How Xi Jinping is fortifying China’s economic security

Security of the economy

In 2014, Chinese leader Xi Jinping’s administration presented its “Comprehensive National Security Outlook,” outlining an inclusive national security framework covering 11 areas — politics, territory, military, economy, culture, society, science and technology, information, ecology, natural resources and nuclear.

The focus on the security of the economy demonstrated in the outlook was an extension of the Chinese Communist Party’s policy of making improving people’s living standards the source of its legitimacy.

At the same time, it implied the goal of making the country a high-end producer, a policy revealed in Made in China 2025, a strategic plan initiated in 2015.

China’s National Security Law that subsequently took effect in July 2015 said in Article 19 that the state shall maintain its basic economic system and the order of the socialist market economy, and improve the rules and mechanisms to prevent and resolve economic security risks.

That is to say China has been ahead of other countries in government-led efforts to integrate economics and national security.

It is also noteworthy that Beijing has constantly been focusing on science and technology even before addressing the security of the economy.

China has traditionally been introducing advanced technology from abroad, starting with the country’s former leader Zhou Enlai who proposed in the 1960s the Four Modernizations, focusing on the areas of agriculture, industry, national defense, and science and technology.

And the key to achieving a higher level of scientific and technological independence and self-strengthening — the goal repeatedly stressed by the Xi administration — is to insource cutting-edge technologies. Needless to say, the country is also focusing on obtaining scientific technologies from abroad.

The ‘dual circulation’ theory

The most distinctive feature of the Xi administration’s approach to economic security is that it clearly recognizes the superiority of the country’s gigantic market.

Such an approach took shape as a strategy under the concept of “dual circulation” proposed in 2020.

Under this idea, China set a goal of achieving a structural shift to a domestic demand-driven economy mainly led by consumption by placing a greater focus on the domestic market, or internal circulation, while making domestic and international dual circulations mutually reinforce each other.

The key to the dual circulation strategy from the perspective of economic security was to secure economic independence by forming a self-contained domestic circulation, and the Xi administration gradually shifted its focus to state-owned enterprises.

In his speech delivered in April 2020, Xi said China must tighten international production chains’ dependence on the country, forming a powerful countermeasure and deterrent capability against foreigners who would artificially cut off supply.

His remarks indicate China’s recognition that deepening interdependence with foreign economies will put the country at an advantage.

Behind the Xi administration’s continued pledge for greater market access to foreign businesses was its strategic aim of making the global economy more dependent on the Chinese economy.

The report to the 20th National Congress of the Chinese Communist Party held in October also had a section on promoting high-standard opening up, stating, “We will leverage the strengths of China’s enormous market, attract global resources and production factors with our strong domestic economy, and amplify the interplay between domestic and international markets and resources.”

Retaliatory measures

One of the reasons why China’s economic security policy cannot be seen clearly from outside is because Beijing is yet to take any legal measures on the clear ground of economic security.

The Xi administration has introduced related laws, including an “unreliable entity list” regime, export controls, an approval process for inbound foreign direct investment and rules on counteracting the extraterritorial application of foreign laws.

However, even after U.S. President Joe Biden’s administration issued in October export controls that restrict Chinese access to U.S. semiconductor technology, China only went as far as to launch a trade dispute at the World Trade Organization.

This was a relatively moderate action, considering the fact that Beijing implemented retaliatory tariffs in four stages against the U.S. during Donald Trump’s presidency.

As for China’s latest move, firstly it is highly likely that the action was just a transitional measure. Beijing must have thought that confronting the U.S. head-on was not a good idea under the current economic climate.

Secondly, it must be noted that in actuality China continues to obtain technologies through conventional means of corporate acquisitions and joint ventures, as well as by pressuring foreign companies with rules setting conditions for their participation in government procurement.

To understand the first point, it is helpful to focus on the enforcement of the Anti-Foreign Sanctions Law. Discussions on the second point will come in later installments in this series.

The 16-article law, enacted by the Standing Committee of the National People’s Congress of China in June 2021, is a piece of legislation built on the Rules on the List of Unreliable Entities and the Rules on Counteracting Unjustified Extra-territorial Application of Foreign Laws and Measures issued by China’s Ministry of Commerce. It provides legal grounds for the implementation of countermeasures against discriminatory measures by other countries.

While the law basically targets sanctions imposed by foreign governments, countermeasures may be issued against foreign entities or individuals directly or indirectly involved in the drafting, decision-making or implementation of discriminatory restrictive measures.

China has so far reportedly utilized the law only to cope with political cases, imposing sanctions on individuals and organizations in retaliation for sanctions over human rights in Hong Kong, the Xinjiang Uyghur Autonomous Region and Tibet, as well as on U.S. defense contractors Raytheon Technologies and Lockheed Martin due to their sales to Taiwan.

Legally speaking, companies involved in Washington’s economic sanctions against Beijing could be banned from conducting transactions or sued for damages, but such cases have not arisen.

Although China established such a legal framework, it is likely that the law is being implemented in a restrained and ambiguous manner.

China’s intentions

Behind China’s actions are its belief that it would not be favorable to elevate vigilance among foreign companies amid an economic downturn, as well as its strategic intention of integrating foreign companies into the Chinese market and supply chains in line with its dual circulation policy.

Beijing is apparently aware of the fact that foreign companies are recognizing the risks of violating countries’ economic security regulations or getting involved in sanctions in case of a Taiwan contingency, and is believed to be taking restrained actions as a signal to offset the risks.

On the other hand, it was reported in January that China was planning to add solar-panel manufacturing technologies to the list of items subject to export restrictions. The measure, if implemented, will affect other countries’ green energy supply plans.

The International Energy Agency pointed out in its July report on solar photovoltaic global supply chains that China’s share in all the manufacturing stages of solar panels exceeds 80%, and called for the need to diversify raw-material and solar-panel import routes to reduce supply-chain vulnerabilities.

China offers low-priced products in such areas as pharmaceuticals and rare earths with its high production capacity backed by government assistance to dominate global markets.

As the case of solar panels suggests, such a supply strategy by China can be used as a tool to acquire strategic indispensability.

This means we must be aware that China is posing an even higher economic security risk than would appear.

In order to cope with such a risk, it is necessary to build multilateral cooperation as a common infrastructure to step up deterrence against China and create a safety net at the same time.

Biden and Prime Minister Fumio Kishida, in their meeting in January, agreed to build resilience in supply chains among like-minded partners against threats to economic security such as economic coercion.

Along with that, related countries should also consider measures to address the Chinese government’s intentions.

International order is in the midst of reconstruction and it is necessary for the time being to continue looking for various ways to find equilibrium.

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Geoeconomic Briefing is a series featuring researchers at the IOG focused on Japan’s challenges in that field. It also provides analyses of the state of the world and trade risks, as well as technological and industrial structures (Editor-in-chief: Dr. Kazuto Suzuki, Director, Institute of Geoeconomics (IOG); Professor, The University of Tokyo).

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