On
the face of things, this is an odd message to trumpet in the country
that has benefited more than any other from the most recent wave of
globalisation. In 2000 China was the biggest merchandise trading partner
of only a tiny number of countries. Now it is the biggest partner of
more than 60. Between 1985 and 2015 Chinese exports of goods to America
rose by a factor of 125. Partly as a result of the associated
manufacturing boom, growth in China’s gdp per person averaged more than 8% a year from 2001 to 2020.
But
the Chinese government has never been completely comfortable with
globalisation, whatever the benefits. The process of “reform and opening
up” started by Deng Xiaoping in the 1970s, under which China
liberalised production and trade, has always been piecemeal and partial.
The Communist Party does not intend to relinquish a commanding role in
the economy. It worries about the infiltration of Western ideas. Foreign
capital and expertise have therefore been courted and rewarded, but
also circumscribed and often resented.
Mr
Xi’s calls for self-reliance reflect his view that the balance of
globalisation’s risks and rewards has changed. He believes that China
has become too dependent on liberal democracies, including Europe and
Japan but especially America. One risk is that the West might experience
another economic slowdown similar to the financial crisis of 2007-09,
sapping demand for Chinese goods and services. Another, made much more
vivid by the sanctions imposed on Russia after its invasion of Ukraine,
is that Western countries might use their economic power to weaken
China.
To ward off such perils, Mr Xi
wants to change China’s place in the world economy. To oversimplify a
little, there are two interrelated elements to what Mr Xi terms
”becoming strong”. The first is to build a commanding position in
industries the government considers strategic—tech and energy, for the
most part—so that no one can thwart China’s economic rise. China knows
that its crucial role in global supply chains helps keep its autocratic
system safe from foreign attacks. The second objective is for China to
rely less on potentially hostile Western partners for trade and finance,
and to develop new and better ones closer to home. The Belt and Road Initiative, a huge global infrastructure development strategy, is just one method by which China hopes to find new economic friends.
Make, don’t buy
China has had some success with the strategic industries. Research published by Goldman Sachs in 2020 found that China’s self-sufficiency in high-tech products
was broadly improving (see chart 1). In many industries domestic
production has caught up with domestic demand, meaning that China needs
fewer products from abroad. Indeed, after hitting an all-time high in
2004-06, China’s imports of goods and services have fallen sharply
relative to its gdp (see chart 2).
In few industries has the push for self-sufficiency borne more fruit than in solar energy.
China accounts for over 70% of the production of the raw materials used
to manufacture solar cells, but also the cells themselves, and the
modules into which they are assembled. Dan Wang, an analyst at Gavekal
Dragonomics, a research firm, suggests that China’s lead in solar
technology is likely to be irreversible. The same is true of batteries
for the booming electric-vehicle industry. Wind energy is going
gangbusters too. China added more offshore-wind capacity in 2021 alone
than the rest of the world managed in the prior five years put together.
In fact, China has come to dominate many businesses in this way. The Economist looked
at export data for 120-odd global manufacturing industries. We estimate
that in 2005 China was ascendant (defined as a share of global exports
of more than a quarter) in 42% of them. In 2019 that hit 67%, a record.
The share of export markets that China dominated—which we define as a
market share of more than half—tripled over the same period, to a third.
Yet in many important respects
China’s drive for self-reliance has disappointed. Even as Mr Xi has
reduced China’s overall import bill, relative to gdp, he has struggled to reduce its dependence on foreign components used to make high-tech goods. China spent 2.7% of gdp
on imported components for electronics when he came to power in 2012,
and 2.6% in 2020. Its overall bill for imports requiring large amounts
of research and development has dropped only slightly.
What is more, China relies heavily on geopolitical rivals for supplies of such goods, including Taiwan
and Western democracies. In aviation and spacecraft—the object of Mr
Xi’s calls for self-reliance earlier this month—the democratic world
still supplies 98% of China’s imported components.
China
is also increasingly dependent on foreign expertise. The vast majority
of Chinese patent filings are home-grown, but the share involving
foreigners has risen from 4.8% to 5.9% since 2012. Scientists based in
the eu, Japan and America are increasingly common
partners with Chinese inventors, even as Western companies and
universities talk of disengaging from China to try to stop industrial
espionage. In 2020 China was responsible for 8.4% of total global
cross-border payments for the use of intellectual property, an all-time
high.
Mr Xi’s second big
objective—finding better trading and investment partners—is another
mixed bag. Take trade. China has eagerly befriended Russia, which has
been shunned by the West. It has also embraced the Regional
Comprehensive Economic Partnership, a fairly shallow but broad trade
deal involving 15 Asian countries that account for almost a third of
global gdp. It has applied to join the rump of the
Trans-Pacific Partnership, an ambitious trade pact conceived by America
but then abandoned by it.
In a survey
of policymakers, business leaders and other grandees from South-East
Asia published earlier this year, 77% of respondents named China as the
most influential economic power in the region. “I see East and
South-East Asia increasingly being pulled within the sphere of the
gravitational force of the Chinese economy. That is inevitable,” says
Henry Gao of Singapore Management University.
Overlapping spheres
Yet big Western economies continue to exert a pull on China. The Economist gathered data on stocks of foreign direct investment (fdi—takeovers
of companies and the construction of factories), portfolio investment
(purchases of stocks, bonds and the like) and international trade for
nearly 120 countries. For each indicator we ranked every country based
on the strength of its bilateral relationship with China, then combined
the rankings.
The countries with which
China has the closest economic relationships are all still Western or
Western-leaning: America, South Korea, Singapore, Germany and Japan. And
during Mr Xi’s rule most Western economies have become more intertwined with China’s. The stock of German fdi
in China has more than doubled, for instance. Chinese long-term
investors have doubled their gross exposure to Australia, even as
politicians in both countries hurled invective at each other. Meanwhile
China’s ties with countries that might be expected to fall within its
sphere of influence, such as Indonesia and Russia, have weakened.
China’s
export industries also remain highly dependent on Western demand for
their wares. In the decade before Mr Xi came to power the share of
Chinese goods exports that were destined for the eu,
Japan and America had fallen from 50% to 39% (see chart 3). But since
then no further progress has been made. Countries with which China would
like to develop closer trading relationships are simply too small to
replace the huge markets of America, Europe and Japan. It is difficult
simultaneously to produce more high-tech goods and services and to
expect the share of them sold to poorer countries rather than rich ones
to increase. Despite all the warm handshakes Mr Xi shares with Vladimir
Putin, Russia’s president, Russia buys just 2% of China’s exports.
In
recent years China has been trying to develop closer financial ties
with countries it believes to be sympathetic to its objectives. This
includes an attempt to promote the use of its currency internationally.
The idea is to reduce China’s dependence on the dollar, and thus to
become less vulnerable to American financial sanctions. To this end
China has slowly opened its bond market to foreign investors. In the
early 2010s the central bank began signing agreements on
yuan-denominated swaps (ie, emergency lines of credit) with other
central banks. It has also been working hard to develop a digital yuan,
which is intended to make trade using the currency faster and easier to
monitor. Chinese firms have been paying for imports of Russian
commodities in yuan this year, which helps Russia by diminishing the
impact of Western sanctions while also raising the yuan’s international
profile.
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But
China’s financial links with its near abroad remain weak. Take its bond
market. A new paper by four economists, Christopher Clayton, Amanda Dos
Santos, Matteo Maggiori and Jesse Schreger, examines private investors’
holdings of yuan-denominated bonds. In recent years the vast majority
of inflows into these assets have come from America, the euro zone and
Japan. A paper published in 2018 by Camilo Tovar and Tania Mohd-Nor of
the imf examined the importance of the yuan to other
currencies (ie, how much one influences the other). The researchers find
“no evidence to suggest that the [yuan] is the dominant currency in
Asia, by influencing exchange rates in the region or through Asian
supply chains”.
China’s push for a
more self-sufficient economy, in short, has not been entirely successful
in its own terms. What is more, the attempt to create one has thrown up
a series of contradictions. The desire to promote the use of the yuan
abroad, for example, clashes with efforts to insulate China from global
financial swings. The resulting muddle has left China neither much of a
force in global finance nor protected from movements in markets beyond
its control. The Chinese currency’s share in cross-border payments
recorded by swift, a financial-messaging network, is
around 2% most months, as it has been for most of the past five years.
Even that overstates the currency’s reach, since most transactions
involving the yuan outside of mainland China take place in Hong Kong,
which is part of China but uses a different currency.
On
a global scale the yuan is an “anchor” for few other currencies (see
chart 4). The number of new yuan-denominated swaps agreed by the central
bank has slowed sharply. Research published last year by Michael Perks,
Yudong Rao, Jongsoon Shin and Kiichi Tokuoka, all of the imf,
found that the Chinese banking system still plays a tiny role in global
finance compared with America’s (see chart 5). A new paper by Yi Fang
of the Central University of Finance and Economics, in China, and
colleagues, finds that Chinese markets “are more influenced by the
financial markets in the g7 economies than the other way
around”. When America sneezes the rest of the world catches a cold. When
China sneezes, most countries brush it off.
Another
tension in China’s push for self-reliance concerns productivity. Total
factor productivity (ie, the amount of output per unit of labour and
capital) has barely grown under Mr Xi, a marked deceleration from before
the financial crisis (see chart 6). The government believes that aiming
for self-sufficiency in high-tech industries will encourage innovation
and so boost productivity. In fact, the opposite is more likely. In its
efforts to boost domestic champions and spur trade with friendly
countries, the government will probably end up conferring advantages on
firms that are not the most efficient or capable suppliers of a given
product, thereby denting productivity. Because lifting productivity is
the only lasting way to raise living standards, that is a worrying
prospect.
Taken alone, either of Mr
Xi’s ambitions—whether fortifying China against economic and
technological vulnerabilities or finding a more reliable set of partners
for trade and investment—would be a massive undertaking. Taken
together, they are already generating contradictions, and more are
likely to emerge. Trade and investment create mutual benefit and
therefore mutual vulnerability by their very nature. China’s leaders are
right that dependence on Western technology, markets and financial
plumbing leaves them exposed, but wrong if they imagine they can escape
this predicament. The only alternative to interdependence is
immiseration, whatever Mr Xi tells China’s rocket scientists. ■
This article appeared in the Briefing section of the print edition under the headline "Fortified but not enriched"