China strives to be self-sufficient amid fear of isolation

China is trying to build the resilience of its economy to avoid the risk of isolation, as the West is doing with Russia.

China has recently invested billions of dollars in semiconductor technology, increasing grain and oil reserves, and establishing international connections for its financial system. According to James T. Areddy, usually a veteran commentator on China affairs, these moves stem from fears of being isolated from Western economies by severe sanctions like those imposed by the US and European Union (EU) on Russia WSJ.

As the Ukraine crisis deepens and the US-China trade war rages on, Beijing could face many sanctions if confrontation with Washington escalates, possibly over Taiwan, or if China clearly backs Russia in its campaign in Ukraine .

“China has recognized that the West has taken bold steps in confronting Russia and presented itself as a united front,” said Eswar Prasad, professor of trade policy at Cornell University in the US.

Chinese President Xi Jinping at an event in Beijing, China, in October 2021. Photo: Reuters.

Chinese President Xi Jinping at an event in Beijing, China, in October 2021. Image: Reuters.

China’s economy is much larger than Russia’s, so it will be harder to isolate it. However, Professor Prasad said events in Europe may have made China realize that it was still vulnerable to the West’s financial, economic and technological sanctions.

During Xi’s tenure, three US presidential administrations have imposed successive sanctions on Beijing, including bans on Huawei and companies accused of having ties to China and the Chinese army. Each of these moves seems to spur China to seek self-reliance.

The day after Russia launched its military operation in Ukraine, people’s newspaper, The mouthpiece of the Chinese Communist Party published an editorial saying, “Independence and self-reliance ensure that the cause of the Party and the people will win victory after victory.”

global times, The People’s Daily newspaper, published in March, said China’s advantage lies in large-scale production.

According to data from the Harvard Center for International Development, China supplies a third of the world’s textiles, more than 27% of electronics and almost 20% of machinery. China is also pretty much the sole exporter of rare earths for products ranging from night vision goggles to electric vehicle batteries.

Attempts to isolate China like Russia will not be easy for the US economy. The American Chamber of Commerce and the Rhodium Group released a report last year estimating that US companies, including aerospace, chemicals and the healthcare sector, could lose $25 billion in annual profits if the US Half of their investments in China would give up blow. US GDP could also lose about $500 billion.

Wang Wen, director of the Chongyang Institute for Financial Studies at Renmin University of China in Beijing, argues that it will be difficult for the West to mount multilateral efforts to increase pressure on an economy 10 times its size russian times. According to Wang, China will rise to the challenge if it becomes isolated from the West, as it did during the trade war with former President Donald Trump’s administration.

A chip production line in Nanchang, China.  Photo: Zuma Press.

A chip production line in Nanchang, China. Picture: Zuma Press.

China has long worked to strengthen its independence. Mr. Xi has frequently used the term “self-reliance” to describe China’s core defense strategy recently in the Mao era.

“Xi Jinping’s version of self-reliance is certainly more focused on domestic manufacturing and technology than we’ve seen from previous leaders,” said Neil Thomas, the company’s regional analyst and US-based policy adviser to Eurasia Group.

As tensions over Ukraine drove up grain prices, Xi promoted calls for self-sufficiency in food production. “Who will feed China? China must be self-sufficient and help itself,” he told parliamentarians in Beijing in March.

As the world’s largest trading nation, China needs to find alternatives to imported goods or create a reliable supply chain to increase its self-sufficiency.

China’s top import order is crude oil, with 70% of its needs imported from abroad. The main oil suppliers to China are countries in the Middle East and Africa, which have benefited from financial and political support from both China and Russia.

To protect oil supplies, China has spent years helping poor but resource-rich countries build seaports and railways under the Belt and Road Initiative.

But Derek Scissors, a fellow at the American Enterprise Institute, said such infrastructure projects give Beijing limited security if the US imposes severe sanctions.

Should the US decide to sanction Chinese banks, as it has done with a number of Russian banks, oil-exporting countries face a choice of halting dealings with Beijing or being cut off from the much-needed source of USD trading. “In such a grim scenario, most of Belt and Road would rip off,” Scissors said.

According to experts, the dollar is the weapon that makes US sanctions effective.

In theory, China is a very rich country that has amassed $3.2 trillion in foreign exchange reserves. But as tensions with the US escalate, many wonder how much of that China can access after seeing the US and its allies freeze about half of Russia’s more than $600 billion in reserves.

To avoid the scenario of being banned from SWIFT, a USD-based international financial transaction system, the People’s Bank of China has been working on building its own cross-border interbank payment system. China is also working with central banks to increase acceptance of the digital version of the yuan.

But analysts say China’s parallel financial system has not been used far enough to be considered a viable solution should it be necessary to evade US sanctions.

China is also trying to strengthen ties with foreign companies investing in the area to avoid the scenario of a massive investment pullback under US pressure.

After Russia launched the campaign in Ukraine, hundreds of multinationals ranging from fast food chains, automakers, oil companies to banks announced that they were partially or fully withdrawing from Russia. But the connection with the Chinese market of many multinational companies is much deeper.

In 2019, US President Donald Trump called on US companies to stop doing business in China and move factories to the United States. However, a recent study by the Paulson Institute found that pressure from the Trump administration made no real difference.

While the US share of equipment imports from China has fallen from 42% in 2018 to 32% in 2021, the study shows that this is mainly due to China abandoning low-value-added assembly activities.

China has also strengthened its legal defenses against external economic pressures. One of them is the Anti-Foreign Sanctions Law, which aims to provide a legal basis for retaliating against individuals or companies that harm China’s national interests.

However, high tech like semiconductors could be the main weakness of China’s “economic fortress” as the country is still heavily dependent on the US. With a quarter of China’s tech exports dependent on components imported from abroad, the impact on the Chinese economy will be three times worse than the impact the US and EU will suffer from being cut off from the domestic market, according to Innes McFee, a researcher Oxford Economics in Great Britain.

China is fully capable of producing its own solar cells or batteries for electric vehicles, but the country still depends on foreign countries for advanced technologies such as manufacturing jet engines for airplanes or the software that runs devices, Dan Wang said. Technology Analyst at Gavekal Dragonomics. “China is not an impregnable fortress,” Dan said.

than tam (Corresponding WSJ)