The four pillars of China’s plan for economic independence

Tianjin Saixiang’s nanoscalpel may be a form of precision surgery, but it is indicative of a broader trend that is reshaping China’s economic relationship with the rest of the world.

Made by a little-known Chinese company, it was designed to fight prostate cancer without invasive surgery. Tianjin Saixiang received the official title of “small giant” in 2020, meaning it qualifies for preferential treatment in exchange for helping China move up the technology ladder.

According to a company executive, who declined to be named, this Chinese version of a cutting-edge treatment is part of an effort to reduce the need for imported medical technologies. According to him, the government requires that local hospitals, whenever possible, replace foreign medical equipment with national ones, which he calls a blessing.

This month, President Xi Jinping delivered a speech on the urgent need for advances in Chinese technology to outpace the West and bolster national security. Tianjin Saixiang’s experience is a small example of the scale of the Chinese leader’s ambition.

Under Xi – who will almost certainly get another term soon – China is trying to become a self-sufficient, state-led tech superpower that will no longer rely as heavily on the West.

The underlying objective, analysts say, is to build a “fortress China” – to reshape the world’s second-largest economy so that it can run on internal energies and, if necessary, withstand military conflict. While many in the United States want to “decouple” their economy from China, Beijing wants to become less dependent on the West, especially its technology.

The strategy has four main trunks and, if successful, will take several years to realize, analysts say.

1. Firm bet on technology

Many changes that are being signaled as China prepares to host the 20th National Congress of the Chinese Communist Party on October 16 have been suggested for some time or are already underway. Congress should reaffirm and accelerate the pace of several of these developments.

Xi’s remarks as he chaired a meeting this month of the Central Commission for the Comprehensive Deepening of Reform, one of the party bodies he uses to govern, set a clear vision for the technology.

The development of “core technologies” is not something that can be left to the free market, but must be led by the Chinese government. “It is necessary to strengthen the centralized and unified leadership of the […] Central Committee and establish an authoritarian command and decision-making system [para tecnologia]”, Xi said, according to the state TV broadcast.

In a sign of the importance Xi attaches to that agenda, he appears poised to stuff the new Central Committee, which includes about 200 of the country’s top officials, with technocrats rather than career bureaucrats, according to Damien Ma’s analysis. managing director of Macro Polo, a think tank in the USA.

These tech-savvy officials will be responsible for overseeing what represents a big gamble: More than $150 billion has been pledged to spur progress in semiconductors.

By comparison, the US plan to dole out $50 billion to support its own semiconductor industry looks far more modest.

Semiconductors are generally considered the Achilles heel of Chinese industry. In 2020, the country imported US$378 billion (R$2 trillion) of semiconductors, a supply chain vulnerability perpetuated by the fact that 95% of Chinese installed capacity is dedicated to the manufacture of cutting-edge technology.

However, there have been some notable advances. It was recently learned that SMIC, one of China’s leading chipmakers, has successfully produced a 7nm chip, putting it just a “generation or two” behind industry leaders such as Taiwan’s TSMC and Samsung. from South Korea.

Several analysts, however, say that despite this progress and the huge funds that China has devoted to developing its chip industry, the goals of self-sufficiency in semiconductors are elusive. The industry is so complex and interconnected that no country can stand alone.

A second strand of Chinese efforts to achieve technological self-sufficiency comes in two interrelated areas — the state’s selection of potential champions, such as Tianjin Saixiang, and the government’s support for a strong push into venture capital.

But here, too, analysts are pessimistic about the long-term effectiveness of Beijing’s attempts to “pick winners.” An adviser to the Chinese government, who declined to be named, says several aspects of the “little giants” plan are flawed.

The advisor says the best way to identify champions is to follow the rule of survival of the fittest. For him, any high-tech company that grows with the competition should be seen as a candidate for “small giant”, which cannot be predetermined by the government.

2. Focus on renewable energies

At the intersection of geopolitics and technology lies another major vulnerability for China – the energy supply.

With the country’s current energy self-sufficiency rate at around 80%, this leaves nearly 20% of supply – mostly in the form of imported oil and gas – relatively vulnerable to external shocks. China is particularly concerned about shipping lanes through “choke points” such as the Straits of Malacca, where US naval might remains supreme.

Michal Meidan, director of the Oxford Institute for Energy Studies, says Beijing is embracing a greater focus on renewable energies, such as solar and wind, as part of the solution.

Analysts say China is on track to achieve a national plan to get about 33% of its energy from renewable sources by 2025. But it will be many years before its vulnerability to oil and gas imports is mitigated, they added.

3. Key food battlefront

A more serious dependence on the outside world is on food production.

China’s food security has plummeted over the past three decades as its population has grown and agricultural land use has shifted from grains to more profitable crops. In 2021, only 33% of the country’s total demand for the three main edible oils – soybean, peanut and rapeseed – was met by domestic production, down from 100% in the early 1990s.

While successive Chinese leaders have stressed the vital importance of food security for years, analysts believe the language and tone have hardened under Xi. Food security and national security were clearly linked by key leaders, and the goal of basic food self-sufficiency was increasingly described in terms similar to other “fortress China” ambitions.

Major policies on grain production focus on raising productivity, protecting arable land, using water more efficiently, and other major water-saving projects. China intends to maintain its self-sufficiency in the main grains, which reached more than 95% in 2019.

But the most important policy, according to Goldman Sachs analyst Trina Chen, is the seed industry revitalization plan, which Xi first promoted in 2021 and which requires greater efforts to achieve self-sufficiency.

The tipping point will be the first generation of genetically modified seeds in the country – a move that has faced strong resistance but that analysts now consider inevitable.

4. The dollar as a weapon

“Fortress China” calculations can also be seen in China’s attitude towards dollar dominance. For Beijing, one of the most alarming features of Western sanctions on Russia has been the exclusion of some of its financial institutions from Swift, the global messaging system that is central to international offsets.

Vulnerability to this type of sanction arises because about three-quarters of Chinese commerce is billed in dollars — meaning they rely on access to Swift.

Beijing’s solution can only be long-term. Its efforts to “internationalize” the yuan have had limited success so far, and plans to promote a digital currency – which dispenses with the use of platforms like Swift – have been slow.

“In the short term, Beijing has struggled not to run afoul of Western sanctions imposed on Russia for the invasion of Ukraine, but its focus on decoupling the dollar has also increased,” says Diana Choyleva, chief economist at Enodo Economics in London. .

For analysts, China will have to stay connected to the world

The Chinese emphasis on self-reliance goes back a long way. From approximately 2015 onwards, the Xi government has placed increasing importance on self-sufficiency in industrial supply chains. This intensified with last year’s launch of China’s 14th “Five Year Plan” and the introduction of a policy called “double circulation” – which emphasized the need for China to rely on internal dynamism.

Since then, a rising wave of US sanctions on Chinese companies, geopolitical divisions stemming from Beijing’s support for Russia in the Ukraine War and rising tensions over Taiwan have reinforced trends supporting “Fortress China”.

However, some analysts believe that, despite all the political slogans, there are still important limitations.

Yu Jie, a senior researcher at Chatham House, a think tank in the UK, argues that China cannot completely isolate itself from the world because of its export-oriented structure. As a result, Beijing is likely to adopt a hybrid approach, depending on the sector.

“Sectors with strategic importance and day-to-day needs for the population will be treated as matters of national security,” says Yu, “while sectors that require foreign capital and labor will remain open and interconnected to the world.”

China’s drive for self-reliance has been building for several years, but it has accelerated since Russia’s invasion of Ukraine and subsequent Western sanctions on Moscow.

Chen Zhiwu, a professor of finance at the University of Hong Kong, says Chinese leaders understand that it could be “hard to avoid” military conflict if Beijing wants to unify Taiwan with the mainland: “Comprehensive economic sanctions against Russia after the invasion of Ukraine only increased the urgency of self-sufficiency in technology, finance, food and energy”.

Steve Tsang, professor at the School of Oriental and African Studies at the University of London, warns that building “Fortress China” does not mean isolation. As the world’s biggest trading power and one of the biggest recipients of foreign direct investment, it would be economic self-mutilation.

“Instead, they are primarily turning into an innovative powerhouse, with technologies that others will want to share, becoming dependent on China.”

Translated by Luiz Roberto M. Gonçalves