Previous Quarterly Editions
Expropriation Risk: 65 65 65 65 Political Violence Risk: 48 48 48 48 Terrorism Risk: 32 32 30 28 Exchange Transfer and Trade Sanction Risk: 55 55 55 55 Sovereign Default Risk: 37 37 37 37
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In February 2021, President Xi Jinping declared a historic victory in his eight-year campaign to eliminate extreme poverty in China, earning him a place in the Communist Party pantheon and clearing the way for the Party to turn towards its next long-term goals: making China a developed country by 2049 and a carbon-neutral economy by 2060. To set China on the path towards these goals, the National People’s Congress launched a new Five-Year Plan in March 2021 that will guide economic, industrial and social policy across the whole government for the next five years.
The plan introduces a concept called ‘dual circulation’, which implies the simultaneous cultivation of both domestic and external sources of economic growth and which some outside China characterise as aiming to make China as self-sufficient as possible while making the rest of the world as dependent on China as possible. At the least, it implies strengthening domestic demand and innovation and a more selective approach to international trade, investment and supply chains.
As China tries to wean itself off reliance on foreign technology, the Party has tightened its grip on the internet giants at the forefront of the country’s own digital economy. A sharp regulatory crackdown has in a matter of months brought years of unregulated expansion to a close, especially for the largest and most disruptive of China’s internet giants, Alibaba.
China’s success in stopping the spread of COVID-19 has been spectacular. New daily cases have not exceeded double digits for months. The economy has reopened and rebounded. Gross domestic product grew 6.5% year-on-year in the final quarter of 2020 and 2.3% for 2020 as a whole. Independent forecasts are for around 8% growth in 2021.
However, international travel remains low due to quarantine requirements, and the authorities are increasingly concerned about the slow pace of vaccination. Vaccine hesitancy appears widespread: with the risk of infection so low, people prefer to wait and see if others experience side-effects.
‘Vaccine diplomacy’ offers China a chance to redeem itself after the blunders that allowed COVID-19 to spread uncontrollably in the first place, and the public relations disaster that ‘mask diplomacy’ became. However, success depends on China being able to deliver the promised vaccines in the quantities required and assuage concerns about their quality.
China is expected soon to begin rolling out its state-backed digital currency, colloquially known as the Digital Yuan. Security and efficiency at home are reason enough for the project, but China’s desire to wean itself off US-dominated international financial institutions and perhaps ultimately replace the US dollar as the international currency of choice give it a foreign policy dimension too. China is likely to promote the Digital Yuan’s use overseas, but the inbuilt ability of the Chinese authorities to track and suspend transactions will make concerns surrounding its adoption as divisive as those over the Chinese government’s Belt and Road Initiative and China’s involvement in 5G telecoms networks- and perhaps yet another bellwether issue on which countries are forced to choose, reluctantly, between China and the West.
The Biden administration has dashed hopes of a reset in US-China relations. President Joe Biden and his cabinet have been as assertive as their predecessors in the Trump administration.
US tariffs imposed under now-former US President Donald Trump show no sign of being lifted. US restrictions on trade in high-tech products were introduced on the grounds of national security, which means they do not lend themselves easily to quid-pro-quo agreements.
China’s human rights abuses in Xinjiang have gradually risen up the agenda, complicating relations not just with Washington but also with London and EU governments. Xinjiang produces around one-fifth of the world’s cotton and reports suggest that some of it is produced using forced labour. Western clothing brands face the threat of boycotts in China if they pledge to avoid Xinjiang cotton, and reputational damage in the West if they do not.
The Biden administration has signalled firm support for Taiwan, where ongoing military intimidation by China has been wearing down morale. Washington has also reaffirmed its commitment to defending disputed islands held by Japan (where Chinese maritime activity is at an unprecedented level) and held the first ever summit of the ‘Quad’, which brings together Australia, India, Japan and the United States in what is effectively an anti-China bloc.
The Chinese government has not expropriated foreign property overtly since the early Maoist period and shows no inclination to do so. On the local level, however, it is possible that authorities might force a foreign firm to divest at a low price or on unfavourable terms, or effectively force it to remain when it would rather leave. Much of the apparent risk from expropriation stems from the possibility that China could retaliate against foreign companies as part of a diplomatic dispute (see “Exchange transfer and trade sanctions risk,” below).
The Chinese Communist Party’s apparatus of political control is the most sophisticated and well-resourced in history. The Leninist political system and the instruments of surveillance, information control, intimidation and state violence that support it make it virtually impossible to mobilise or coordinate any kind of opposition political movement.
Outbreaks of localised violence targeting local officials over specific grievances do occur, but the system is able to crush them before they can gain momentum or link up with people with similar grievances elsewhere. An elite-level coup cannot be ruled out, but there is nothing to suggest this is currently a significant risk. A coup in any case would likely remain ‘within the system’, and perhaps even remain concealed for some time afterwards, rather than a violent conflict playing out in public.
TREND ▼
In a country of China’s size, isolated acts of violence by individuals with grudges inevitably sometimes occur and can include bombings. However, the only potential for organised terrorism in pursuit of a political agenda comes from Xinjiang. The government claims terrorists in or from this region 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 systems of surveillance and social control in Xinjiang. Meanwhile, the government has adapted its internal security surveillance technologies to account for increased mask-wearing due to COVID-19.
Beijing has a record of selectively applying regulations to hurt firms from countries whose governments say or do things it objects to. Such undeclared but de facto sanctions have been used against Japan and South Korea, among others, and are currently in force against Australia. Restrictions can affect imports and exports.
The industries targeted vary but are typically those that hold little importance to China’s economy and significant (if not necessarily overwhelming) importance to the target country. A series of laws and regulations introduced over the last few years - most importantly the ‘Unreliable Entity List’ - give Beijing means of imposing sanctions directly and overtly too, though these have so far never been used.
The central government’s fiscal position is sufficiently strong meaning that there is negligible risk of it being unable to meet its debt obligations. It is possible, however, that a Chinese state organ might, without making it explicit, decide to withhold or block payment to a foreign creditor deliberately, as a means of applying pressure on that firm or its home government for political reasons- most likely as part of a broader suite of measures.
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