions on oil imports from Iran. The exemption, of limited duration (180 days) but renewable, answers the need to mitigate price fluctuations on international markets. 12 Numerous media sources track the granting of oil exploration permits to Chinese companies. In 2017, for example, it was reported that a subsidiary of the China National Petroleum Corp. had obtained an exploration contract for a large area in Saudi Arabia. 11

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Fig. 6.2 Oil imports of China and the USA (a, millions of barrels per day) and distribution by origin of Chinese imports (b, percentage values). Sources: authors’ elaboration based on US Energy Information Administration, China Customs, Refinitiv, and CEIC data

Infrastructure and Services Within the BRI, the countries of the Arabian Peninsula play a role of no small importance in view of their geographical position between India and Suez. In this context, Chinese involvement in the modernization of the Emirates’ ports—in particular Port Khalifa in Abu Dhabi and Jebel Ali in Dubai, as well as Duqm in Oman—appears strategic. In order to facilitate investment, China and the GCC countries are setting up joint investment vehicles, such as the Sino-Saudi fund established in 2017 with an initial endowment of $20 billion and a mandate to support projects linked to the BRI and Vision 2030 (the Saudi government’s medium-term structural reform plan). Chinese financial institutions are already operating out of the Dubai International Financial Center, where they control about one-quarter of the total financial assets traded. On the occasion of Xi's visit to the United Arab Emirates in July 2018, Abu Dhabi Global Market was opened. This is a subsidiary of China’s Industrial Capacity Cooperation Financial Group, a conglomerate whose mission is to facilitate the financing of projects in the

6.4 The Southern Mediterranean

67

BRI area. To support liquidity in these market segments, the PBoC has signed currency swap agreements for RMB35 billion (ca. $5.1 billion) each with the central banks of Qatar and the United Arab Emirates. Alternative Energy Sources For the Gulf countries, diversifying the energy mix would increase the quantity of crude oil available for export and improve public finances and trade balances. For the Chinese economy, a greater commitment by the Arab countries on the alternative energy front would open up an outlet market for its energy and electromechanical companies. Given the convergence of interests, among the high-tech sectors mentioned in the Arab Policy Paper, the section dedicated to non-fossil energy sources is the one that best captures the possible synergies. A first example of collaboration is the construction in Dubai of what, upon completion, will be the largest solar energy plant in the world, with an installed generating capacity of 700 MW.

6.4

The Southern Mediterranean13

With a population of over 200 million inhabitants, North Africa represents an important export market for Chinese products. From 2004 to 2017, trade between China and North Africa grew at an average annual rate of 20%, rising from $4.4 billion to $28.7 billion (Fig. 6.3.); the goal of the PRC authorities is to double this figure by 2020. China’s exports to North Africa have exceeded its imports from the region, generating a large trade surplus. China’s interest in the region is not limited to trade alone. In line with the government's plan to rebalance its economy, China has begun to outsource laborintensive operations, such as clothing and automobile assembly, to North Africa. According to the China–Africa Research Initiative, Chinese direct investment in North Africa in 2017 amounted to $3.4 billion, about 10% of the total inflow to Africa that year.14 The Chinese presence in the region is also aimed at deepening China’s commercial ties with Europe through those North African countries that have free-trade agreements with the EU and the European Free Trade Association (EFTA).15 The BRI sea route passes through two bottlenecks: the Strait of Malacca and the Suez Canal. As regards Suez, the absence of alternatives has led the Chinese authorities to seek to control the area through massive direct investment and closer diplomatic relations with Egypt. In 2015, completion of the enlargement of the Canal made it possible to double the daily capacity of cargo traffic and reduce waiting times in both directions. Unlike the Panama Canal, also recently doubled, the Suez 13

With the contribution of S. Iezzi. According to Eid-Oakden (2017), Chinese direct investment in North Africa accounts for 30% of total foreign direct investment in the Arab world. 15 Norway, Switzerland, Iceland, and Lichtenstein. 14

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a 9 8

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Fig. 6.3 Trade between China and North Africa by country (a, USD billion) and overall (b, USD billion). Source: authors’ elaboration based on China Customs and CEIC data

Canal allows the transit of large ships.16 These elements are strengthening the competitiveness of the Europe–Far East route and the economies along it. In fact, Suez is becoming increasingly central not only for trade to Europe but also for shipments to the east coast of Central and North America. In many cases, the factors mentioned, combined with the facilities provided by the Suez Canal Authority, make this route advantageous compared with transpacific shipment. According to the think tank Studi e Ricerche per il Mezzogiorno, in 1995 the transpacific routes accounted for 53% of global maritime traffic, while that of

16

The Panama Canal can handle container ships with a maximum capacity of 14,000 TEU (20-foot equivalent units, the standard measure of containers transported by ship) as against the 20,000 TEU limit of Suez.

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Europe–Far East, through Suez, accounted for only 27%. Today the gap in shares has essentially closed: by 2015, the former had fallen to 44%, while the latter had increased to 43% (SRM 2016). For the Chinese government, Egypt is consequently one of the top five destinations for extraordinary corporate operations under the BRI. During Xi’s visit to Cairo in January 2016, the two countries signed a memorandum of understanding that included $17 billion of investment linked to the BRI. The agreement envisaged numerous cooperation projects, including the expansion of the Sino-Egyptian special economic zone, already present in the Suez Canal Zone, and investments in maritime and road transport. While Egypt aspires to complete its infrastructure in order to become the main trading hub for logistics among the BRI countries, China for its part is striving to increase its influence (and possibly control) over a strategic infrastructure. Aware of this transformation and under the umbrella of the BRI, Chinese companies, especially SOEs, are investing heavily in port infrastructure and in the construction of special economic zones, making China the largest foreign investor in the Suez Canal Corridor Area Development Project, an $8.5 billion investment program launched in 2014 to strengthen river transport capacities and transform the Canal region into a center of economic development and an industrial and logistics hub. As of today, Chinese investments amount to less than $1.5 billion, but they are expected to exceed $10 billion in the coming years, thanks to a recent agreement between Egypt and the China State Construction Engineering Corporation (CSCEC). These investments follow those undertaken in 2009 for the construction of the China-Egypt Suez Economic and Trade Cooperation Zone, a special economic zone later merged into the framework of the BRI projects. In Port Said, at the northern entrance to the Suez Canal, the China Ocean Shipping Company (COSCO), the largest Chinese state-owned company specialized in shipping, shipbuilding, and logistics, has invested in the joint venture to control the Suez Canal Container Terminal. The China Harbor Engineering Company (CHEC) has signed a contract for the construction of a multipurpose terminal in the Port of Alexandria. In addition, the China Railway Construction Corporation is currently building a 70-km rail network in the metropolitan area of Cairo. The scope of the BRI in the region extends beyond the Suez Canal and includes sea routes along the southern shore of the Mediterranean, in particular Morocco and Algeria. The Tanger Med Port, near the Strait of Gibraltar, is already a global logistics port linked to 174 destinations worldwide, with a capacity of 9 million containers, and constitutes an industrial hub comprising more than 750 companies in the automotive, aerospace, logistics, textile, and commercial sectors. In the vicinity, the Chinese conglomerate Sichuan Haite High-Tech is building a large industrial park that will host 200 multinationals and provide access to West Africa and

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Europe.17 For the infrastructure alone, covering some two thousand hectares and to be built over 10 years, the planned investment amounts to $10 billion. Moreover, with the prospect of Morocco’s membership in the Economic Community of West African States, which Morocco asked to join in 2017, China’s trade route could be extended further toward West and Central Africa. Further east, in Algeria, the leading destination of Chinese investment in North Africa, in 2016 China signed a $3.3 billion agreement to expand the transshipment center of Cherchell port, 60 kilometers from Algiers, which would also facilitate access to the sea for neighboring countries, such as Mali. The port, with 23 piers capable of handling 26 million tons of goods a year, has become a key point in China's economic expansion in the Mediterranean. The project, slated for completion by 2023, will operate under the management of the China Shanghai Port Group. The expansion of Chinese business in North Africa in recent years has not had a significant qualitative impact on the labor market. The jobs created locally have been mostly for unskilled workers, despite high unemployment rates among the young educated population. Needing financial resources, the region's governments have exempted Chinese investors from a series of conditions on the employment of local workers that they generally apply to European operators. This has led to conflicting perceptions of China's growing influence. While the countries of the region are worried about the trade imbalance,18 they find the promised financing of a substantial infrastructure and investment program very attractive. In addition, many governments in the area appreciate the PRC’s non-meddling in their domestic politics and the fact that China does not set its sights on leadership in regional affairs. The recent overtures by Cairo to the Chinese government came after the deterioration in Egypt’s relations with the USA, due to the American attempt to interfere in the country’s domestic politics following the Arab Spring.

References Eid-Oakden F (2017) China’s growing North Africa footprint. ACT Middle East Treasury Summit, Summer SRM (Studies and Research for the South) (2016) Italian Maritime Economy - Third Annual Report State Council Information Office of the People’s Republic of China (2018) China’s Arctic Policy, January. http://english.www.gov.cn/archive/white_paper/2018/01/26/content_ 281476026660336.htm

17 On the other side of the Strait, COSCO has acquired 51% of the Noatum Port Holdings, the Spanish company that operates the largest container terminal in the port of Valencia, among the leading Mediterranean ports. 18 Representatives of the region’s governments have paid numerous visits to Beijing, in part to encourage a greater opening of the Chinese domestic market to North African products.

Chapter 7

China in Sub-Saharan Africa

Starting in 2001, Sub-Saharan Africa (SSA) has been a preferred destination for Chinese investments and loans, although more recently the projects linked to the BRI and MIC2025 have partially shifted the focus of Chinese investment policy to other countries. Box 7.1 China’s Need for Raw Materials1 China became a significant player on the international commodities markets beginning in the 1990s and assumed a dominant role after 2000. The driving factor for Chinese purchases has gradually shifted from processing for export to serving domestic demand. Despite the government’s commitment to the recycling of used materials and the optimization of production processes in order to limit consumption and raw materials imports, Chinese demand for basic materials is destined to remain very substantial in the coming decades. Aside from demographics (China makes up 18.5% of the world population), the strong demand for raw materials from China can be explained by four factors: (a) Industry’s demand for capital projects and production. (b) Physical consumption by the population in connection with urbanization, which influences the demand for residential construction (iron and steel, copper and base metals, glass), public services (water, energy, and transport supply), and durable consumer goods. Furthermore, the evolution of consumption habits from an agricultural, proto-industrial, and self(continued) With the contribution of A. Coco 1

With the contribution of A. Giraudo.

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2020 L. Bencivelli, F. Tonelli, China’s International Projection in the Xi Jinping Era, SpringerBriefs in Economics, https://doi.org/10.1007/978-3-030-54212-2_7

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Box 7.1 (continued) consumption to a post-industrial-revolution model, with vigorous demand for new products and a rapidly changing diet (animal proteins in particular), has had a considerable impact on China’s demand for raw materials. (c) The central government’s determination to promote strategic stockpiling. This is reflected in China’s investment strategies in commodity-exporting countries, aimed at ensuring continuity of supply and limiting the risks associated with possible network disruptions (Sow 2018; Chalmin 2018). (d) Investors’ use of commodities (gold in the first place) to hedge against exchange rate risk to their assets, largely denominated in renminbi. Although China is among the leading global producers of numerous crops, it is also among the top importers of many foodstuffs, in particular cereals, rice, and soya (Table 7.1). The Chinese steel industry is the largest in the world, with output five times that of the European Union. Despite an excess of installed capacity, China remains the world’s third-ranking importer of special steels, as domestic production is unable to satisfy the demand. Chinese iron ore imports account for 78% of the total volume traded in global markets.2 With reference to non-ferrous metals, China is the world’s largest producer of aluminum, refined copper, tin, and zinc (respectively 53%, 33%, 40%, and 45% of world output), and for some of these it is also the top global importer of basic minerals. For lead, zinc, and aluminum, local extraction almost fully covers domestic demand. Rare earths, an expression that refers to certain alkaline, refractory, and semi-conductive metals,3 deserve special mention. These materials are increasingly used in high-tech electronic products, and their extraction and processing have a major environmental impact. The Chinese government’s tolerance for pollution produced in mining and refining them used to be much greater than that of other countries with exploitable deposits (Giraudo 2017). This, together with an aggressive market strategy based on public subsidies, made China the world’s leading producer, especially with regard to processed minerals. Rare earths’ specific importance is at the root of their exclusion from the recent US-China trade dispute (Henry 2018). The Ministry of (continued)

2 Despite the domestic demand for ferrous materials, Chinese scrap imports are just one-tenth of Europe’s, reflecting the Chinese steel industry’s limited capacity to operate with recycled materials. Since the beginning of 2017, the steel industry has replaced induction furnaces with electric arc furnaces, suitable for the processing of scrap metal; last June, the government imposed a ban on imports of 24 types of scrap iron, in order to rationalize the sector. 3 Antimony, fluorite, gallium, germanium, graphite, indium, magnesium, and tungsten, among others.

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Box 7.1 (continued) Environmental Protection’s decision of February 12, 2017, aimed at drastically reducing air, soil, and environmental pollution caused by the mining and industrial sectors, could have an impact, still to be quantified, on the costs of extracting and processing rare earths. Although China is the leading global producer of cotton and ranks second for wool (after Australia, which produces about a quarter of the world total), it is also the leading importer of both materials. Alongside large purchases for domestic consumption, imports feed the production of textiles and garments for export. For wool, Chinese imports are about double those of Italy, the second-largest importer (Table 7.2). At the end of 2016, China accounted for 23% of global electricity consumption and for about a quarter of the global increase (BP 2017). In its energy mix, the Chinese economy favors coal, which covers 62% of national demand, down from 74% around the turn of the millennium. Although the rich deposits in the north of the country allow it to be self-sufficient in coking coal (and even to export), about a fifth of international exports in steam coal go to China, the top global importer. China also ranks first in oil imports, its industrial system requiring three times the volume of domestic output. Over the years, the PRC has signed commercial agreements with some major exporters (in particular Nigeria, Angola, South Sudan, and Malaysia) to ensure a constant share of their production. Nevertheless, the Chinese government has decided to develop shale oil extraction from its soil (S&P 2018). Natural gas still represents a modest component of national energy production (around 6%), but its share of China’s energy mix will double by 2040 (IEA 2018). Although China is the third-ranking world producer, the expected dynamics of national demand suggest that China’s share of world natural gas imports (currently 8%) will increase, despite the contribution coming from the reactivation of the shale fields of Sichuan. Looking ahead, the completion of pipelines from Eastern Siberia and Central Asia and the imminent commissioning of regasification plants in southern China will accelerate the country’s purchases of natural gas abroad (Table 7.3). Bilateral trade data signal the importance of the relationship between China and Sub-Saharan Africa, especially for the latter. China is among the main trading partners of many African countries.4 Merchandise flows grew continually from 2010 before suffering a setback beginning in 2015 (Fig. 7.1). The reversal had multiple causes. On the one hand, the value of China’s imports dropped due to the fall in commodity prices coupled with slowing demand, which reflected the gradual transition of the Chinese economy toward services and high-value-added products. 4 In 2016, China took almost 30% of South Africa’s exports and sourced 18% of its imports, shares exceeded only by the European Union as a whole.

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Table 7.1 China’s rank in world production and imports Corn Wheat Barley Sorghum Rice paddy Rice husked Soya—Seeds • Oil • Flour Rapeseed Sugar Meat—Bovine • Sheep • Swine • Poultry Milk Fish

Production 2 2 13 8 1 6 4 1 1 3 4 4 1 1 2 4 1

Imports 5 8 2 1 1 1 1 1 3 2 1 2 1 1 5 2 1

% on world imports 6.4 2.5 25 73 14 15 65 25 25 15 12 15 35 27 8 10 33

Source: based on the US Department of Agriculture, FAO Stat, International Wheat Council, and Statista data Table 7.2 China’s rank in world production and imports

Iron Aluminum Copper Tin Zinc Nickel Lead Cotton Wool

Production 1 1 1 1 1 1 1 2 2

Imports 1 n.d. 1 1 3 1 1 1 1

% on world imports 78 n.d. 35 25 8 50 10 16 18

Source: Based on the World Bureau of Metal Statistics, International Lead and Zinc Study Group, International Aluminium Institute, and International Tin Association data Table 7.3 China’s rank in world production and imports

Coal Crude oil Natural gas

Production 1 6 5

Imports 1 2 3

% on world imports 20 15 8

Source: based on British Petroleum, International Energy Agency, Sands (2019), S&P Global (2019), ENGIE, the World Bank, and the US Department of Energy data

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Fig. 7.1 Merchandise trade between China and Sub-Saharan Africa (USD billion). Source: authors’ elaboration based on UN—Comtrade data

On the other hand, African imports recorded a sharp slowdown as a result of the fall in export revenues starting the following year. China’s main trading partner in the region is South Africa, which accounts for 18% of Sub-Saharan African exports to China (mainly minerals and precious metals) and absorbs 30% of SSA imports from China. The second-largest exporter is Angola, whose shipments to China consist almost exclusively of oil. According to data from the China–Africa Research Initiative at Johns Hopkins University, from the beginning of 2000 Chinese lending to the SSA countries amounted to $139 billion, two-thirds of it from the China Exim Bank (Fig. 7.2), showing marked though discontinuous growth since 2011. The annual flow of direct investment ranged between $2 billion and$3 billion in the years from 2010 to 2016 and nearly doubled in 2017. From the point of view of sectoral allocation, credit fed the transport sectors (30 percent), power (generation and distribution, 26 percent), mining (13 percent) and telecommunications (6 percent). The main recipients of direct investment are mining and construction, with respectively 23 and 32 percent of the total stock as of 2017. In the financial sector, there is only one major direct investment in SSA (ICBC’s equity interest in the South African Standard Bank), but this does not mean that there is no Chinese presence. On the contrary, in recent years Chinese banks have opened branches in the region or entered into partnership agreements with local banks in order to finance Chinese companies’ growing investment activity in Africa. For example, BoC opened a branch last year in Angola (the first Asian bank in the country), while its branch in Johannesburg also acts as a clearing bank for the renminbi, supported by a swap agreement between the South African and Chinese central banks, similar to those with other central banks of the continent. Also worth mentioning is the activity of the Chinese Exim Bank, which operates in several countries of the region (e.g., Mozambique and Tanzania) to guarantee export credits or finance infrastructure works. The expansion of the Chinese financial sector in

76 Fig. 7.2 Chinese bank and FDI loans in SSA (a and b, USD billion) and percentage distribution by sector of activity (c) and (d). Source: authors’ elaboration based on China–Africa Research Initiative data

7 China in Sub-Saharan Africa a Bank loans 28 24 Angola Ethiopia Nigeria South Africa Zambia Other

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Africa responds to a logic of lender proximity to investment projects and recipients of loans. During the Forum on China-Africa Cooperation (FoCAC) in Johannesburg in 2015, China made commitments for $60 billion to be spent by 2018, divided as follows: • $35 billion for concessional loans and aid, preferential credit lines, and export credits • $5 billion for donations and interest-free loans • $5 billion for the fund for small and medium-sized enterprises (raising its endowment to $6 billion) • $10 billion for the creation of the China-Africa Industrial Capacity Cooperation Fund • $5 billion to expand the budget of the China-Africa Development Fund (up from $5 billion) In addition to the financial commitment, on the same occasion Chinese President Xi made commitments for capacity-building initiatives and for the preservation of security and peace in the region. Regarding capacity-building, Eom et al. (2018) point out that the projects would largely involve education and study trips, also used as tools of soft power and to disseminate an “alternative narrative” about China. The Chinese leader promised military assistance in advance of the establishment of a continental crisis force, exchanges of expertise and information, and anti-piracy activities in the Gulf of Aden, to be run from the naval base opened in Djibouti in 2017. In August 2018, Chinese financial commitments were pared (the government’s budget line decreased from $60 billion to $50 billion in the three-year period, $10 billion being delegated to the private sector), with a reallocation in favor of aid and donations, up from $5 billion to $15 billion over the three years. The package also provides for debt cancelation on expiring concessional loans. The intensifying Chinese presence in Sub-Saharan Africa goes beyond a swap of raw materials and outlet markets for infrastructure and financing. For African countries, credit and investments from China are not explicitly subject to conditions or to the obligation to enact reform programs, as is the case when they turn instead to international financial institutions. Furthermore, the PRC government does not intervene in the partner countries’ home affairs. However, this policy carries the risk that the financing from China could push the indebtedness of some African countries beyond the limit of sustainability, putting them in an uncomfortable bargaining position if they were to face Chinese requests for further concessions on commodity prices and for political support in international forums. According to Eom et al. (2018), the sustainability of the exposure vis-à-vis China is not a major problem. Financial tensions have originated mostly from internal factors, such as civil wars, or from the decline in commodity prices. Debt to Chinese institutions is the most critical factor only for Djibouti and Zambia, whose exposure to Chinese financial institutions makes up about three-quarters of their total foreign

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debt, and the Republic of the Congo, where the situation is so chaotic that the president had to travel to Beijing to clear it up in person. In SSA–China relations there are also issues relating to the quality of the infrastructure built by Chinese companies and to insufficient job creation and transfer of know-how to the local population, as Chinese contractors tend to use Chinese workers for skilled and managerial positions, while employing local workers only for low-skilled jobs. Furthermore, crowding out of African firms by Chinese competitors could offset the benefits deriving from cheap input costs. Finally, the asymmetry in trade—African raw materials against Chinese manufactured goods—poses risks of a displacement of local manufacturing industry. This was most recently underscored by South Africa’s Minister of Trade and Industry, Rob Davies, on the occasion of the latest BRICS5 summit, hosted by South Africa at the end of August 2018.

References BP (British Petroleum) (2017) BP statistical review of world energy Chalmin P (ed) (2018) World commodities markets – 2018. In: Cyclope yearbook, pp 247–252 Eom J, Brautigam D, Benabdallah L (2018) The path ahead: the 7th forum on China-Africa cooperation. China Africa Research Initiative Briefing Paper, No. 1 Giraudo A (2017) The Pantagruel hunger of the South China Sea Basin for all commodities. Geostrateg Maritime Rev 9(Winter):81–91 Henry S (2018) US spare rare earths in China trade war. Financial Times, 16 Jul 2018. https://www. ft.com/content/a776dd74-bb26-11e8-94b2-17176fbf93f5 IEA (International Energy Agency) (2018) World Energy Outlook 2018 S&P (S&P Global) (2018) Asia energy’s landscape in 2018. S&P Global Platts Report S&P (S&P Global) (2019) Oil 2018 Report. S&P Global Platts Report Sands (2019) World Energy Statistics - 2018 figures. Oil Sands Magazine Sow M (2018) Figures of the week: Chinese Investments in Africa. Brookings Institution, Sep 2018. https://www.brookings.edu/blog/africa-in-focus/2018/09/06/figures-of-the-week-chi nese-investment-in-africa/

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Brazil, Russia, India, China, and South Africa.

Chapter 8

Investments in Latin America

The economic integration of Latin America and Caribbean (LAC) and China began almost two decades ago: in 2000, China accounted for just 3% of the trade flows of the region’s main countries (Argentina, Brazil, Chile, Colombia, and Peru), far less than Europe or the USA (25% and 23%, respectively). Since then, China’s trade with LAC has grown more than 25 times over, its share surpassing those of the USA and of the European Union (25 as against 17% and 16%, respectively). More than 80% of Latin American exports to China are minerals or agricultural commodities, concentrated in a handful of products: soy, iron, oil, and copper make up almost 70% of total exports (Fig. 8.1). Integration through Chinese direct investment in Latin America is a more recent development than trade integration, dating from the years following the great financial crisis. The official data underestimate the phenomenon, as many Chinese investments transit from jurisdictions that have special tax treatment. According to data from the China Global Investment Tracker (which also includes some portfolio investments), Chinese investment inflows in Latin America exceeded $150 billion in the last 12 years (Brazil leads with $62 billion, followed by Argentina with $28 billion), making China one of the main investors in the region. The total, though significant, is still far less than that for Africa, which received $280 billion of Chinese investment. At first, Chinese direct investment was largely bound up with China’s need for dependable access to natural resources (especially in the extractive sector). More recently, it has also been motivated by a desire to exploit Brazil’s large domestic market and to diversify China’s presence in manufacturing. According to data compiled by the Global Development Policy Center of Boston University, Chinese greenfield investments in South America have historically been concentrated in a few sectors (notably extraction; Fig. 8.2a), with a stable profile

With the contribution of G. Trebeschi © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2020 L. Bencivelli, F. Tonelli, China’s International Projection in the Xi Jinping Era, SpringerBriefs in Economics, https://doi.org/10.1007/978-3-030-54212-2_8

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over time and no glaring deviations from the pattern of total foreign investment in the region. As far as M&A activity is concerned, the electricity sector has come to the fore in recent years (particularly with the acquisition in 2017 of CPFL Energia by State Grid Corporation of China for over $12 billion), a period during which the relative importance of the extractive sector decreased (Fig. 8.2b). Bilateral loans disbursed by the two major Chinese development banks, the China Development Bank and China Exim Bank, are an important aspect of the financial

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Fig. 8.2 FDI in Latin America from China and the rest of the world, greenfield (a, percentages) and M&As (b, percentages); period: 2013–2017. Source: authors’ elaboration based on Global Development Policy Center data

integration between China and Latin America. In the last 12 years, they amounted to $150 billion (of which $62 billion to Venezuela alone). In the past few years, loans have mainly financed the oil sector (often to guarantee oil supplies). More recently, financing for infrastructure projects such as railway and road construction has been growing in importance. Chinese investments have been directed above all toward Venezuela and Ecuador while shying away from Colombia, traditionally the strongest US ally in the region. This is now changing, however. Chinese state investors are committing billions of dollars to Colombia, winning bids to build infrastructure (Bogota’s first metro line

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and a regional rail line), and acquiring licenses to exploit natural resources. The governments of the two countries are preparing to sign a deal that will pave the way to include Colombia in the BRI and extend cooperation to ICT, renewable energy, technology, and agriculture. China’s increasing prominence as an investor in Latin America has significant repercussions on its relations with the USA, which has always considered Latin America to be solidly within its sphere of influence. In all likelihood, China is motivated essentially by commercial objectives: to promote new markets for its exports, to mitigate excess domestic production capacity, and to help its companies in going global by acquiring cheap and at least partially strategic assets (e.g., the investments to secure the supply of raw materials). China has signed strategic partnerships with virtually all the countries in the region (Colombia is the sole exception). At the multilateral level, China works closely with the Comunidad de Estados Latinoamericanos y Caribeños (CELAC), embracing all the countries of Latin America and the Caribbean, toward which it has adopted since 2015 its “1 + 3 + 6 strategy”: one integration plan, three engines (trade, investment, and finance), and six priorities (energy and natural resources, infrastructure, agriculture, manufacturing, science, and technology and IT). The Latin American countries welcome China’s “patient capital” approach. China assures partner countries of its longer time horizon by emphasizing non-interference in sovereign issues and refraining from imposing conditions of fiscal austerity and transparency (as Western governments have done in the past). This approach allows Latin American countries greater fiscal flexibility during business-cycle downturns, helping them to smooth cyclical fluctuations. On the other hand, awareness of the risks inherent in the relationship with China, such as de-industrialization, is gaining ground. While Latin American exports to China consist almost entirely of a limited number of raw materials, imports are concentrated in manufactured goods (consumer electronics, optical instruments, textiles, etc.) offering competition that could impoverish local industry. Furthermore, many observers raise the issue of inadequate standards of labor and environmental protection in Chinese direct investments. Finally, it cannot be denied that the immense financial resources supplied by China potentially pose a problem of moral hazard: lending without conditionality could in fact stoke excessive debt accumulation (as has already happened in the case of Venezuela).

Chapter 9

China and the UK: End of the Golden Era?

Political-institutional relations between China and the UK have often been clouded by misunderstandings and conflicts rooted in the colonial past: the First Opium War and the perception of the British Empire as mainly responsible for “national humiliation.” However, the establishment of full diplomatic relations in 1972 and especially the long negotiations over Hong Kong and its reversion to Chinese sovereignty under the “one country, two systems” constitutional principle—started under a Tory leader back in 1979 (M. Thatcher) and concluded under the Labour premiership of Tony Blair in 1997—favored greater mutual understanding and a progressive rapprochement between the two states.1 The “constructive engagement” strategy was first defined during Blair’s leadership (1997–2007) but only accelerated under David Cameron’s premiership (2010–2016) thanks to the activism of his Chancellor of the Exchequer George Osborne.2 Full awareness of the key role the PRC will play globally and the economic and geopolitical interest to build a preferential partnership with China are among the determinants of the policy pursued by the UK. The government and the business and financial community worked together to shape a lasting relation whose linchpin is the City, the most valuable and strategic asset in the UK. The “depoliticization” of governmental action to focus mainly on issues relevant for the Chinese leadership (RMB internationalization, Chinese investments in Britain, BRI) was instrumental in bringing bilateral relations to a “Golden Era,” based on

With the contribution of A. Marra 1 In 1950, the UK became the first country outside the communist bloc to recognize the PRC. The two countries opened official relations at the level of chargés d’affaires in 1954 but did not open embassies until 1972. 2 The government that emerged from the May 2010 elections had set itself the goal of building closer relations with rapidly growing emerging countries, seeing that the UK, Europe, and the West were bound to emerge from the financial crisis of 2007–2008 economically and financially weakened.

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2020 L. Bencivelli, F. Tonelli, China’s International Projection in the Xi Jinping Era, SpringerBriefs in Economics, https://doi.org/10.1007/978-3-030-54212-2_9

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“constructive and incremental engagement” and promoting President Xi Jinping’s state visit to the UK in 2015. In this perspective, the bilateral relations with China could be framed as based on “mutual opportunisms”: London is functional to Beijing’s internationalization of the renminbi, while China is functional to the City in order to confirm London’s role as a leading world financial center. However, the British decision to refrain from taking political positions on the most critical dossiers in relation to China and the preference for bilateral over multilateral initiatives, especially when EU-led, became from time to time a point of friction with the EU and the USA, as in the case of the UK’s decision to join the newly established AIIB.3 Political tensions never really affected commercial and financial relations (Fig. 9.1), but until 2010 British exports to China were modest in value, essentially consisting of capital goods and industrial supplies; since then, they have progressively diversified in favor of transport-equipment components. By contrast, imports, limited to capital and consumer goods, had already begun to trend upward at the turn of the century. Overall, the trade balance is strongly tilted in favor of China, the UK running a bilateral deficit of almost 34 billion € in 2017. The 2016 referendum on the EU membership, the appointment of Theresa May as new prime minister, and the exit from the political arena of George Osborne have led many observers to wonder whether the “Golden Era” might have come to a premature end. Yet, the departure from the EU is likely to reinforce the UK’s interest in China. In particular, the need to counterbalance the foreseeable negative effects of Brexit on the economy as a whole and primarily the City could lead the UK to strengthen relations with fast-growing countries in order to progressively decouple from the EU, attract much needed FDI to rebalance the economy, build key infrastructures, and increase growth in the areas outside London (“Northern Powerhouse”), thus showing the feasibility of the goal of a “Global Britain.” Nevertheless, Theresa May took a more cautious stance toward China. Notwithstanding the growing concerns about the potential loss of control on strategic sectors (telecommunications, defense, energy national security), in September 2016 she finally signed the contract with EDF (France) and state-owned China General Nuclear Power Group (CGN) for the Hinckley Point C new nuclear power station. However, the ninth UK-China Economic and Financial Dialogue in December 2017, where cooperation agreements amounting to some £9 billion were signed in several sectors, did not lead to the prime minister signing the Memorandum of Understanding endorsing the BRI. Given the shared interests between the two countries, Brexit should not really affect Sino-British relations. For the CCP leadership, a partnership with the UK is 3 The major Western European countries first treated this Chinese-led initiative to create a new multilateral institution with great caution, due to the opacity of the negotiation process, the fear that the new institution might adopt unrecognized standards for doing business, and the political inappropriateness of participating in a development bank that could potentially compete with those already in place. Amid general uncertainty, the British government’s decision in March 2015 to join the AIIB also prompted Germany, France, and Italy to come in as founding members.

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important not only for the internationalization of the renminbi but also for sectors such as green finance, sustainable finance, and climate change. Financing of the BRI is an additional field in which the British government aims to consolidate a special link with China, leveraging on the expertise found in the City.4 The final exit from the European Union on January 31, 2020, without a clear view of what the future relations with the EU will look like, in the framework of ongoing economic and political tensions between China and the USA, could make it increasingly harder for the UK to strike a balance. At the same time, security concerns at domestic level are growing and the decision by the new prime minister, Boris Johnson, in January to give Huawei a limited role in 5G wireless networks and 4 During the 12th Asia-Europe Meeting (ASEM) Summit in October 2018, the two prime ministers promoted a further strengthening of relations to usher in a “diamond era.”

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fiber, while restricting the company from the network core which has access to and controls sensitive information, has once again created frictions with the USA. In addition to that, the colonial legacy still influences bilateral relations, with any comments from British leaders on sensitive issues, like the recent protests in Hong Kong, always prompting a particularly severe response from the Chinese counterparts.5 British policy toward its historical allies and China has often been somewhat ambiguous, due to a hard core of self-interested pragmatism. That is unlikely to change. In an increasingly polarized world, however, the feasibility of “depoliticized” partnerships might prove more difficult than previously thought.

In June 2019, the “Shanghai-London Stock Connect” was launched at the London Stock Exchange (LSE). The agreement was designed to allow Shanghai-listed companies to raise funds on London’s stock market and LSE-listed companies to sell shares on the Shanghai market. Shanghai-listed companies list on the LSE via Global Depositary Receipts (GDRs), while LSE-listed companies can list on the Shanghai Stock Exchange through Chinese Depositary Receipts (CDRs). The same day, Huatai Securities, a China-based brokerage firm, listed on the LSE. This has been the first and only listing while rumors have spread that the stock connect program was halted due to political tension between the two countries at the beginning of January 2020.

5

Chapter 10

Europe’s Position: The Desire for Cooperation and the Need for Protection of Sensitive Sectors

In 2016, the inflow of foreign direct investment to the EU reached $538 billion, or 3% of total GDP; the share accounted for by China has progressively increased, from 0.3% in 1995 to 2% in 2015, though remaining far smaller than those of traditional players (41.1% for the USA in the same year) (EC 2017a). According to the Chinese business press, Chinese direct investment in Europe rose by 72.7% in 2017 to an all-time high of $18.46 billion (Han 2018). The European institutions have always maintained a regime of openness to direct investment from abroad, as sanctioned by the Treaty on the Functioning of the European Union (TFEU), recognizing its multiple benefits, namely: (1) stimulus for innovation, research, and competitiveness and therefore for productivity growth, (2) improved resource allocation, (3) job creation, and (4) opening up of international markets. At the same time, FDI can pose important challenges when investments touch on fundamental and strategic economic interests, due to the possible acquisition by foreign companies of influence or control over companies that use or manage critical technologies and infrastructures, productive factors, or sensitive information bearing on national security. Three potential risks are implicit: (1) inadequately remunerated technology transfers, (2) erosion of the integrity of industrial information, and (3) regulatory dumping, i.e., the possibility that some members of the single market could enact milder regulations in order to attract FDI flows to the detriment of other members (race to the bottom). These risks are amplified when the foreign investor is a state-owned company or sovereign wealth fund. The objective of a country’s investment policy may be to acquire technologies that can be used for military as well as civilian purposes (so-called dual use)1—an even greater problem in the Chinese case in light of the arms embargo imposed in 1 The European Commission has drawn up a list of products which, though designed for civilian use, are used in military settings as instruments of torture or capital punishment. The sectors relating to dual-use technologies are specified in EC (2017b).

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2020 L. Bencivelli, F. Tonelli, China’s International Projection in the Xi Jinping Era, SpringerBriefs in Economics, https://doi.org/10.1007/978-3-030-54212-2_10

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1989 by the EU and the USA after the Tiananmen Square protests. Discussion of the aims and dangers of FDI was kindled in 2016 by two Chinese acquisition projects in Europe involving companies whose products potentially could be put to military use: the purchase of the leading German robotics company Keller und Knappich Augsburg (KUKA) by the Midea Group and the failed attempt to take over the German conglomerate Aixtron, active in the semiconductor sector, by China’s Fujian Grand Chip Investment Fund (FGC). On these occasions, the objections raised by the CFIUS carried weight, forcing KUKA to sell its aerospace division before concluding the transaction and causing regulatory approval of the takeover of Aixtron to be withdrawn.2 According to the European Commission, the opening of European markets combined with state support for many foreign investors could lead to competitive distortions (EC 2017a). Many Chinese investors do enjoy state backing. Meanwhile, European companies in China are subject to a host of legal and regulatory constraints that still limit their ability to invest in numerous sectors, creating an uneven playing field (ECCC 2018). Owing to this lack of reciprocity, EU companies often seek Chinese partners for the sole purpose of ensuring their products’ access to China’s markets. Another significant issue was raised by the acquisition by China Three Gorges of the relative majority interest in Energias de Portugal (EDP), Portugal’s electricity company, in light of its possible effects on assets located in third countries (including Italy, Poland, and the UK).3 According to some commentators (Godement and Vasselier 2017; Seaman et al. 2017; Benner et al. 2018), Chinese FDI raises concerns about the PRC’s influence on negotiations. They contend that some of the EU states most in favor of Chinese investments have blocked the formulation of a common European stance opposed to Beijing’s interests in a good many matters of geostrategic importance.4 Many analysts have interpreted the creation of the “16 + 1” group, intended to intensify dialogue and economic, commercial, and cultural cooperation between China and the central and eastern European countries (CEE), as a Chinese attempt to weaken the cohesion of the European bloc (Godement and Vasselier 2017; see Box 10.1).

According to the Wall Street Journal, the CFIUS put pressure on Germany to rescind the clearance it had granted for the acquisition of Aixtron. Aixtron itself issued a press release stating that the CFIUS recommended refraining from completing the transaction for reasons of national security, without specifying the reasons or the possible sanctions in case of noncompliance. For more details on the acquisition of KUKA, see the next section. 3 In April 2019, the EDP shareholders’ meeting rejected China Three Gorges’ request to eliminate the ceiling on the voting rights of any single shareholder (currently set at 25%). This resolution effectively blocked any negotiations for the acquisition by the Chinese company of the rest of EDP’s equity. 4 In July 2016, for example, Greece and Hungary blocked an EU resolution condemning the militarization of the South China Sea by the Chinese navy. 2

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Box 10.1 The Chinese Diplomatic and Commercial Initiative in Central and Eastern Europe: The “16 + 1”5 In 2012, the PRC promoted the creation of a diplomatic platform, the ChinaCEEC Business Council, to embrace 16 central and eastern European countries (hence “16 + 1”).6 This initiative, included in the BRI since 2013, aims at intensifying economic, commercial, and cultural cooperation between China and these 16 partners, in order to make Central and Eastern Europe a privileged gateway to EU markets. Chinese resources would be especially important for EU candidate and potential candidate countries, which do not benefit from EU structural funds. On the diplomatic front, the initiative allows the partner countries to maintain direct and preferential relations with China, thus staking out partial autonomy with respect to the positions taken by the main EU countries (Barisitz and Radzyner 2018). (continued)

5 In April 2019, the ninth 16 + 1 summit was also attended by Greece, a new participant. The group was accordingly renamed “17 + 1.” 6 The 16 comprise 11 EU member countries (Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia) and 5 candidate or potential candidate countries (Albania, Bosnia-Herzegovina, Macedonia, Montenegro, and Serbia). The “16 + 1” platform has a permanent General Secretariat, based in Beijing, which coordinates the thematic ministerial conferences.

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Box 10.1 (continued) The “16 + 1” approach has been called “experimental and innovative” (Grieger 2018), having a decision-making process based on consensus, inclusiveness, non-conditionality, voluntariness, and mutual benefit (win-win). The organizational structure, initially loose, has been progressively institutionalized with the creation of working groups and multilevel and sectoral coordination committees.7 China’s interest in the “16” is bound up with their high degree of openness to trade, with the availability of relatively low-cost skilled labor and, in some cases, with an institutional setup generally favorable to investments from abroad. Additional factors are their proximity to the more developed European outlet markets and their position along the routes traced by the BRI. In 2018, the trade of the “16” with China totaled more than $82 billion (of which $80.3 billion for the 11 EU countries; Fig. 10.1),8 and the region absorbed 11.7% of total Chinese trade with the EU. In the period 2012–2016, the “16” recorded strong growth in goods imports from China (cumulatively 53%, compared with an increase of 22.7% in the EU), and a stronger growth in exports, 74.0%. The trade deficit with China increased from $25.6 billion to $36.3 billion. According to China Global Investment Tracker data, in the 5-year period prior to the launch of the initiative, Chinese investment in CEE countries had come to less than $4 billion; in the next 5 years, the amount exceeded $17 billion. Between 2012 and 2016, Chinese direct investment in the “16” went mainly to Serbia, Hungary, Romania, Bosnia-Herzegovina, Czech Republic, Poland, and Montenegro.9 By comparison, between 2014 and 2020, CEE countries belonging to the EU stood to receive more than 224 billion € in structural funds, 86 billion € of which allocated to Poland alone. Chinese investment activity in the “16” group of countries has focused mainly on the transport sector (infrastructure and transport equipment), energy and chemical products, and advanced technologies, in line with China’s goals of enhancing the technological content of its own manufacturing, drawing (continued)

7

In April 2017, the China-CEE Institute was established in Budapest by the Chinese Academy of Social Sciences, to cultivate contacts with scholars, academic institutions, and think tanks across the region. One matter of concern is that Chinese funding for research may be increasing against the backdrop of insufficient funding for independent expertise in Europe. 8 In 2016, “16” trade with China accounted for 3.7% of those countries’ aggregate trade (5.3% in the case of the EU subset); two-thirds of the total flows were attributable to Poland, the Czech Republic, and Hungary (31%, 22%, and 13%, respectively). 9 The distribution of Chinese investments among the 16 + 1 countries reflects not only the scale and presence of a business-friendly environment but also the quality of bilateral relations.

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Box 10.1 (continued) closer to the main outlet markets, and improving its physical linkages with Europe. Despite great expectations, up to now the platform has not performed as the European participants had hoped, and bilateral approaches have continued to prevail. Some analysts find that competition has emerged on the European side, with China exploiting it to the hilt (Godement and Vasselier 2017). The projects outlined display a pronounced divergence of interests and expectations between the “16” and China. While China is interested primarily in acquiring existing companies in order to penetrate the European market, the “16” would prefer greenfield projects, which they think would give greater support to exports and employment. Among the reasons for the disappointment of the CEE countries, Godement and Vasselier (2017) cites China’s pronounced preference for opening credit lines as opposed to direct investment. However, with interest rates lower in Europe than in China, this orientation has generally proven unattractive for the EU members among the “16”. Godement also points out that the Chinese government tends to make the provision of credit subject to stringent conditions, such as the use of Chinese equipment and materials or privileged access to critical local infrastructures. Finally, for some of the smaller countries, large Chinese loans could pose severe risks for debt sustainability.10 The European institutions, and among member states Germany, regard the consolidation of the “16 + 1” group with growing concern, noting that the Chinese negotiating stance is sometimes openly designed to create divisions within the ranks of the EU. In the autumn of 2017, German Foreign Minister Sigmar Gabriel stated: “If we do not succeed for example in developing a single strategy towards China, then China will succeed in dividing Europe” (Poggetti 2017). A 2015 resolution of the European Parliament urged EU member states to speak “with one voice to the Chinese government, particularly in view of Beijing’s present diplomatic dynamism,” stressing that the 16 + 1 group “should not divide the EU or weaken its position vis-à-vis China and should also address human rights issues” (EP 2015). The worry that foreign direct investment may be a means for China to acquire know-how and sensitive technologies is bound up with the fear that the EU could lose its competitive advantage in the most innovative sectors. Roughly half of the EU’s member states have a mechanism for controlling inward FDI, but the scope of these controls differs both by sector and geographically (depending on whether they 10 According to the IMF, the first phase of construction of the Bar-Boljare motorway in Montenegro increased the debt-to-GDP ratio by 21 percentage points, forcing the Montenegrin authorities to undertake an otherwise unnecessary fiscal consolidation plan. The completion of the project could pose additional risks for the overall sustainability of the debt (IMF 2018).

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apply only to investments from non-EU countries or also to intra-EU investments). As things now stand, there is still no harmonized system at European level to address the new challenges posed by China as an emerging player on the EU market. In February 2017, the economic ministers of Germany, France, and Italy, in an open letter to European Commissioner for Trade Cecilia Malmström, signaled their concern that frequent acquisitions of European strategic companies and technologies by foreign investors could lead to a “sell-out” of European expertise. Similarly, they underlined the lack of reciprocity for European investors abroad. On September 13, 2017, the European Commission presented a proposal for a “Regulation of the European Parliament and of the Council establishing a framework for screening of foreign direct investment into the European Union” (EC 2017c). The Regulation was approved in March 2019 and went into force the following month. The text provides a legal framework that encourages and facilitates cooperation in this field without requiring any member state to modify its screening mechanism or to adopt one, leaving the sovereignty of decision making by individual governments unchanged (EP 2019). Striking a difficult balance between the national and security interests of the various member countries, the new Regulation lays down some essential requirements that the screening systems already in force must fulfill, but it does not make it mandatory for countries that have yet to adopt a screening system to introduce one. These requirements include (1) transparency of the review procedures in force in any individual member country for reasons of security or public order, (2) nondiscrimination between third countries, (3) a definite time frame for decisions on the admissibility of the investment, and (4) the possibility for the investor to appeal. The Regulation empowers the Commission to screen foreign direct investments that are likely to affect the security of “projects or programs of Union interest,”11 and those already planned or completed in one state that another member considers could be detrimental to security in its own territory.12 The Commission may issue a non-binding opinion which must be given the utmost consideration by the government of the state that receives the foreign investment. Finally, the text invites the member countries to consider the circumstances in which the transaction was planned, especially where the buyer is controlled by the government of a third country or acts within the framework of a state agenda with international ramifications.

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The Regulation aims at creating a mechanism for the exchange of information based on collaboration and transparency. Member states must inform the Commission and other member states annually about foreign direct investments made on their territory. The formation of a permanent coordination group for exchanging information, analyzing investments and strategic sectors, and sharing best practices is also proposed. The Regulation does not address the issue of reciprocity.

10.1

Relations Between Germany and China13

Economic and diplomatic relations between Germany and China have intensified since German reunification. The three successive chancellors at the helm of postreunification Germany—Helmut Kohl, Gerhard Schröder, and Angela Merkel— have put a personal stamp on the effort to expand relations with China, including an intense program of official visits whose institutional nature gained an operational dimension from the conspicuous presence of ministerial and industrial delegations. In the period 1993–1998 alone, 52 bilateral meetings were held at ministerial level. Chancellor Merkel visited China 11 times in the period 2005–2018. Trade and economic relations have grown along with diplomatic relations. In 2017, China overtook the USA as Germany’s leading non-European trade and industrial partner. Meanwhile, Germany has become the only major European country to run a bilateral trade surplus with China (Fig. 10.2). Chinese imports of German cars, 15% of total German exports to China (13.2 billion €), have been a major factor shaping the dynamics of trade between the two countries over the last decade. Chinese FDI in Germany grew steadily from 2004 to 2011, especially in the energy, automotive, and real estate sectors. In 2016, Chinese investors completed a number of large-volume acquisitions of strategic importance, including the German waste disposal giant EEW, acquired by Beijing Enterprises (1.44 billion €); the KraussMaffei Group (machinery), acquired by ChemChina (925 million €); the LED lighting division of Osram, purchased by a consortium led by MLS (400 million €); and the robot maker KUKA, acquired by Midea (4.4 billion €). The KUKA takeover bid launched in May 2016 has figured prominently in the ensuing debate, not only for its sheer size but also for its strategic implications. KUKA is an all-German success story. Founded in 1898, it produced the first industrial robot in the world in 1973 and is the world leader today in the field of industrial automation. It has become a leading-edge industrial operator in the “fourth industrial revolution”: its most recent patent covers a small, manageable robot whose ability to allow interaction between man and machine makes it effective both for industrial purposes and for assisting medical patients’ rehabilitation. The implications of the KUKA acquisition in terms of technology transfer and information integrity stirred political reactions and a wide-ranging discussion in

13

With the contribution of R. Tartaglia Polcini.

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Fig. 10.2 Bilateral trade in goods between China and Germany: German exports and imports (EUR billion). Source: authors’ elaboration based on Eurostat data

Germany. During the period in which the bid remained open, there were many exhortations to bring forward an offer that would keep control of the company in German or at least European hands.14 But the Chinese offer, with a 36% premium to the price on the stock exchange, was beyond the reach of potential European buyers. Midea adopted a stance aimed at strengthening its image in the local manufacturing system as a reliable industrial operator, making precise commitments on employment levels and on the presence of German key figures on the company’s supervisory board at least until 2023. German law ruled out government intervention to prevent completion of the transaction, inasmuch as the takeover did not involve infrastructure or present insurmountable security problems.

14 Among them, the public references of the then European Commissioner for Digital Affairs, Gunther Oettinger, and the then German Minister of Economy and Energy, Sigmar Gabriel.

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Chinese FDI in Germany fell sharply in 2017 to 1.8 € from 11 billion € the previous year, although it is not possible to establish a causal link between this development and the evolution of the debate on Chinese FDI. However, Chinese financial activism continued to manifest itself in an increase in the volume of venture capital and portfolio investment, including the acquisition of significant stakes in Daimler and Deutsche Bank.15 While bilateral economic relations between Germany and China remain intense, the Merkel government has taken a more prudent approach: at the end of 2018, it approved new rules that lowered from 25% to 10% the threshold equity holding that triggers a screening procedure on non-EU investments in sensitive infrastructure.16 The measure was designed to guarantee equal access conditions for German firms in foreign markets while maintaining the principle of opening up domestic markets. This is a matter of growing importance in light of the envisaged transition of Chinese manufacturing to a more mature stage. Accordingly, the German government is working to ensure that the Bilateral Investment Agreement (BIA) between China and the EU is concluded, so as to guarantee the formulation of a shared framework for the protection of investments and reciprocal access to markets. On February 5, 2019, the German Minister of the Economy and Energy Peter Altmaier published “Nationale Industriestrategie 2030,”17 a document setting out the strategic lines of German industrial policy for the next decade.18 With the declared target of raising the contribution of manufacturing to gross value added to 25% in Germany and 20% in the European Union by 2030,19 the document explicitly refers to two guidelines: (a) the use of market tools based on private responsibility but also on forms of “limited, residual, and temporary” state support to specific companies

15

Both of these transactions gave rise to some discussion, though for different reasons. In the case of Daimler, it was observed that the equity interest was acquired by Geely, a Chinese company that has owned Volvo since 2010 and is Daimler’s direct competitor in a number of product segments and markets. In the case of Deutsche Bank, instead, attention focused on the financial reliability of HNA, the group making the acquisition, which was heavily indebted at the time and since then has undergone a major restructuring, with the sale of many of its foreign assets. In September 2018, HNA announced the sale of some portfolio investments, including the stake in Deutsche Bank, which it had acquired at the beginning of 2017. 16 The same threshold is applied to non-German investors in the protection and transmission of encrypted data. 17 https://www.bmwi.de/Redaktion/EN/Publikationen/Industry/national-industry-strategy-2030. html 18 “Industrial policy strategies are experiencing a renaissance in many parts of the world. Hardly a successful country exists that relies exclusively and without exception on market forces to manage the tasks at hand. Strategies of rapid expansion quite evidently exist with the clear objective of conquering new markets for own economies and monopolising such wherever possible. [..]The issue of industrial and technological sovereignty and capacity of our economy is the decisive challenge to maintaining the future viability of our country.” 19 From 23.4% and 16.4%, respectively, in 2017 (Source: Eurostat).

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and/or sectors20 and (b) the identification of more stringent criteria for delimiting direct investment in German companies.21 According to Minister Altmaier, by opposing the interference of other countries in the operations of the market economy and preserving their own economic interests, Germany and the European Union will contribute to the emergence of a “global social market economy.” The case of an “emerging country” that becomes a global investor is quite new, forcing us to review all the legislative and negotiating arrangements.22 In the German view, the dialectic between agreements and competition unfolds at system level, not individual company level. Consequently, Germany tends to remain a cohesive country system, characterized by objectives shared both nationally and with the major European partners, solid strategic international alliances, and a steady hand as regards the enforcement of a level playing field.

References Barisitz S, Radzyner A (2018) The New Silk Road: implications for Europe. SEURF Policy Note, No.25, Jan 2018 Benner T, Gaspers J, Ohlberg M, Poggetti L, Shi-Kupfer K (2018) Authoritarian advance responding to China’s growing political influence in Europe. Global Public Policy Institute and Mercator, Institute for China Studies EC (European Commission) (2017a) Welcoming Foreign direct investment while protecting essential interests. Communication from the European Commission, Sep 2017. https://ec.europa.eu/ transparency/regdoc/rep/1/2017/EN/COM-2017-494-F1-EN-MAIN-PART-1.PDF EC (European Commission) (2017b) Data and information collection for the EU dual-use export control policy review - Annexes, May 2017. http://trade.ec.europa.eu/doclib/docs/2017/may/ tradoc_155610.pdf EC (European Commission) (2017c) Proposal for a Regulation of the European Parliament and of the Council establishing a framework for screening of foreign direct investments into the European Union. Sep 2017 ECCC (European Chamber of Commerce in China) (2018) European Business in China 2018/2019 EP (European Parliament) (2015) Resolution of 16 December 2015 on EU-China relations EP (European Parliament) and the Council (2019) Regulation of the European Parliament and of the Council for the Screening of Foreign Investments in the Union, 19 Mar 2019. https://data. consilium.europa.eu/doc/document/PE-72-2018-REV-1/en/pdf Godement F, Vasselier A (2017) China at the gates: a new power audit of EU-China relations. European Council on Foreign Relations (ECFR), Dec 2017

20

This support can extend to the temporary acquisition of shares owned by individual companies through an ad hoc fund. 21 “The state prohibition of company takeovers by foreign competitors must be based on strict requirements in future too and may only happen if this is necessary to defend against risks to national security, including the area of critical infrastructures.” The document also calls for a change in competition law both in Germany and in the European Union, to allow European and German companies to engage in international competition “on equal terms.” 22 Opinions collected during a conversation with Gerhard Stahl, professor of economics at Peking University HSBC Business School in Shenzhen, during a visit to Berlin.

References

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Grieger G (2018) China, the 16 + 1 format and the EU. European Parliamentary Research Service (EPRS) Han W (2018) China’s outbound investment falls for first time on record. Caixin Global, 28 Sep 2018. www.caixinglobal.com/2018-09-28/chinas-outbound-investment-falls-for-first-time-onr e c o r d - 1 0 1 3 3 1 1 9 9 . h t m l ? rkey¼4jojcpercento2BU9DvvtuaHc2n7nIpercento2FFLpercento2FE7ci4pKhuUjGF04r1Har W9zC1fHpercento2Bgpercento3Dpercento3D&cxg¼web&Sfrom¼twitter IMF (International Monetary Fund) (2018) Montenegro - 2018 Article IV Consultation. IMF Country Report, No. 18/121, May 2018 Poggetti L (2017) One China – One Europe? German Foreign Minister’s remarks irk Beijing. The Diplomat, 9 Sep 2017. https://thediplomat.com/2017/09/one-china-one-europe-german-for eign-ministers-remarks-irk-beijing/ Seaman J, Huotari M, Otero-Iglesias M (eds) (2017) Chinese Investment in Europe - a country-level approach, ETNC, Dec 2017

Chapter 11

Conclusions

This study has investigated some of the most important aspects of China’s international projection, a process developing on a global scale that must be carefully analyzed with specific tools. Unlike the rise of other global superpowers, which imposed military supremacy before or in parallel to economic dominance, China’s ascent in the world context has begun with the weaving of a widespread net of bilateral commercial and financial relations. Understanding its nature and motivations, in a geopolitical context that is no longer bipolar but profoundly interconnected and globalized, is essential in order to engage with this phenomenon on the basis of a cooperative and non-confrontational approach. Technology industries in China and the USA are being forced to stop using each other’s components and technologies on grounds of national security. The US decision to blacklist a number of Chinese corporations was mirrored by the Chinese order to strip all US hardware and software from Chinese public offices by 2023. By reinforcing China’s determination to attain complete technological independence, US policy has backfired on American manufacturing. Indeed, if China manages to close the technology gap rapidly, the USA could face severe problems in reshoring manufacturing processes already installed in China. The outcome could be a West that is more dependent on China and a China that is more independent of the West. It is very difficult to predict how US-China tensions will evolve in the near term. The confrontation is wide ranging and involves multiple fronts: that of technology but also military affairs, communications, and culture, political, and economic relations. Over the medium term, the most likely risk is that decoupling and conflict between the two superpowers could divide the world once more into two spheres of influence as regards not only governance but also technology standards. This would dramatically hamper the circulation of information and knowledge and could force countries caught in the middle to choose sides. As has been documented throughout this chapter, some Chinese initiatives can result in a massive distortion of competitive mechanisms, produce overinvestment, divert supply chains, and undermine the protection of intellectual property rights. © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2020 L. Bencivelli, F. Tonelli, China’s International Projection in the Xi Jinping Era, SpringerBriefs in Economics, https://doi.org/10.1007/978-3-030-54212-2_11

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Conclusions

Nevertheless, one cannot underestimate China’s contribution to eradicating poverty or its efforts to promote technological innovation and sound development. A proper acknowledgment of this contribution can lay the foundation for a new form of engagement with China. In a recent essay, the international relations scholar E. C. Economy (2018) suggests that it would be wise to revisit the overall approach to China, combining the analytical tools used in the past with others better suited to the new challenges posed by Xi Jinping’s presidency. In particular, the USA (and, by extension, Europe) should leverage on China’s ambition to position itself at the center of global governance, inducing it to assume the responsibilities that this role entails. The diplomats of the two countries have demonstrated in the past that they know how to cooperate with regard to climate change or in facing the spread of the Ebola epidemic in Africa. A form of accountability similar to that applied in dealing with those two issues could be employed fruitfully in providing solutions to the global refugee crisis or in managing the nuclear threat from North Korea. The same approach should also be applied in the economic and financial field, not compromising the cardinal principles of a free and competitive trading system and insisting on Chinese adoption of international standards and best practices. The European Union appears to want to move in this direction: in December 2018, it brought legal action against China within the WTO to stop “systemic practices that force European companies to give up sensitive technology and know-how as a precondition for doing business in China.”1 In the words of EU Trade Commissioner Cecilia Malmström, the practice covered by the initiative “clearly goes against the rules that China committed itself to when it joined the WTO.” The action taken by the EU underlines the desire of the European institutions to hold China accountable for the pledges it has made to the international community.

Reference Economy EC (2018) The third revolution - Xi Jinping and the new Chinese state. Oxford University Press, Oxford

1

http://europa.eu/rapid/press-release_IP-18-6882_en.htm