Improved state capacity, deeper commercial and financial links with the outside world, and online activism will have an important impact on Chinese politics in the coming years, while many trends point towards more, not less cooperation between China and western countries
On 1 July 2021, China’s ruling Communist Party celebrated the 100th anniversary of its founding in 1921 in Shanghai’s French Concession. The official festivities included a massive show titled ‘Great Journey’ held at Beijing’s Olympic Stadium. The performance was attended by the Party’s top brass – including Chinese President Xi Jinping – and featured hundreds of dancers re-enacting some of the key moments in the Party’s history.
But the centennial celebrations were not confined to China’s political circles. The Party’s media apparatus has been in overdrive to remind absolutely every one of the anniversary’s significance. The event has even sparked a thriving market for CCP themed souvenirs and decorations.
For China analysts, the Chinese government’s commemoration of past glory offers an opportunity not only to look back at the turbulent – and often tragic – history of a Party which has been in power for 72 years of its existence but also to wonder how the future might look. In this update, Torsten Weller outlines four important trends and developments that may shape Chinese politics and policies in the coming decade.
Communists steeped in Marx’s concept of ‘historic materialism’ have traditionally been close followers of socio-economic macro trends and their political significance. It is therefore only fitting that we outline some key developments from the last decade and look at how they could shape China and its foreign relations in the near future.
We will look at four major trends in the political, economic, business and social realms. On the political side, Beijing’s growing reach into all walks of life and the improvement of China’s state capacity is definitively the most important development of the last decade. Economically, the opening up of China’s financial markets and the increasing importance of foreign capital in local debt markets is a second major development that is already shaping policy decisions worldwide. For businesses, the emergence of a truly innovative and competitive Chinese tech sector, and its expanding role abroad, is another important trend. Finally, the fragmentation and radicalisation of Chinese nationalism poses some challenges, not just for its foreign targets, but increasingly for China’s leaders as well.
Trend 1: Increased state capacity
In a vast country like China, getting central orders implemented locally has always been a challenge. Under Mao, most policies were carried out in a ‘campaign style’ whereby local Party members would mobilise officials and the broader population to put policy into practice. While there are still remnants of this approach – take, for example, the widespread tree planting to fight desertification – most of today’s policies follow a much more institutionalised approach. As a result, government effectiveness has improved vastly. According to the World Bank’s Government Effectiveness Index, China’s score has improved continuously over the last ten years, jumping from less than 0.1 in 2010 to over 0.5 in 2019.
Most of the reform initiatives that have enhanced China’s state capacity preceded Xi, but it was under his leadership that they gained steam. Whether it was the landmark judicial reform starting in 2013 or the passing of China’s first Civil Code in 2020, most laws passed over the last decade had been debated for years, rarely moving beyond the initial legislative stages. That so many of these reforms were finally brought to a conclusion could well be one of Xi’s greatest achievements.
China’s score on the World Bank’s Government Effectiveness Index
One of the major projects of this trend is the development of a nationwide Social Credit System (SCS). Often decried as an Orwellian surveillance tool, the SCS’s main function is a standardisation and harmonisation of China’s fragmented and inconsistent legal system. While far from complete, the improved exchange of information across departmental and even regional borders has made it much easier for China’s central agencies to monitor both citizens and businesses.
Alongside this reform has come the consolidation of many supervisory agencies. The major institutional reorganisation in 2018, and the merger of important regulatory bodies, like the one combining three different anti-monopoly bureaus into the single State Administration for Market Regulation (SAMR), streamlined the central government’s decision-making process and thus enhanced effectiveness.
The first results of the reform were seen in the financial sector, where the China Banking and Insurance Regulatory Commission (CBIRC) – itself the successor of two previously independent regulators – managed to clean up China’s vast shadow banking sector.
Last year, the CBIRC’s effectiveness spilled over into the tech sector, with SAMR getting more active, too. The ultimate clarion call came when Alibaba, China’s largest online platform company, had to cancel the IPO of its fintech subsidiary Ant Group only days from its planned listing. Since then, a flurry of new regulations and investigations has engulfed China’s tech sector, with ride-hailing giant DiDi Chuxing being just the latest – but surely not the last – target of central administrators.
Trend 2: The growing importance of foreign capital
The second trend which will become an important factor in Chinese policymaking in the coming decade is the country’s increasing reliance on foreign capital. While foreign direct investment (FDI) has long played a crucial role in China’s economy and rapid modernisation, the recent opening-up of the country’s financial sector has triggered a veritable rush into China’s debt market by foreign investors.
FDI has seen steady growth over the last decade but has received a further boost from recent market liberalisation, for example in the automotive sector, and the lack of similar opportunities in western economies. In 2019, FDI into China surpassed – for the first time – the threshold of £100 billion and jumped yet again by 15.4%, reaching £117.8 billion in net inflows last year, according to data from UNCTAD.
Foreign direct investment flows into China 2000-2020 in £ billions (source: UNCTAD)
China’s attractiveness for foreign businesses is hardly surprising, but the growing influx of foreign capital into China’s debt market is an interesting development, given the country’s opaque financial system and the debt-ridden public finances. Between January 2020 and March 2021 alone, the value of Chinese onshore bonds owned by foreign entities surged by over 61% from £253 billion to over £408 billion. Since 2014, the amount increased more than eightfold according to data from China’s central bank.
However, the overall share of foreign investment remains tiny compared to debt owned by domestic institutions. By the end of 2020, foreign entities held only around 3% of China’s total onshore bond volume, according to calculations by Bloomberg. But the growing presence of foreign lenders nonetheless increases pressure on both debtors and regulators to handle debt in a far more consequential way than previously.
While the additional incentive for better market oversight is welcomed by Chinese reformers, the growing influx of foreign capital also brings new risks. Chinese regulators have already warned about ‘hot money’ and the potential dangers which could be caused by a sudden reversal of capital flows.
RMB onshore bonds owned by foreign entities (in £ billions); Source: People’s Bank of China
More importantly, Chinese authorities will also have to find a sustainable solution for how to deal with insolvent debtors. Recent bond defaults – including by a rising number of SOEs – indicates a growing reluctance for Chinese authorities to bail out struggling companies. Nonetheless, it is uncertain whether China’s financial system could withstand a major default by a large debtor like real-estate developer Evergrande.
Trend 3: Chinese companies abroad
A third trend is the growing global presence of Chinese private companies – both as investors and competitors. During the last decade, Chinese outbound foreign direct investment (OFDI) flows nearly doubled. After reaching an initial peak in 2016 at over £140 billion, Chinese investments abroad somewhat decreased to £97.4 billion last year but still remained above the level of 2014.
Total Chinese outbound FDI from 2010 to 2020 in £ billions (source: MOFCOM, Statista)
Yet more important than quantity is the changing quality of Chinese investment. Ten years ago, nearly all Chinese OFDI was carried out by State-Owned Enterprises (SOEs). For example, in 2011, only 7% of Chinese investment in the EU came from private companies. By 2020, the situation was almost completely the opposite. Only 18% of Chinese capital invested in the EU and UK came from SOEs whereas private investors accounted for 82%, according to research by Merics and Rhodium Group.
Gone are the days when Chinese firms only invested in oil fields in Venezuela or European football clubs. Today, Chinese investment focuses more on higher value-added activities – like a new plant for EV batteries in Sunderland together with Nissan or offshore wind farms.
Share of private FDI in the UK and the EU from 2011 to 2020; Source: Merics, Rhodium Group
Chinese outbound investment thus more and more resembles that from other advanced economies like the US, Germany or Japan. What’s more, China’s own government support for Industry 4.0 technologies could mean that Chinese firms will soon become global leaders in certain key technologies such as battery storage capacities, 5G and other advanced manufacturing and technology sectors.
Keeping Chinese investment and high-tech firms out will therefore become a less viable strategy and could even be detrimental to other countries’ own industrial development.
Trend 4: China’s changing nationalism
The last trend concerns the changing nature of China’s domestic nationalistic sentiment. In particular, extreme nationalists – who are mostly active on social media platforms such as Weibo and WeChat – are turning their ire and incriminations increasingly towards domestic targets, sowing division and risking a similar destructive polarisation of Chinese society as we have witnessed in some western democracies of late – most notably the US.
Although nationalist outbursts are not a new phenomenon in China’s public sphere, they were usually directed at foreign governments and – by extension – businesses from these countries. Most prominently, the dispute about the Diaoyu Islands (Japan) or the stationing of US THAAD Missiles (South Korea) all have in common that the targets of Chinese online vitriol were non-Chinese entities. Usually, they ebbed once the official discourse changed. But recent attacks by high-profile netizens suggest that this link has been broken.
In a recent interview with Guancha, a Chinese news website, the Chinese Ambassador to France, Lu Shaye, explained that the support and approval from Chinese netizens for aggressive public statements is more important than diplomatic etiquette.
Although this attitude is not confined to Chinese diplomats, the permissive and even encouraging approach towards nationalist online influencers has created an environment where online attacks have shifted more and more from foreign governments and companies towards domestic individuals who – in the eyes of China’s online warriors – are considered as not patriotic enough.
That this trend also affects trade and investment became clear when nationalists called for a halt to plans by Taiwanese chipmaker TSMC to invest an additional USD2.87 billion (~£2.1 billion) in its Nanjing plant, arguing that it would harm the mainland’s own semiconductor industry.
The CBBC view
The four trends outlined in this update will play an important role in Chinese policymaking over the next decade and maybe even beyond. Some of them support a more optimistic assessment of China’s political trajectory than the one which is commonly presented in western media. In particular, the improved regulatory capacity of the Chinese central government should generally be welcomed as it reduces legal uncertainty, even though the security-focused approach by Chinese authorities towards many issues might suggest the opposite. As the case of the new Personal Information Protection Law shows, national security-oriented legislation can lead to better legal protection for all affected parties.
The increasing interconnectedness of Chinese investment and financial markets with the rest of the world also points towards a more positive trade relationship in the coming years. Despite frequent talk about decoupling, commercial links between China and the rest of the world are deepening. This means that it is not only western governments who are forced to adapt to China’s growing role; Chinese policymakers, too, can no longer ignore global challenges and regulatory environments. China’s role in global talks on climate change and its support for the planned 15% global minimum tax on corporate profits indicates that cooperation with China on these issues will have to deepen as well.
The final trend of the turning inward of Chinese online nationalism highlights that Chinese society is changing, too; and the public statement of a leading Chinese diplomat that soothing public anger expressed online is more important than the guidance of a supposedly ‘enlightened’ technocratic Party leadership suggests that the ‘democratic’ element in Chinese politics has become far stronger than many analysts are willing to admit.