Index trend
Previous Quarterly Editions
Expropriation risk: 71 70 70 71 ► 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 46 46 ►
Overall Risk Temperature: 52 (Medium) TREND ►
Special topic: Relationship with the 'global rules-based order'
Since its rapprochement with the U.S. in the mid-1970s, China has been a major beneficiary of the global order, which has overall provided a benign external economic and security environment for its development, and has a significant stake in many of its constitute institutions, especially the United Nations (U.N.) Security Council as a veto-wielding permanent member.
Nevertheless, as its economic and geopolitical heft has grown, Beijing has increasingly begun to see the rules-based order as a tool for Washington to limit China’s growth and ability to pursue its interests. President Xi Jinping has called for China to “lead the reform of the global governance system.” This “reform” means simultaneously supporting and increasing China’s role within international institutions and agreements where it sees this as being aligned with its goals and norms, while undermining those that are not.
China supports parts of the rules-based order that are state-focused, such as the U.N. and World Health Organization, by pushing for leadership roles in these agencies and increasing funding and engagement. It also promotes itself as the major power that represents the interests of the Global South and seeks to “democratize” these institutions by increasing Global South representation and wielding its influence supposedly on the Global South’s behalf; however, this is often simply rhetorical as, for instance, with the U.N. Security Council where China has talked much about reform and increasing Global South representation without much concrete action. China has often found pushback to increasing its influence in some international institutions due to U.S. opposition, such as in the International Monetary Fund where Washington has blocked attempts to increase the voting share of other nations, including China.
A feeling that it has been blocked from increasing its influence to a satisfactory extent within the current order has led China to create and strengthen the influence of China-led institutions that promote its norms and world view, such as the Asian Infrastructure Investment Bank and the Shanghai Cooperation Organization. These and other China-led institutions do not match the scale of their Bretton Woods equivalents and have varying levels of buy-in from Western nations and sometimes debatable impact. They have, however, proved attractive for many states, including some with which China may have competing geopolitical interests, and including democracies such as India and Brazil. Participating states see clear benefits from their involvement that vary in each case but often include the fact that they share some of China’s grievances with the rules-based order.
China also takes issue with much of the liberal normative basis of the rules-based order, seeing the “universal values” its proponents point to as its basis as a threat to its own one-party system.
Since 2021, China has launched three major global Initiatives (the Global Development, Security and Civilization initiatives) that together provide the blueprint for “building a community with a shared future for mankind” that China invites others to join. These initiatives do not in fact contain new thinking but rather bring together China’s normative framework for its foreign policy, positing the normative tenets of a world order that is multipolar rather than U.S.-led. The initiatives are firmly based on the U.N. Charter, so China is positioning itself as the true champion of multilateral institutions rather than a revisionist power. All of the China-led institutions reflect this idea. China is pushing its narrative especially strongly in the Global South, but even there it is questionable how much support China’s normative approach can garner when its actions contradict its professed values — for example, when it claims to respect territorial integrity but fails to criticize Russia’s invasion of Ukraine or when it denounces unilateral sanctions but imposes such sanctions itself.
A complete collapse of the rules-based order would not suit Beijing, as it benefits from many of the public goods that this provides and that it has no interest in providing itself. A further weakening of the order benefits Beijing, however, as it increases the attractiveness of its China-led institutions and norms, as well as increases China’s strategic room for maneuver should it choose to make foreign policy decisions that proponents of the rules-based order would oppose.
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 confrontation 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 exchanges 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 on 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 force large foreign firms to make philanthropic donations of money or resources as the domestic internet giants did 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.
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 spread. 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, but the conditions that led to these protests were extreme and exceptional, and they were short-lived. Future episodes cannot be ruled out, particularly since a slowing economy may continue to drive public discontent. Unexpected events can become flashpoints for public dissatisfaction that catch the Communist Party by surprise. An elite-level coup is conceivable, and the delay of the Party Central Committee’s Third Plenum meeting last fall might indicate unrest within the top echelons. 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. A revised counterespionage law took effect in June 2023 through which the state gives itself permission to detain foreigners and Chinese nationals alike for spying on extremely flimsy grounds. This new law has received a lot of coverage in China with citizens encouraged to participate in counterespionage activity, including by reporting potentially suspicious activity.
In a country of China’s size, isolated acts of violence by individuals with grudges inevitably sometimes occur and can include bombings; however, the government has highlighted Xinjiang and Hong Kong as the only potential sources for organized terrorism in pursuit of a political agenda. The government 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. In December 2023, three Hong Kong activists were jailed for an attempted bomb attack on public buildings in 2021, but no similar plots have occurred since. Significant weakening of state capacity for any reason could lift the lid on extreme discontent, particularly among Uyghurs.
Beijing has a record of selectively applying regulations to hurt firms from countries whose governments say or do things it objects to. High-profile targets include 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 as well as “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. In late 2023, China announced counter sanctions against U.S. companies and individuals for their connection to involvement in the imposition of U.S. sanctions on Chinese entities over their links to alleged human rights abuses in Xinjiang and later a separate set of sanctions against five companies involved in U.S. arms sales to Taiwan.
Moody’s recently lowered its outlook on China’s credit rating to negative from stable because the country is likely to provide more support to financially stressed local governments and state-owned enterprises; however, the central government’s fiscal position is sufficiently strong for there to be negligible risk of it being unable to meet debt obligations.
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.
