It is difficult for governments and companies to come to terms with this. They’ve spent years, if not decades, building their China strategies and getting used to the idea that China’s market and power, warts and all, is the future and unstoppable.
It is true that high levels of integration are difficult to disentangle, but this thinking could turn out to be as misguided as the one that misled our politicians in the 1990s and 2000s. And that’s before we consider the meaning and consequence of the two recent shocks – its zero Covid policy and the Russian invasion of Ukraine.
China is the largest or nearly the largest trading partner of about 120 countries on all continents. It is the hub of global supply chains, sucking large quantities of copper, iron ore, oil and other raw materials from Perth to Peru, and has acted as a magnet for foreign manufacturing companies , financial services and other services, captivated by the Chinese market. size, or committed to it as the ideal place to manufacture or assemble manufacturing, technological and financial products. It is certainly a technology leader in many branches of science and engineering, but not all.
The world’s dependence on China is legendary. Production of many lower-value goods, such as toys and textiles, has shifted to countries like Vietnam and Bangladesh, but China still supplies the West with clothes, shoes, sports equipment, kitchen and household appliances and furniture.
We also depend on China for certain so-called rare earth elements, the minerals used in mobile phones and for electric vehicles, batteries, solar-powered equipment, smartphones, tablets, televisions, computers and other equipment. Office.
As our Covid experiences have demonstrated, China also supplies large quantities of pharmaceutical and medical equipment, antibiotics and prescription drugs.
The US-China relationship is one of the most complex and interdependent in the world. The value of their commitment is over $2 trillion. Two-way trade in goods and services amounts to just over $700 billion a year. The stock of US investment in China is just under $150 billion, while China’s in the US is around $60 billion.
The Chinese government holds over $1 trillion of US financial assets in its over $3 trillion foreign exchange reserves, and likely more as some assets are held in offshore financial centers or outsourced to managers private foreigners.
Bank loans have funded China’s Belt and Road, accounting for the bulk of the roughly $1 trillion in loans and projects that have accrued since 2013. Loans have actually dried up since 2018, but China is always eager to develop what it calls digital. and Health Silk Roads, where it wants to be the go-to place for public health goods and services and technology and communications equipment and standards.
Dependency is of course a two-way street, and China’s dependence on the rest of the world is just as high. It needs the $1.5 trillion in annual bilateral trade it does each year with the United States and Europe. It needs foreign companies in China that provide high-tech goods and expertise, aerospace equipment and parts, and extensive know-how.
He wants foreign financial firms to provide expertise in wealth management and investment banking. It remains heavily dependent on imported technology, especially microchips, on which it spends more than it spends on crude oil. With a closed financial sector, capital controls and a managed currency, China still needs global capital markets to be open and to invest the proceeds of its trade surpluses, which seem destined to endure.
Breaking up ain’t that hard to do
You could be forgiven for thinking that such a two-way addiction would be difficult to untangle, and it is. Yet it would be a mistake to think that high levels of integration cannot be undone by politics, as our predecessors learned at great expense after 1914. Today the political will to decouple or disengage is become much stronger.
Business has continued to thrive in China – until recently, at least – and has adapted to the idiosyncrasies of the Chinese Communist Party even as Xi’s China has grown more authoritarian and controlling.
But from around 2020, Beijing’s policies had a much bigger upside – not only in favor of the already significant involvement of state-owned enterprises and government in the economy, but also in measures designed to put businesses and private entrepreneurs in step.
Financial and regulatory sanctions on tech giant Alibaba and a storm of regulations affecting data, finance and technology platforms have worsened the industrial mood as the government pressures private companies to align their activities on the social and political goals and objectives of the party.
Business angst and uncertainty became more evident following the Hong Kong crackdown that began in 2019, and the deterioration of relations following both the outbreak of the Covid pandemic in 2020 and revelations about the incarceration of Uyghur Muslims in Xinjiang province – where Chinese oppression has even sparked allegations of genocide.
The 2018 focus on tariffs was replaced by an extensive web of export controls, increased scrutiny of foreign investment, restrictions on which domestic companies to do business with and, ultimately, sanctions. against those who violate the regime.
Some of them have been enforced because of Hong Kong, Xinjiang and national security concerns, but China has also continued to punish sovereign states and companies whose policies it disagrees with. .
These actions and developments have already begun to compromise businesses, increasingly drawn into the awkward crosshairs where they must choose which rules and laws to flout and which to follow.
China’s support for the Russian invasion of Ukraine, and more recently the consequences of its zero Covid quarantine and lockdown policy, have taken these issues and concerns to a new level.