Index trend
Previous quarterly editions
Expropriation risk: 70 71 71 70 ► Political violence risk:48 48 48 48 ►Terrorism risk:22 22 22 22 ►Exchange transfer and trade sanction risk: 44 44 44 44 ►Sovereign default risk:46 46 37 47 ▲
Overall Risk Temperature: 52 (Medium 2) TREND ▲
Special topic: Gray zone aggression
Degree to which the country relies on outbound gray zone action to achieve its strategic objectives1 = Not at all5 = Gray zone action is a core tactic
5
Impact of inbound gray zone attacks on the country1 = Negligible impact5 = Significant impact on economic growth and/or political stability
4
Beijing sees itself as a target of gray zone aggression by the United States and its allies. The U.S has imposed — and encouraged others to match — restrictions on trade and investment that specifically target China’s military development and ability to access critical technology. These sanctions include placing Chinese entities on the Department of Commerce’s export controls lists and a specific Chinese Military-Industrial Complex Companies List. Washington has also used sanctions against Chinese companies and research institutions accused of assisting Chinese military modernization efforts. U.S. economic containment measures have affected China’s military development, slowing Beijing’s ability to close the technological gap with Washington.
Beijing sees Washington as using “salami slicing” tactics to undermine the status quo in cross-Strait relations and harm China’s regional external environment in other ways. China sees the U.S. government as persistently and deliberately undermining its official “One China Policy” through regular arms sales to Taiwan, allowing high-level bilateral visits, engaging in military cooperation (such as training exercises and intelligence sharing) and making diplomatic efforts to boost Taiwan’s international legitimacy by lobbying for Taiwan to join international organizations such as the World Health Organization and Asia-Pacific Economic Cooperation.
Beijing sees U.S. surveillance patrols along China’s coast, transits through the Taiwan Strait and military exercises in nearby seas as intimidation and sees Washington’s “freedom of navigation operations” in disputed areas of the South China Sea, military cooperation with rival claimants and diplomatic efforts to support rival claims as an effort to undermine China’s position.
Increasing U.S. military and diplomatic involvement with regional military grouping (such as the Quad and AUKUS) and its strengthening bilateral defense agreements with China’s regional rivals (such as Japan and South Korea) put pressure on China in a way that does not involve actually using military force.
China claims that U.S. support for calls for democracy in Hong Kong and criticism of alleged human rights abuses in China are efforts to destabilize China internally and sully its international reputation and accused the United States of using disinformation campaigns, for example to encourage countries not to use Chinese 5G equipment or to discredit China’s COVID-19 vaccines in the Philippines.
There is no doubt that the United States does use gray zone operations against China but probably not as much as Beijing claims (and perhaps even believes). For example, U.S. efforts to promote democracy overseas does not have weakening China by destabilizing its political system as a primary objective, though they could contribute to that outcome in the long run. The extent to which U.S. action is coordinated is also questionable. For example, China saw House Speaker Nancy Pelosi’s visit to Taiwan in 2022 as an example of salami slicing, but it was not something that the executive branch of the U.S. government had direct control over.
China makes frequent use of gray zone tactics itself. Indeed, they are a core and unusually prominent instrument of the country’s foreign policy. It has often used economic methods to punish governments that have behaved or spoken in ways Beijing does not like. These include both formal sanctions and informal measures where Chinese companies are advised not to import products from particular countries, or state officials subject foreign firms to bureaucratic delays or find pretexts to crack down on them for alleged regulatory violations. The exact reasons are not always made explicit. Past targets include Norway for awarding a Nobel Peace Prize to a Chinese dissident, South Korea for agreeing to deploy a U.S. missile defense system, Australia for calling for an investigation into the origins of COVID-19 and Lithuania over its relations with Taiwan. China’s economic importance is such that many governments are deterred by the threat of economic punishment.
Taiwan is the foremost target of Chinese gray zone operations. Chinese military vessels and aircraft frequently enter Taiwan’s air defense identification zone and increasingly violate the de facto boundary line in the Taiwan Strait, and sometimes they conduct military drills close to Taiwan’s territory. These activities aim to test Taiwan’s ability to respond, stretch its resources and assert China’s territorial claims without crossing the threshold that would require a response.
In the South China Sea, China has defended its territorial claims through large-scale island-building on reefs and atolls in contested areas. These islands were subsequently fortified and became military facilities bases that expanded China’s military reach without provoking a response. In addition, China uses Coast Guard vessels and militarized fishing boats to harass foreign vessels, occupy disputed areas and support China’s military goals without using the navy. In the case of the “maritime militia,” ambiguity in who the actors are makes it difficult to calibrate a response. China has successfully created new facts on the ground while stopping its rivals from doing the same.
TREND ►Foreign firms in general face an increasingly difficult environment, given the national policy priority on self-reliance and promoting domestic firms, the possibility of being caught up in U.S.-China tension and increasingly abrupt policymaking in various areas. Authorities are focusing on foreign high-technology providers in priority sectors. Such firms are still generally protected by China’s need for their technological contributions and for their assistance in lobbying against the trend in their home jurisdictions toward restricting exchange with China.
China’s government has not expropriated foreign property overtly since the early Maoist period and shows no inclination to do so now. It is possible, however, that the local level authorities might force a foreign firm to divest at a low price or on unfavorable terms — or effectively force it to remain when it would rather leave. The government could conceivably pressure large foreign firms to make philanthropic donations of money or resources — that is, extort them — as the domestic internet giants did during the short-lived “Common Prosperity” push in 2021. The Anti-Foreign Sanctions Law explicitly authorizes the government, among other things, to seize real estate and other assets of individuals and organizations that “directly or indirectly participate in the drafting, decision-making, or implementation” of sanctions against China. The government has not used this capability yet.
Rather than expropriation of assets, the greatest threat to large foreign multinationals is the risk of being leaned on by the Chinese government to lobby their home government to become more friendly to China.
TREND ►
The Communist Party’s political control apparatus is sophisticated and well resourced. It is virtually impossible to mobilize any political opposition. Outbreaks of localized violence targeting local officials over specific grievances occur, but the system can crush them before they develop. Authorities are practiced at combining forceful repression with half measures to defuse discontent. The “White Paper” protests across the country against the government's draconian COVID-19 regime in late 2022 demonstrated that the potential for mass protests is never completely extinguished. The conditions that led to these protests were extreme and exceptional, and they were short-lived.
However, future episodes cannot be ruled out, particularly since a slowing economy may continue to drive public discontent. Significant events — such as the death of a senior former leader — can become flashpoints for public dissatisfaction that catch the Party by surprise. An elite-level coup is conceivable, but any coup would likely remain “within the system,” and perhaps even remain concealed for some time afterward, rather than spilling over into large-scale violence.
The most direct risk to foreign firms is that they will be targeted in politicized “counterespionage” operations. In May a new state secrets law came into force, containing an undefined provision on “work secrets” that could potentially be applied to foreign companies sharing information obtained through conventional research and due diligence.
In a country of China’s size, isolated acts of violence by individuals with grudges inevitably sometimes occur and can include bombings, but there has not been a terrorist attack for over seven years. The government has highlighted Xinjiang and Hong Kong as the only potential sources for organized terrorism in pursuit of a political agenda. It claims terrorists in or from Xinjiang have caused more than 400 deaths since 1990. All but a couple of these incidents have been very small and unsophisticated, and none has occurred since 2017, when the government rolled out comprehensive surveillance and social control systems in Xinjiang. A significant weakening of state capacity for any reason could lift the lid on extreme discontent, particularly among Uyghurs, with potential for widespread violence, but rather than a lifting of restrictions, the government has declared they should be “normalized and institutionalized.” The greater threat of terrorism arises from attacks on Chinese infrastructure projects overseas or in regions close to China’s borders in Central Asia rather than inside China itself, such as attacks on Chinese workers in Pakistan in March and October.
Beijing has a record of selectively applying regulations to hurt firms from countries whose governments say or do things it objects to. Such de facto sanctions have been used prominently against South Korea, Australia and Lithuania. Restrictions can affect both imports and exports. The industries targeted vary but are typically those that hold minimal strategic importance to China and significant (if not necessarily overwhelming) importance to the target country. A series of laws and regulations introduced in recent years — for example, the Anti-Foreign Sanctions Law and the Unreliable Entity List — give Beijing means of imposing sanctions directly and overtly, with associated deterrent effects. The range of such tools continues to expand. The Anti-Foreign Sanctions Law authorizes the government to apply sanctions in a tit-for-tat manner to foreign individuals and organizations that “directly or indirectly participate in the drafting, decision-making, or implementation” of sanctions against China, as noted. Counter measures may include prohibiting transactions and cooperation with Chinese individuals and entities and “other necessary measures.” The law potentially puts foreign firms in a position of having to choose between violating foreign sanctions and risking Chinese counter sanctions. Since 2023, China has applied it against U.S. companies and individuals in connection with U.S. arms sales to Taiwan and the imposition of U.S. sanctions on Chinese entities linked to alleged human rights abuses in Xinjiang.
The Ministry of Commerce on September 24 announced a probe into U.S. retailer and Calvin Klein-parent PVH Group over alleged business disruptions around its supply chain in the Xinjiang region. The ministry said the probe forms part of the Unreliable Entity List mechanism. It came after the U.S. Commerce Department the previous day announced plans to ban the import or sale of cars with certain China- or Russia-linked hardware or software.
TREND ▲
Ratings agencies have been lowering China’s credit rating this year due to increasing risks in China’s public finance outlook — a development met by criticism in Beijing. China remains overall in a strong fiscal position and is at negligible risk of being unable to meet debt obligations, but the central government has continued to issue large amounts of debt, contributing to a rising debt-to-GDP ratio. It is possible, however, that a state organ might, without making it explicit, decide to withhold or block payment to a foreign creditor as a means of putting pressure on that firm or its home government for political reasons, most likely as part of a broader suite of measures.
