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Italy’s ‘arrivederci’ to China’s BRI could be a template for others.

Italy’s ‘arrivederci’ to China’s BRI could be a template for others.

Italy’s upcoming withdrawal from the Belt and Road Initiative (BRI) will reshape transatlantic relations for the better, while serving as a closely watched test case for other countries that may be thinking of doing the same.


This week, the Italian government reportedly delivered a formal note to the Chinese government that it will opt out of renewing its agreement, while confirming the desire to maintain a “strategic friendship” with China.  


When Giuseppe Conte’s populist government signed the BRI Memorandum of Understanding (MoU) in March 2019, It was argued that it was overly optimistic and geared toward short-term gains while being naïve on long-term vision. Ironically, the MoU between Italy and China was signed one day after the European Council met to discuss the European Union’s (EU) common strategy on China before the EU-China Summit. This was the moment when the EU’s diplomatic language started becoming more pointed, describing China as a negotiating partner, economic competitor, and systemic rival in its strategic outlook.  



This time, notice of Italy’s decision to leave the BRI—which Prime Minister Giorgia Meloni had been indicating for months—came right before the EU-China Summit got underway in Beijing. Though this was the first in-person EU-China Summit since 2019, expectations for concrete outcomes were never high.


Importantly, Italy’s decision to leave the BRI is not just a reflection of frustration over failed expectations and unmet promises, but is based on a real commitment to defending democratic values and human rights. Meloni, in the footsteps of her predecessor Mario Draghi, has criticized China for everything from its mistreatment of ethnic minorities in Xinjiang to its mismanagement of the COVID-19 pandemic. She’s warned about the risks of any potential attack on Taiwan and called out Bejing’s position on Russia’s 2022 invasion of Ukraine.


A Widening trade imbalance

Italy’s membership in the BRI was viewed as one of China’s most symbolic wins in Europe, with Beijing celebrating it as a sign of China’s growing political and diplomatic role in the world. For China, establishing a beachhead in the third-largest economy in Europe and a Group of Seven (G7) country was critical for its European strategy. It also allowed China access to Italy’s advanced industries, brands, and technologies. Although Italy was the true prize for Beijing, by 2019, fifteen other EU countries had become members of the BRI.


Beijing’s Italian gambit rolled in nicely on the heels of more than a decade of Italian economic distress, and some Italian policymakers clearly viewed China as a white knight. The menu for Italy’s BRI MoU included fifty agreements covering six main areas—policy dialogue, transport and infrastructure, trade and investment, financial cooperation, people-to-people connections, and green development cooperation.


In 2019, the Italian government was aiming to expand exports in China and attract investment with an agreement on “unimpeded trade and investment.” Unfortunately, little or nothing has been achieved. Trade between China and Italy has increased 1.6 times since 2019, from $50 billion to $80 billion, but the advantage went to China: Chinese imports into Italian markets rose from just over $35 billion in 2019 to nearly $61 billion in 2022, while Italian exports to China increased slightly from $14.5 billion to $19 billion, according to COMTRADE data. The trade imbalance in favor of China has widened, flooding the Italian market with Chinese products, which now make up 9 percent of Italy’s total imports (second-most in the world). But China is only the tenth-largest export market for Italy, making up less than 3 percent of its total exports.


These numbers explain why any fears of Chinese commercial retaliation against Italian products, especially in the luxury sector, are unfounded because of the importance of the Italian market for Chinese companies. Indeed, the numbers were much smaller when Beijing followed up with trade retaliations against Lithuania after its 2021 withdrawal from what had been a “17+1” format of Central and Eastern European nations’ cooperation with China (it’s now 14+1). In this case, Chinese trade with Lithuania totals a little more than $2 billion, and Lithuanian exports to China fell to $100 million in 2022 from $270 million in 2021.


Chinese investments, construction contracts, and loans in Italy between 2008 to 2020 totaled more than $27 billion, according to the American Enterprise Institute’s China Global Investment Tracker, and have been focused primarily on energy, transport, technology, and finance. Chinese strategic investments included a state-owned firm’s nearly $8 billion investment in Pirelli, the world’s largest tire maker. Investment in the Italian stock exchange and the financial sector have been very important for Chinese companies, both state-owned and private. However, since 2019, new Chinese investments in Italy amounted to just $1.8 billion. Most Chinese takeovers in Italy took place after the 2009 eurozone crisis, when investment from China skyrocketed from €100 million in 2010 to €7.6 billion in 2015. 


While the aim of the BRI was to level the economic playing field and increase market access reciprocity, Beijing has always demonstrated resistance when it comes to meeting the standards of free market economies.


“Golden power” rules

Beijing also overplayed its hand during the COVID-19 pandemic with its misinformation campaigns, smashing the enthusiasm of Italians toward Beijing. One poll found that 52 percent of the country believed Chinese pandemic aid to be an attempt at political influence, while 62 percent of Italians had a negative opinion toward China in 2020.


The Italian parliament has played a very important role, using the “golden power” law to protect its national strategic assets. First introduced in 2012 to cover defense and national security, the law was updated in 2019 to cover 5G technology and later extended to a wide range of sectors including health, raw materials, infrastructure, robotics, finance, and media. It is one of the strongest screening laws in the EU.


The Italian government further reinforced that power in 2022, with the addition of prenotification procedures in support of investment screening mechanisms. Upon taking office in 2021, one of Draghi’s first priorities was enforcement of the “golden power” rules, focusing not only on strategic investments in infrastructure but also blocking access to strategic technologies and protecting destressed national companies. He blocked semiconductor manufacturing acquisitions and widened the scope to include food, applied materials, and drone deals that had been concluded during the previous government.


Quo vadis, BRI?

The BRI needs to be understood as an economic, foreign policy, and power projection tool of the Chinese Communist Party (CCP)—and central to Chinese leader Xi Jinping’s global ambitions. Current Chinese statecraft aims to ultimately reshape global norms and institutions to the CCP’s liking. The BRI comprises 149 countries, including thirty-five in Europe and Eurasia, and the tide will not change immediately. Italy’s exit will damage the reputation of an already scaled-back BRI, with China facing its own economic turmoil while its partners deal with debt distress.


In the big picture, perhaps Meloni has been ahead of the curve in reading the CCP. Her courage to take action by calling into question the propriety of an agreement with the CCP—whose fundamental values are in direct contrast to the EU and the transatlantic community—may ultimately prove to be the precedent for other leaders to follow.



By Valbona Zeneli, nonresident senior fellow at the Atlantic Council’s Europe Center and at the Transatlantic Security Initiative of the Atlantic Council’s Scowcroft Center for Strategy and Security.



India has several things going for it...

India has several things going for it that China doesn’t.

With the ongoing war in the Ukraine, it seems as though the main longterm beneficiaries will be China and India, although not necessarily in that order. Both China and India are already benefitting from trade on more generous terms with Russia than President Putin would otherwise be minded to give, and from a renewed interest in how the diplomatic axes in Asia really work.


No-one would argue that these two countries are the regional powers in Asia writ large, Japan and South Korea existing still largely as satellites of the USA. And, although in recent years China has gained more of the press as the next likely Superpower, recent population trends argue that in the later 21st and early 22nd centuries, it might instead be India that actually takes on that mantle.



India has several things going for it that China doesn’t.


First, it’s a genuine bridge between east and west. No question, India is firmly rooted in Asia, and its own multiplicity of cultural identities are uniquely its own. But it also had superimposed on it for more than two centuries the functioning bureaucracy, unifying language, railway system, economic know-how, military effectiveness and educational system of the colonial English. For good or ill, that means its educated elites can now talk directly and with mutual understanding with Western leaders in a way that’s never been possible for the Chinese.


That ability to swap ideas and merge cultures is now extending far and wide, and from top to bottom. There’s an ethnic Indian, Vivek Viraswamy, running seriously, although not with any real hope, for the US Presidency. Who Wants to Be A Millionaire sold directly into India with almost no format changes, and was then re-exported to the West in movie format as Slumdog Millionaire. The UK has an ethnic Indian prime minister.


Cricket, a game invented by idle aristocrats in England, but played now in Africa, Australia, New Zealand and multiple other countries is now the second-most popular sport in the world. And guess which country is the cricket superpower? – India.


China can’t quite do any of this.


There are parallels. The NBA is popular in China. Chinese martial arts are popular in the West. Hollywood and China seem joined at the hip. But you can see the joins. China has the reputation of being more of a closed culture, and more of a racist culture. Yes, there’s a lot more racial violence in India, but there are also a lot more races.


Is there a deeper explanation for these differences?


Maybe it’s because China has always been more of a daunting proposition for the West than India. After all, the British and the French were fighting the Seven Years War over parts of India before they’d even got into China. Clive of India virtually walked in at Plassey, and after that Western domination spread steadily and with only a few mutinous setbacks.


But China couldn’t be rolled over so easily. Suspicion goes back at least to the days of the famous stand-off when Lord Macartney’s diplomatic mission refused to kowtow to the Qing emperor in 1793. After that, gunboat diplomacy came in, writ large first at Hong Kong and then on the Yangtse River, and mutual antagonism built. The West participated in the Taiping Rebellion, one of the bloodiest wars in history, two Opium Wars and the Boxer Rebellion. Then, the media went electric and along came Fu Manchu, the archetypal Bond villain, invented in the early 1900s by a man at a Ouija board, the “Yellow Peril”, and Dr No himself. Is it coincidental that Fu Manchu was a diabolical scientist or that a lot of Bond villains created deadly viruses in their attempts at world domination?


Old tropes die hard, especially in this strange world where media fictions tend to become reality, they turn out to be true. US public opinion has now turned against China, in a way that it never will against India. For one thing, the US doesn’t yet know enough about India. The most controversial Indian issue the US has faced relates to Apu from the Simpsons.


The problems it has with China, though are legion. One of the first things the US did when it took over world domination from the British was to lose China to communism. Since then, the relationship has been tricky to say the least, with the wars in Korea and Vietnam providing a context for a later capitalist relationship which seemed to start well, but which has now soured.


The same is not true of India. Maybe the average American worker doesn’t like it that call-centre jobs are going to India. But the weapons systems that shot down a family member a generation or two ago didn’t come from India. And India is not the country that supplied the missile launcher that Hanoi Jane manned in the late 1960s.


How much of this matters?


Perhaps it’s all in the ebb and flow of international relations. It’s been reported this week that  AstraZeneca will create an independent listing in Hong Kong for its Chinese operations. Anti-Chinese rhetoric is ranting up in the US political and cultural scene, as patient number one for Covid was at last – apparently – revealed.


On the other hand, the Chinese and US economies have become inextricable intertwined. They won’t easily be separated. The Americans funded the lab that Covid allegedly came from, which blunts the force of other attacks. Elon Musk does a lot of business in China, and it looks like China is actually leading the world in electric vehicles.


Yet, for all the huge and ongoing growth in both the Indian and the Chinese economies, innovation remains the exception rather than the rule.


And so the world turns, but it changes only slowly.


The U.S. Tech Industry Needs China.

The U.S. Tech Industry Needs China.

The U.S. economy of the 1970s was, in certain ways, quite similar to the U.S. economy today: rising inflation, a population broadly pessimistic about the future of the market, and persistent declines in overall productivity. There was also, back then, a growing economic threat from across the Pacific. Only, in the 1970s, the threat came from Japan, which was the subject of dozens of books, and even a handful of movies, as fears of it overtaking the U.S. as the world’s economic superpower loomed large.



Today, the competition isn’t coming from Japan, but from China. Still, there is a lesson in history, for that period of Japanese innovation and economic growth did not turn out to be any great tragedy for the U.S. Indeed, certain sectors in the U.S. were so spurred on by the perceived Japanese threat that they ended up, by the 1980s and 1990s, dominating the global market. China might play a similar role today, not as a juggernaut to be feared, but as a competitor; one that can—as Japan once did—accelerate the pace of innovation and even bring boom times to the U.S. economy.


Today, part of the fear of China’s rise has to do with the uniqueness of its model: a politically centralized system of power, coupled with a rigorously decentralized economy, wherein local governments compete to build up their own mini ‘Silicon Valleys’ all over the country. One example of this structure comes from the municipal government of Hefei, a city in eastern China of 5 million, which took a chance as early as 2008 in staking the company BOE Technology Group Co. with billions of yuan—or hundreds of millions of dollars—helping the LCD maker overtake Samsung in becoming the world’s largest manufacturer of LCD screens. The city also plays host to mega projects in quantum computing, and backed companies in the sector like CIQTEK when no private investors deemed it commercially viable. Today, Hefei has built the globally renowned “quantum avenue,” which is home to many of the world’s leading quantum companies. The Hefei government also recently saved Nio, an EV company that was on the verge of bankruptcy, by coordinating an entire supply chain—from battery makers to manufacturers—around it. Within a year of that supply chain effort, Nio’s production grew by 81%, and its market value went from $4 billion to $100 billion.



Hefei is not the only city making such moves. Second-tier cities such as Shenzhen, Wuhan, Suzhou, Guangzhou, Chengdu, Tianjin each have their own focal areas, whether it is in autonomous vehicles, AI, semiconductor design or manufacturing. Each city has a unique approach to help companies arrange for loans, attract talent, and build up complimentary business hubs.

These efforts and approaches help distribute the talent, and the wealth. China’s unicorns, second only to the U.S. in sheer numbers, are spread throughout China, not clustered in coastal cities as they are in the U.S. By the end of 2022, there were 1,500 of these municipal level government funds, totalling 2.7 trillion yuan (about $340 billion) for investing in companies. While U.S. cities and municipal governments award grants to businesses too, it is nothing on this scale, and it is usually in response to a crisis, as when Houston awarded $15 million in grants to help prop-up small businesses during the depths of the COVID-19 pandemic.


Many in the U.S. have looked on China’s astonishing rise with consternation, which again echoes how Japan was viewed in the 1970s and ’80s. The seminal moment came when the Japanese semiconductor industry began to leap ahead of the U.S. in the late 1970s—despite the U.S. being the birthplace of the microchip.


The U.S. reaction then was also not too dissimilar to the skirmishes with China today: it raised 100% tariffs on Japanese products, put in place voluntary export controls, and sued Japanese manufacturers for patent infringement.


But more importantly, and lastingly, the reaction from the U.S. wasn’t purely negative. Both U.S. companies and the U.S. government took inspiration from Japan’s novel innovation ecosystem that integrated its national labs and universities with its industries. Japan’s ascent spurred the U.S. to pass the Stevenson-Wydler Technology Innovation Act in 1980, to facilitate collaboration between researchers in national labs and academia with industry. The same year, the Bayh-Dole Act and the Small Business Patent Act incentivized professors to patent and universities to license breakthroughs, which encouraged an active transfer of technology from the ivory tower into private industry. As a result of these changes, productivity growth soared throughout the 1990s and 2000s thanks to lab-grown innovations like the world wide web, the digital camera, and the smartphone.


The contemporary parallel of leapfrogging a homegrown U.S. industry is now happening with China, which has for more than a decade now completely dominated solar panel manufacturing, and is also currently the biggest player in the electric vehicle market—two industries that were pioneered in the U.S.. Here, too, lessons from the past abound: In the 1980s, U.S. firms folded in aspects of Japanese manufacturing to aggressively innovate with their competitors across the Pacific. As a result of these changes, manufacturing capacity rose; American companies focused on a narrower set of products and differentiated; microchips got faster, better, and cheaper. By the mid 1990’s, the U.S. firms were surging to dominate markets such as micro components, with a 72% market share. Much of the world today, where chips are in everything from our coffee makers to our cars, is owed to this period of fierce competition and innovation between Japan and the U.S.


This is, at its essence, why this moment of Chinese competition with the U.S. is so crucial—not simply because it would lead to more innovation by each of these nations, but because, in the end, this sort of competition benefits consumers the world over. We see this firsthand with solar, where the cost of solar panels has declined by 80% since 2010; it is now the cheapest source of energy in the world. This can also be seen in the ongoing competition between the Chinese EV maker BYD and U.S.-based Tesla, where more affordable and better-quality cars are the result of their competition. It can even be seen in Big Tech: Facebook took inspiration from WeChat’s payment option in its chat functions, and Amazon’s Prime Day echoes China’s Singles day. China’s new “juguo” system of governmental management, which takes a whole of nation approach, is inspired by both the Japanese system of integration of its public universities and private businesses, as well as the sort of sweeping government projects in the U.S.—such as the Apollo Program or the Manhattan Project—that have had such world shifting results. Rather than turn away from China, or force China to turn away from the U.S., evidence and history has shown that greater competition leads to greater innovation, which will inevitably lead to more growth.


It is not as though China and the U.S. have no collaboration already. In fact, the two nations have generated the largest amount of cross-national published research in AI than any other two nations (the second most productive pair is the U.S. and the U.K.) There are plenty of good models for collaborative competition happening at this very essential moment, when the world is embarking on a green transition. The German government, for example, is ramping up its battery manufacturing sector, and building it atop Chinese technology. Major car manufacturers such as Ford and Toyota have been investing in Chinese electric vehicle companies so that they can incorporate Chinese tech in their cars, and bring that tech to the American, Japanese, and European markets. Tesla opted for a Chinese battery maker Contemporary Amperex Technology Co. Ltd. (CATL), which has factories in Germany.


Any nation that chooses to develop its technologies in isolation is likely to see its technological advancement slow down. The lesson of the past is not to run from international competition and cede the field in certain sectors, but to learn from your competitor, rise to the occasion, and innovate to win.


Source: Adapted from The New China Playbook by Keyu Jin, published by Viking




China's demographic crisis.

China's demographic crisis.
A shrinking population and growing dependency ratio could halt Beijing's ascendanc.

Nobel Prize-winning economist Joseph Stiglitz declared almost a decade ago that 2014 “was the last year in which the United States could claim to be the world’s largest economic power.”


It was, he claimed, the start of the “Chinese century”.


He was wrong: the US remains the world’s largest economy. Yet experts keep predicting that China will soon become the preeminent global superpower, now believing that China’s GDP will overtake America in the late 2030s.


This weekend, outgoing premier Li Keqiang is expected to reveal a new 5pc growth target at the National People’s Congress as Beijing seeks to get the country’s roaring economy back on track after Covid disruption.


Yet the “Chinese century” could soon have a double meaning – encapsulating not just the country’s stratospheric rise, but also its economic implosion.


A dramatically ageing population, the largest property crash in its history, the burden of zero Covid blunders and escalating geopolitical tensions mean China faces a growing crisis.



“China’s population is expected to peak at 1.4bn in 2024/25 and then it will almost halve by the end of the century,” says Pushpin Singh, of the Centre for Economics and Business Research. “That is a massive shift.”


As China’s population ages, its workforce will come under huge strain as a decreasing proportion of working age people are required to support a growing elderly population. A larger share of government spending will also be diverted to health and social care.


For every 100 working age adults in China in 2010, there were 37 people aged either under 15 or over 64.


Today, that “dependency ratio” has swelled to 45, according to Oxford Economics. By 2050, it will be 71.


Advanced economies around the world have the same problem with ageing populations. However, the issue has been exacerbated by China’s one child policy, says Louise Loo, of Oxford Economics, which compelled couples to have only one child between 1980 and 2016.


Births have languished even after the policy was scrapped, falling to a record low of 6.77 births per 1,000 people last year.


Steve Tsang, director of the China Institute at SOAS, says: “It is easier to limit growth in population by repressive means. It is much more difficult to get people to have more children by the order of the Government.”


Officials last month urged regional chiefs to come up with “bold innovations” to boost the fertility rate, reflecting the growing panic about this demographic time bomb.



China also faces permanent scarring from Covid. Beijing's zero Covid policy, which dragged on for far longer than the rest of the world, cost it 4.7pc of GDP, says Loo.


“Some of that is permanently lost,” she adds.


The economy has rebounded more quickly than expected since the reopening but the boom years enjoyed are long done.


Chinese GDP grew by 6pc in 2019 before the pandemic. In 2022, this had slumped to just 3pc.


Oxford Economics has forecast growth of 4.5pc this year and believes it will drop to 3pc after 2030.


“The Chinese government is trying to pivot to a consumer led, rather than investment led, economy. To do that, they need consumers to spend. It is harder to do that if they are supporting elderly relatives,” says Loo.


Tsang says: “The even bigger challenge is the reality that Xi [Jinping] does not want to acknowledge this, so it is difficult for the Chinese Government to confront and prepare for the shift.”


This will be a critical, but slow burning, problem for China, he says.


Beijing is ignoring the issue in part because of a more pressing crisis: the country’s spiralling property market.


Since the collapse of Evergrande, the country’s second largest property developer, at the end of 2021, China’s property market has been hit by the biggest downturn since the emergence of the private sector in the 1990s, says Mark Williams, chief Asia economist at Capital Economics.


Sales have slumped by more than a third compared to their peak in spring 2021. House prices have been falling for 16 months.


Values have so far fallen by 3.5pc and are likely to be down 6pc from peak at the worst point, says Loo. The numbers sound small, but they are remarkable considering China's highly interventionist government.


“The fundamental problem in the housing market is that developers have been building more and more houses but now the population has peaked and urbanisation has slowed to a crawl,” says Williams.


Demand for housing between 2025 and 2030 will be half what it was in the five years before the pandemic, says Loo.


“That is pretty dramatic. The property sector was the key engine of growth in China. It won’t be going forwards,” she says.


A fifth of China’s economy is tied to the property and construction industry, says Williams.


“As that goes away, the difficulty is how to find a different growth driver, because the property boom is over.”


“A lot of developers won’t exist in five years’ time. They will go bankrupt or they will be bought up. There will be a huge wave of consolidation.”


60pc of household wealth is in property and the housing downturn therefore has massive repercussions for wealth and spending.



Falling house prices are not only a risk to citizens. Local governments have huge amounts of borrowed money tied up in land. The debt across all of China’s local government financing vehicles (LGFVs)  has doubled in five years to RMB 50 trillion, says Loo – or £6.05 trillion.


“They have contingent liabilities that could explode down the road,” says Loo.


There are two other immediate risks: another high profile property developer goes bust; or escalating geopolitical tensions boil over.


A military invasion of Taiwan would bring an enormous shock. Analysts see a growing risk of Beijing invading.


Fears of potential conflict, combined with the disruption to supply China wrought by zero Covid, mean China is losing its attractiveness to international businesses.


“China is no longer the primary investment destination it once was,” according to Colm Rafferty, the chair of The American Chamber of Commerce in the People’s Republic of China.


Writing in its March business climate survey report, Rafferty reported that 45c of his members thought China’s investment environment was deteriorating – the highest share in five years. For the first time, less than half of AmCham China’s members ranked China as a top three investment priority.


AmCham China noted a 10 percentage point jump in the number of companies leaving or planning to relocate their manufacturing and sourcing outside of China.


“A lot of companies are worried about getting caught on the wrong side of sanctions in the future, particularly in the tech sector,” says Williams.


Confronting an ageing population, a slowing economy, a property market implosion and rapidly rising geopolitical risks, many Sino-watchers are rethinking their outlook.


“10 years ago, it seemed inevitable that China would dominate the world’s economy,” says Williams. “That is no longer the case.”


By Melissa Lawford for The Telegraph



China losing its grip on global manufact...

China losing its grip on global manufacturing?

As Apple has accelerates its plans to move some of its production outside of China, the country’s share of global exports of furniture, footwear and clothing accessories continues to fall, highlighting a trend stared in 2016.


The anti-lockdown unrest gripping China has forced the authorities in Beijing to respond by easing some restrictions in big manufacturing centres, as they map out a “new stage and mission”. There are concerns that more freedom of movement could allow the virus to rip through a population where immunity is lower than in the west. Those health risks mean the “world’s workshop” is heading for a difficult winter, casting a shadow over the prospects for international trade. Western companies have learned lessons from the first wave of lockdowns, and some may be better prepared, but for others, at a time when supply chains are still recovering from nearly three years of on-off pandemic problems, there is trouble ahead.



A wider shift away from reliance on China has already begun, encouraged by the Donald Trump-led trade wars with China and the pandemic disruptions of the past three years. Internal demographic changes have made Labour more expensive as the country’s population growth has slowed. Meanwhile, trade between the U.S. and E.U. has risen sharply, and analysts view Mexico and Vietnam as countries that could benefit the most from diversifying supply chains.


Six out of 10 companies surveyed by Make UK thought supply chain problems were the biggest risk to their businesses. As a result, more companies were beginning to move away from the fabled “just in time” system of supply management to one best described as “just in case”. Companies can’t afford to have their supply chains solely in China. They’d rather have components coming from Manchester or Munich.


Depending on Beijing’s ability to keep control of any future outbreaks, or whether Covid spreads more rapidly through China than it has so far, will determine manufacturing capacity. The wider impact on China’s own economy, which has already been hit by a slump in its huge property sector and is growing more slowly than at any time for 35 years, could also be important.


This has set the scene for a broader world order: multipolarity, where groups of nations with enough influence and incentive to pursue economic strategies that, if achieved, do not substantially follow the same direction of other global power centers.



China and the US in the Global Semicondu...

China and the US in the Global Semiconductor Value Chain

The last ten years witnessed the US’ return to a reliance on industrial policy, which ironically is more in keeping with the approach taken in China. Already Morris Chang of TSMC fame has pointed out the limitations of trying to attract companies like TSMC to establish fabs in the US because of a lack of comparative advantage in terms of costs and skills. It will take some years to get such fabs up and running and even then they are likely to contribute only a small part of the overall demand for leading-edge chips. The US CHIPS Act of 2022  will have some effect in encouraging companies like Intel and Micron, which have been hedging their bets on China to invest more in the US and reduce the dependence of the US on supply chains based in mainland China and also in Taiwan. What is likely, however, to make China’s own efforts to develop greater self-reliance in semiconductors more challenging are the sanctions which have been imposed on Huawei and SMIC which prevents them from accessing critical suppliers for developing leading-edge chips. Also considering the growing geopolitical tensions over Taiwan, it is likely that this will lead to a greater bifurcation of the semiconductor value chain. In the short-term, most companies will continue to seek to benefit from the existing global value chain despite its heavy reliance on China for its market and on TSMC for its superior foundry services. Unless there is a sudden escalation in geopolitical tensions, companies will try to continue for some years exploiting what is a highly optimised value chain, and will gradually begin to reconfigure supply chains to ensure alternative options. The CHIPS and Science Act will encourage this reconfiguration, but the benefits of the existing configuration will take some years to replace. Also the cost of reconfiguring the existing value chains will be huge.



Today, the world's major high-tech companies and key suppliers are heavily embedded in the current global value chain. All of these companies have operations in China and work closely with leading Chinese electronics companies like Huawei, Lenovo, Xiaomi, Oppo and OEMs like Foxconn and Pegatron. Apple continues to be very heavily reliant on their operations in China, but work much more closely with Taiwanese companies like Foxconn and Pegatron and the input from Chinese companies, while growing, continues to be modest. The close connection between these global lead companies and their critical suppliers will continue. While their preference would be to have alternative locations such as Vietnam involved in their overall value chains, the attractions of China in terms of scale, labour force skills and overall productivity are difficult to replicate elsewhere. Radical changes to strategies will only take place if geopolitical risks rise significantly. Policymakers are keenly aware of China's interdependent and unbalanced relationship with other countries, like the United States, in technology value chains, like semiconductors. They have also recognized that their future success will depend in part on their ability to advance in China's innovation market.



The semiconductor global value chain has been developed over time to suit the needs of global companies rather than their headquarter countries. However, countries still see a key position in the value chain as a geopolitical weapon. It is clear already how the US is weaponising these choke points to constrain China’s ability to progress its semiconductor sector. The US is also putting considerable pressure on South Korea, Japan and even European countries like the Netherlands not to supply Chinese companies with critical components for developing greater self-reliance. The US is already seeking to develop an alliance among its allies to redevelop the semiconductor value chain without Chinese inputs. What these countries have to put in the balance is the real possibility of losing China’s market, which would be a major problem in many cases. In the absence of a serious escalation of geopolitical tensions, companies are likely to find ways around restrictions being imposed on their business strategies. Most companies share the view that the current global value chain is the most optimised in terms of productivity and innovation and are very reluctant to be pressured into making radical changes for political reasons. They also appreciate that the current GVC allows leading US companies to have significant funding to maintain their dominant position in the upper segments of the semiconductor value chain.



Source: By Symmers Grims: Emeritus Professor of the University of Galway for Saint Pierre Center for International Security


Pictorial: Backstage at the Peking Opera...

Pictorial: Backstage at the Peking Opera.

Peking opera is a performance art incorporating singing, reciting, acting, martial arts. Although widely practised throughout China, its performance centres on Beijing, Tianjin and Shanghai. It arose in Beijing in the mid-Qing dynasty (1644–1912) and became fully developed and recognized by the mid-19th century. The form was extremely popular in the Qing court and has come to be regarded as one of the cultural treasures of China.







Peking opera is sung and recited using primarily Beijing dialect, and its librettos are composed according to a strict set of rules that prize form and rhyme. They tell stories of history, politics, society and daily life and aspire to inform as they entertain. The music of Peking opera plays a key role in setting the pace of the show, creating a particular atmosphere, shaping the characters, and guiding the progress of the stories.







Traditionally, stage settings and props are kept to a minimum. Costumes are flamboyant and the exaggerated facial make-up uses concise symbols, colours and patterns to portray characters’ personalities and social identities. Peking opera is transmitted largely through master-student training with trainees learning basic skills through oral instruction, observation and imitation. It is regarded as an expression of the aesthetic ideal of opera in traditional Chinese society and remains a widely recognized element of the country’s cultural heritage.







This series of images was taken by Mexican Documentary Photographer Patricia Calvo, backstage at the Peking Opera in Tianjin. The full series of 60 images is available for licensing or purchase by contacting the artist directly at:








The future of China's BRI in the Post...

The future of China's BRI in the Post-20th Party Congress Era.

While China’s president, Xi Jinping, is widely expected to secure his coveted third term as party chief at the upcoming 20th congress of the Communist Party of China, the future of his flagship economic foreign policy, the Belt and Road Initiative (BRI), deserves closer observation. XUE GONG argues that China’s connectivity project may be set back by three factors: unresolved sustainability issues, geopolitical shocks, and Beijing’s shrinking capacity for bankrolling the BRI.



The Communist Party of China is gearing up for its most important political event of the decade — its 20th congress, starting on 16 October 2022. Just a month prior to this significant political event, Chinese president Xi Jinping made a rare overseas visit to Kazakhstan, where he spoke highly of his flagship economic foreign policy, the Belt and Road Initiative. The visit carried much symbolic significance since Kazakhstan is where Xi in 2013 first evoked memories of the ancient silk roads and spun stories about seamless regional connectivity through his proposed “Silk Road Economic Belt”.

While Xi is widely expected to secure his coveted third term as party chief, the future of the BRI deserves closer observation. The overseas visit signalled Xi’s confidence in his own authority and leadership to both domestic and international audiences. But to what extent are such audiences confident in a China under his continued leadership?


From the outset, the BRI has been framed as a public good which Beijing provides to the world. It is said that the BRI will allow for the application of “China’s wisdom” to global development issues. Despite the great deal of goodwill that Beijing has generally attracted through the launch of the BRI, the international community’s response to the initiative is varied. While touted highly in some developing countries which are hungry for China’s infrastructure funding and assistance, the rest of the world is questioning the sustainability of projects launched under the BRI, as well as China’s capacity for continued bankrolling of the BRI amid global geopolitical setbacks and China’s own economic struggles of late.


Self-Correcting and Adjusting?

Responding to international criticism of BRI projects revolving around sustainability issues, China has begun self-correcting and adjusting the concept. At the Second Belt and Road Forum for International Cooperation in 2019, Xi pledged to build “open, green and clean cooperation” through the BRI, shrewdly rebranding it with a more benign image. The new focus requires Chinese companies and entities involved in the BRI to strictly follow stringent environmental and social standards. Ostensible improvements can be seen in some BRI collaborations with international entities which work towards minimising climate, biodiversity, and pollution impact.


The Chinese government has also attempted to resolve worrisome debt issues through multilateral means, namely, the G20’s Debt Service Suspension Initiative. In August 2022, Beijing announced that it would waive 23 interest-free loans for 17 African countries which had matured by the end of 2021. Furthermore, China provides ad hoc debt relief to low-income countries, to send important diplomatic signals about its lending practices. This measure is likely to continue in the future for foreign policy purposes.


Regional pushbacks have prompted the Chinese state in recent years to shift its focus from large-scale resource extractive and land-grabbing infrastructure projects, such as hydropower and mining, to more sustainable infrastructure projects. Besides that, the outbreak of the Covid-19 pandemic has changed the nature and scale of infrastructure projects under the BRI, giving way to China’s Health and Digital Silk Road initiatives, supported by Chinese technology and governance experience.


So far, Beijing has not been able to deliver on a long-standing source of concern for the international community — transparency. Currently, there is no way to assess how BRI projects have performed in terms of environmental and social impact. As the lack of transparency has already incurred reputational costs, it will be a daunting challenge for China to reverse this negative image. Unless Beijing releases information on its BRI projects through an internationally credible entity, the international community will continue to entertain doubts about Beijing’s commitment to good governance.


International concerns over the heavy debt burdens which participants in the BRI bear have loomed large over the past few years. Although the notion of a Chinese debt trap has been contested, the economic consequences of the pandemic, along with global commodity and energy price shocks, have crippled the ability of some developing countries to service their debts. China is the largest bilateral creditor, and the opaque nature of its lending policies to developing countries raises eyebrows over the viability and sustainability of these projects. Moreover, debt relief is seldom provided for concessional loans, which are treated like commercial loans, with an average interest rate of 4.2 per cent. What is as alarming is the increasing number of Chinese loans that are collateralised, where, in the event of default, repayment is secured by acquiring assets from the borrowing country. As interest rates across the world rise swiftly, China will face greater pressure to provide debt relief for its borrowers.


Counterproductive Foreign Policy

The future of China’s BRI, especially the land route, is uncertain owing to the ongoing Russia-Ukraine war. Ukraine is strategically significant in the BRI as it not only carries transport networks and pipelines that link Russia to the European continent, but also serves as an attractive market for Chinese technology exports and a source of agricultural imports (e.g., corn and barley) into China. The war has clearly affected the BRI, having caused destruction to infrastructure, disruption to global supply chains, and threats to connectivity plans.


In his expected third term, Xi’s oversight of the BRI is likely to face insurmountable challenges owing to the Russia-Ukraine war. To begin with, there is the question of how China will engage in two diplomatic tangos simultaneously: with Russia’s president, Vladimir Putin, to convince him that Beijing has not betrayed him, and with the rest of the world, to convince them that China is not taking Putin’s side.


In a war that is widely perceived to be illegal and is almost universally condemned, an ambiguous foreign policy will meet its limits at some point. For one, China’s balancing act carries risks for the BRI, namely its reputation for having a “no limits” partnership with Russia. Moreover, in promoting the Global Security Initiative endorsed by Xi in April 2022, China has acknowledged its belief in Russia’s legitimate security concerns in the war. This statement serves as an oblique warning to neighbouring countries that have territorial disputes with China. In addition, Western economic sanctions imposed in response to the war have created challenges for Beijing in implementing the BRI, by being likely to affect the flow of goods and capital.


Intensified geopolitical opposition to China may pose challenges for Xi’s third term. China is already in strategic competition with the United States, and has been at loggerheads with other key trading partners like Australia. Meanwhile, countries like Japan have begun taking steps to diversify away from the Chinese market, recognising the dangers of overreliance on China as an export destination and a source of imports.


Regardless of their continued support for the BRI, participating countries are hardly comfortable with the potential consequences of heavy reliance on China, given that most of them are already running trade deficits with it. As China’s economic might grows, its inclination to apply confrontational and coercive economic measures also increases. This is seen in its diplomatic spats with countries like the Philippines, over disputed expanses of the South China Sea; and South Korea, over the Terminal High Altitude Area Defense or THAAD anti-ballistic missile defence system; as well as with individuals who criticise China’s political system. Even if Xi pursues a less confrontational diplomatic approach in his third term, negative views of China are unlikely to be reversed.


Self-Defeating Domestic Policy

Compounding the risks of sustainability issues and geopolitical disruptions is China’s own questionable economic capacity to support the BRI. During the initial stages of the pandemic, the Chinese government was able to revive business activity quickly, in strong contrast to other economies. Since then, China’s self-defeating pandemic policy has shattered investor confidence in the Chinese economy as its harsh lockdowns have disrupted business. Despite being relabelled as a “dynamic”, targeted policy based on science, China’s zero-tolerance policy is still being indiscriminately practised by local officials for fear of being sacked or punished for doing otherwise.


As a result, international engagement with the Chinese economy has been severely impacted. Soaring flight ticket prices and strict border controls have turned away visitors and dented confidence in the Chinese market. Some observers speculate that after the 20th party congress, the Chinese government will incrementally loosen the border restrictions. Yet, it is difficult to envision China reopening its borders to pre-pandemic levels. Just a week ahead of the party congress, the People’s Daily newspaper, China’s official mouthpiece, published a piece in strong support of Xi’s “dynamic” Covid-19 policy.


The business community has already begun to experience the disruption caused by China’s unhelpful Covid-19 policy practices: rising costs, associated with unpredictability in the Chinese market. For the past several decades since China began opening up its economy, it has been able to provide a relatively open market, where foreign companies could reap the benefits of low-cost and efficient production. Today, however, two concerns loom large among the business community, arising from the unpredictability of China’s Covid-19 policy. First, companies realise that low-cost supply chains are not necessarily safe and stable. Second, the single-minded pursuit of cost efficiency has led the home offices of these foreign companies to a worrisome dependency on the Chinese market.


The BRI is designed on the premise of a vibrant Chinese market which provides capital, knowledge, and information. But China’s business-unfriendly Covid-19 policy practices and slowing economic growth today call into question its ability to continue bankrolling the global connectivity project through Xi’s projected third term.


BRI after the 20th Party Congress

The waning confidence of the international community in globalisation and economic integration does not bode well for the future of the BRI during Xi’s third term. Today, globalisation appears to be more about cooperation on economic security and less about cooperation for efficiency. Most countries, especially those in the West, are strengthening their capacities for economic self-reliance, just like China is doing.


In the run-up to the 20th party congress, Xi has manoeuvred to consolidate his power and secure an unprecedented third term. This simply means that China is unlikely to change course in future, as far as the BRI is concerned. The challenge that lies ahead for one of the world’s most powerful men is in how to make the rest of the world believe in his story of connectivity.



Source: By Dr. Xue Gong for RSIS


Expats Shun China Over Covid Policies...

Expats Shun China Over Covid Policies, Forcing Foreign Firms to Scale Back.

China has long been a coveted assignment for business executives and diplomats, a prestigious posting in a rising power and a valuable addition to one’s résumé.


Now, it is an assignment that few are eager to take on, as China’s “zero-Covid” isolation deepens and concerns about geopolitical tensions and economic delinking rise.



Since March 2020, China’s borders have been closed to most foreigners. Flights into the country remain scarce and pricey and come with a minimum seven-day hotel quarantine. Covid-19 restrictions remain strict, and some international schools have shut or shrunk as students and teachers depart. Geopolitical tensions have become a constant concern.


With little sign of a major shift in policy after 2½ years, many Western companies and embassies have concluded that the challenges they face in the country are no longer temporary. Goldman Sachs, in a report this week, said it doesn’t expect China to begin reopening to the world until near the middle of 2023. The European Union Chamber of Commerce in China isn’t expecting a full reopening until at least the second half of next year.


As the restrictions have dragged on, many organizations have suffered an outflow of talent in China, a country that is the world’s most populous and its second-largest economy. Many of the departures have taken place ahead of schedule and without backfills to replace those leaving. In response, some China-based units are pleading with headquarters for extraordinary measures, while some companies are overhauling their organizational charts.


In some cases, “companies are even questioning whether it is responsible for them to deploy foreign staff to China when the numerous restrictions mean they are unable to guarantee a basic duty of care for them and their families,” the European business lobby in China said Wednesday in its annual report on the state of business in the country.


Many of the chamber’s member companies, multinationals with a longstanding presence in the country, are downsizing, localizing and hiving off their operations in China as the number of Europeans and Britons living there roughly halved from prepandemic levels to around 60,000 in recent months, according to the chamber’s estimate.



China’s own census, the most recent version of which was published last year, showed the number of China-based nationals from the U.S., Germany, France, South Korea, Japan and India falling by double-digit percentages over the prior decade, though China enjoyed a sharp rise in inbound migration from poorer neighbors like Myanmar.


For some organizations, the inability to bring in new blood has left them scraping to get by in what for many of them was once a growth driver, either as a critical market or manufacturing base.


While China has made it difficult for businesspeople and their family members to secure new visas to relocate to the country, even foreign embassies, which don’t face such restrictions, are struggling to staff their operations.


Quarantines, the increasing frequency of sudden lockdowns and the prospect of extended school closures have made a China posting prohibitive for many, especially those with children.


Souring relations between Beijing and many countries in the West have also hurt China’s image in recent years, as well as a perceived hostility to foreigners, business executives say. The chief epidemiologist at the Chinese Center for Disease Control and Prevention warned the Chinese public this week to avoid skin-to-skin contact with foreigners to avoid contracting monkeypox, in a statement that has prompted charges of xenophobia among expatriates in China.


Jörg Wuttke, the European chamber’s president, said China’s stringent Covid-19 controls had the effect of inhibiting human-level exchanges between China and the rest of the world, which he warned “inevitably leads to less understanding” of the country.


In one example, Brazil’s consulate in Shanghai is set to shrink to two diplomats next year, from a regular staffing level of five, as a result of scheduled departures and a lack of diplomats willing to move to China. Meanwhile, the number of Brazilian support staff—nondiplomats usually drawn from the local pool of expatriates—is expected to fall to zero from the usual seven, according to a Brazilian diplomatic cable seen by The Wall Street Journal.


The cable sent to Brazil’s foreign minister in July by the head of its consulate in Shanghai calls for exceptional measures to be taken to address the staffing-shortage issue, including offering diplomats a promise to be posted to a preferred location after China. Otherwise, the cable warned, “it wouldn’t be feasible to operate the Consulate.” Brazil’s foreign ministry didn’t immediately respond to a request for comment.



The U.S. diplomatic community has also been hit by China’s pandemic-control policies. In April, the State Department ordered the departure of nonemergency U.S. government employees and family members based at the American consulate in Shanghai as Covid cases surged in the city. An official at the U.S. Embassy in China said that the ordered departure in Shanghai has ended, and most people are back in place.


To make assignments in China more attractive, the State Department has recently reduced the typical length of assignment for diplomats in the country to two years from three, and raised the additional compensation rate for all posts in China, the official said.


“Our diplomats feel a deep sense of mission in working here. It can also be very challenging to serve in China as the zero-Covid policy and pandemic play out,” said Nicholas Burns, the U.S. ambassador to China.


Vacancies are often taking longer to fill than in the past. One European nation has been holding online recruitment sessions in recent months to explain what it is like to work in China in hopes of drawing more recruits, diplomats from the country said.


Many multinational companies doing business in China have seen their expatriate ranks shrink. German auto maker Volkswagen AG, which has a large presence in China, has plans to shed 30% of its China-based expatriates over the next two to three years, to around 1,000 people, Volkswagen’s then-China chief said in January, adding that China’s travel restrictions had made the country an unattractive place to work. Other large multinationals, including Apple Inc., which manufactures many of its devices in China, have localized more functions, hiring Chinese nationals to fill positions once held by foreign expatriates.


The exodus of foreign talent also includes international schoolteachers. For the current school year, the British Chamber of Commerce in China forecasts a turnover rate of at least 40% of teachers in international schools in China for foreign-passport holders. As student numbers have fallen since the pandemic’s onset, some international schools have closed or adjusted their operations.


Should new teachers not come in sufficient numbers to replace those on the way out, “international families will be forced to relocate to ensure continued education for their children,” the British Chamber said in its April report. “Those considering moving to China will look elsewhere. This will exacerbate further the flow of talent from China.”


Some organizations have had to get creative to retain talent in China. Beijing-based multinational lender Asian Infrastructure Investment Bank began allowing China-based employees to work for weeks or even months outside the country, The Wall Street Journal has reported.


Source: The Wall Street Journal.




The Myth of the Chinese Debt Trap

The Myth of the Chinese Debt Trap
Over the past two decades, China has built large infrastructure projects in almost every developing country, possibly because, through their own experience they are so good at it. However this is making some Western powers uncomfortable amid wider concerns about Beijing’s intentions global intentioan. A deeper look shows that accusations of so-called debt trap diplomacy are, at least so far, unfounded.

China, we are told, inveigles poorer countries into taking out loan after loan to build expensive infrastructure that they can’t afford and that will yield few benefits, all with the end goal of Beijing eventually taking control of these assets from its struggling borrowers. As states around the world pile on debt to combat the coronavirus pandemic and bolster flagging economies, fears of such possible seizures have only amplified.



Seen this way, China’s internationalization—as laid out in programs such as the Belt and Road Initiative—is not simply a pursuit of geopolitical influence but also, in some tellings, a weapon. Once a country is weighed down by Chinese loans, like a hapless gambler who borrows from the Mafia, it is Beijing’s puppet and in danger of losing a limb.


The prime example of this is the Sri Lankan port of Hambantota. As the story goes, Beijing pushed Sri Lanka into borrowing money from Chinese banks to pay for the project, which had no prospect of commercial success. Onerous terms and feeble revenues eventually pushed Sri Lanka into default, at which point Beijing demanded the port as collateral, forcing the Sri Lankan government to surrender control to a Chinese firm.


The Trump administration pointed to Hambantota to warn of China’s strategic use of debt: In 2018, former Vice President Mike Pence called it “debt-trap diplomacy”—a phrase he used through the last days of the administration—and evidence of China’s military ambitions. Last year, erstwhile Attorney General William Barr raised the case to argue that Beijing is “loading poor countries up with debt, refusing to renegotiate terms, and then taking control of the infrastructure itself.”


As Michael Ondaatje, one of Sri Lanka’s greatest chroniclers, once said, “In Sri Lanka a well-told lie is worth a thousand facts.” And the debt-trap narrative is just that: a lie, and a powerful one.


Chinese banks are willing to restructure the terms of existing loans and have never actually seized an asset from any country, much less the port of Hambantota. A Chinese company’s acquisition of a majority stake in the port was a cautionary tale, but it’s not the one we’ve often heard. With a new administration in Washington, the truth about the widely, perhaps willfully, misunderstood case of Hambantota Port is long overdue.


The city of Hambantota lies at the southern tip of Sri Lanka, a few nautical miles from the busy Indian Ocean shipping lane that accounts for nearly all of the ocean-borne trade between Asia and Europe, and more than 80 percent of ocean-borne global trade. When a Chinese firm snagged the contract to build the city’s port, it was stepping into an ongoing Western competition, though one the United States had largely abandoned.


It was the Canadian International Development Agency—not China—that financed Canada’s leading engineering and construction firm, SNC-Lavalin, to carry out a feasibility study for the port. We obtained more than 1,000 pages of documents detailing this effort through a Freedom of Information Act request. The study, concluded in 2003, confirmed that building the port at Hambantota was feasible, and supporting documents show that the Canadians’ greatest fear was losing the project to European competitors. SNC-Lavalin recommended that it be undertaken through a joint-venture agreement between the Sri Lanka Ports Authority (SLPA) and a “private consortium” on a build-own-operate-transfer basis, a type of project in which a single company receives a contract to undertake all the steps required to get such a port up and running, and then gets to operate it when it is.


The Canadian project failed to move forward, mostly because of the vicissitudes of Sri Lankan politics. But the plan to build a port in Hambantota gained traction during the rule of the Rajapaksas—Mahinda Rajapaksa, who served as president from 2005 through 2015, and his brother Gotabaya, the current president and former minister of defense—who grew up in Hambantota. They promised to bring big ships to the region, a call that gained urgency after the devastating 2004 tsunami pulverized Sri Lanka’s coast and the local economy.


A second feasibility report, produced in 2006 by the Danish engineering firm Ramboll, that made similar recommendations to the plans put forward by SNC-Lavalin, arguing that an initial phase of the project should allow for the transport of non-containerized cargo—oil, cars, grain—to start bringing in revenue, before expanding the port to be able to handle the traffic and storage of traditional containers. By then, the port in the capital city of Colombo, a hundred miles away and consistently one of the world’s busiest, had just expanded and was already pushing capacity. The Colombo port, however, was smack in the middle of the city, while Hambantota had a hinterland, meaning it offered greater potential for expansion and development.


To look at a map of the Indian Ocean region at the time was to see opportunity and expanding middle classes everywhere. Families in India and across Africa were demanding more consumer goods from China. Countries such as Vietnam were growing rapidly and would need more natural resources. To justify its existence, the port in Hambantota would have to secure only a fraction of the cargo that went through Singapore, the world’s busiest transshipment port.



Armed with the Ramboll report, Sri Lanka’s government approached the United States and India; both countries said no. But a Chinese construction firm, China Harbor Group, had learned about Colombo’s hopes, and lobbied hard for the project. China Eximbank agreed to fund it, and China Harbor won the contract.


This was in 2007, six years before Xi Jinping introduced the Belt and Road Initiative. Sri Lanka was still in the last, and bloodiest, phase of its long civil war, and the world was on the verge of a financial crisis. The details are important: China Eximbank offered a $307 million, 15-year commercial loan with a four-year grace period, offering Sri Lanka a choice between a 6.3 percent fixed interest rate or one that would rise or fall depending on LIBOR, a floating rate. Colombo chose the former, conscious that global interest rates were trending higher during the negotiations and hoping to lock in what it thought would be favorable terms. Phase I of the port project was completed on schedule within three years.


For a conflict-torn country that struggled to generate tax revenue, the terms of the loan seemed reasonable. As Saliya Wickramasuriya, the former chairman of the SLPA, told us, “To get commercial loans as large as $300 million during the war was not easy.” That same year, Sri Lanka also issued its first international bond, with an interest rate of 8.25 percent. Both decisions would come back to haunt the government.


Finally, in 2009, after decades of violence, Sri Lanka’s civil war came to an end. Buoyed by the victory, the government embarked on a debt-financed push to build and improve the country’s infrastructure. Annual economic growth rates climbed to 6 percent, but Sri Lanka’s debt burden soared as well.


In Hambantota, instead of waiting for phase 1 of the port to generate revenue as the Ramboll team had recommended, Mahinda Rajapaksa pushed ahead with phase 2, transforming Hambantota into a container port. In 2012, Sri Lanka borrowed another $757 million from China Eximbank, this time at a reduced, post-financial-crisis interest rate of 2 percent. Rajapaksa took the liberty of naming the port after himself.


By 2014, Hambantota was losing money. Realizing that they needed more experienced operators, the SLPA signed an agreement with China Harbor and China Merchants Group to have them jointly develop and operate the new port for 35 years. China Merchants was already operating a new terminal in the port in Colombo, and China Harbor had invested $1.4 billion in Colombo Port City, a lucrative real-estate project involving land reclamation. But while the lawyers drew up the contracts, a political upheaval was taking shape.




Rajapaksa called a surprise election for January 2015 and in the final months of the campaign, his own health minister, Maithripala Sirisena, decided to challenge him. Like opposition candidates in Malaysia, the Maldives, and Zambia, the incumbent’s financial relations with China and allegations of corruption made for potent campaign fodder. To the country’s shock, and perhaps his own, Sirisena won.


Steep payments on international sovereign bonds, which comprised nearly 40 percent of the country’s external debt, put Sirisena’s government in dire fiscal straits almost immediately. When Sirisena took office, Sri Lanka owed more to Japan, the World Bank, and the Asian Development Bank than to China. Of the $4.5 billion in debt service Sri Lanka would pay in 2017, only 5 percent was because of Hambantota. The Central Bank governors under both Rajapaksa and Sirisena do not agree on much, but they both told us that Hambantota, and Chinese finance in general, was not the source of the country’s financial distress.


There was also never a default. Colombo arranged a bailout from the International Monetary Fund, and decided to raise much-needed dollars by leasing out the underperforming Hambantota Port to an experienced company—just as the Canadians had recommended. There was not an open tender, and the only two bids came from China Merchants and China Harbor; Sri Lanka chose China Merchants, making it the majority shareholder with a 99-year lease, and used the $1.12 billion cash infusion to bolster its foreign reserves, not to pay off China Eximbank.


Before the port episode, “Sri Lanka could sink into the Indian Ocean and most of the Western world wouldn’t notice,” Subhashini Abeysinghe, research director at Verité Research, an independent Colombo-based think tank, told us. Suddenly, the island nation featured prominently in foreign-policy speeches in Washington. Pence voiced worry that Hambantota could become a “forward military base” for China.


Yet Hambantota’s location is strategic only from a business perspective: The port is cut into the coast to avoid the Indian Ocean’s heavy swells, and its narrow channel allows only one ship to enter or exit at a time, typically with the aid of a tugboat. In the event of a military conflict, naval vessels stationed there would be proverbial fish in a barrel.


The notion of “debt-trap diplomacy” casts China as a conniving creditor and countries such as Sri Lanka as its credulous victims. On a closer look, however, the situation is far more complex. China’s march outward, like its domestic development, is probing and experimental, a learning process marked by frequent adjustment. After the construction of the port in Hambantota, for example, Chinese firms and banks learned that strongmen fall and that they’d better have strategies for dealing with political risk. They’re now developing these strategies, getting better at discerning business opportunities and withdrawing where they know they can’t win. Still, American leaders and thinkers from both sides of the aisle give speeches about China’s “modern-day colonialism.”


Over the past 20 years, Chinese firms have learned a lot about how to play in an international construction business that remains dominated by Europe: Whereas China has 27 firms among the top 100 global contractors, up from nine in 2000, Europe has 37, down from 41. The U.S. has seven, compared to 19 two decades ago.


Chinese firms are not the only companies to benefit from Chinese-financed projects. Perhaps no country was more alarmed by Hambantota than India, the regional giant that several times rebuffed Sri Lanka’s appeals for investment, aid, and equity partnerships. Yet an Indian-led business, Meghraj, joined the U.K.-based engineering firm Atkins Limited in an international consortium to write the long-term plan for Hambantota Port and for the development of a new business zone. The French firms Bolloré and CMA-CGM have partnered with China Merchants and China Harbor in port developments in Nigeria, Cameroon, and elsewhere.


The other side of the debt-trap myth involves debtor countries. Places such as Sri Lanka—or, for that matter, Kenya, Zambia, or Malaysia—are no stranger to geopolitical games. And they’re irked by American views that they’ve been so easily swindled. As one Malaysian politician remarked to us, speaking on condition of anonymity to discuss how Chinese finance featured in that country’s political drama, “Can’t the U.S. State Department tell the difference between campaign rhetoric that our opponents are slaves to China and actually being slaves to China?”


The events that led to a Chinese company’s acquisition of a majority stake in a Sri Lankan port reveal a great deal about how our world is changing. China and other countries are becoming more sophisticated in bargaining with one another. And it would be a shame if the U.S. fails to learn alongside them.











Can the yuan be a key world reserve...

Can the yuan be a key world reserve currency?

The yuan, or renminbi, China’s currency unit, has been touted as a contender to become a key world reserve currency on par with the greenback and surpassing the euro, yen and British pound. But is this feasible?


Given that China is the biggest trading nation, with around 125 countries counting it as their biggest trade partner, the answer is probably yes.



China’s trade was valued at around US$6 trillion in 2021, according to the country’s General Administration of Customs. If China and its trade partners agreed to use their respective currencies for bilateral transactions, the demand for the yuan would be astronomical. This would accelerate the yuan toward becoming a key world reserve currency.


Indeed, the yuan being a major world currency or serving as an alternative to the greenback is not necessarily a bad thing. Trade partners using each other’s currencies for investment settlements and other interactions would reduce transaction costs, minimize exchange-rate volatility and bypass US sanctions, for instance.


Effect of US sanctions

Sanctions against nations deemed “unfriendly” to the United States have had a devastating effect not only on the targeted countries, but also on global economies, ironically including America’s. The latest instance is the US and its European and Asian allies sanctioning Russia for invading Ukraine.


The harsh sanctions are not only crippling the Russian economy, but also hurting other economies, including those that themselves have sanctioned Russia. Oil and food prices have shot through the roof, threatening a global recession.


In the US and Western Europe, many families are making hard choices between eating and keeping warm, for example. Though the West’s economies are growing, the numbers of impoverished and homeless have risen, suggesting that the growth is not equitably distributed.


Yuan as medium of exchange

It is perhaps because of the impact of US sanctions on their own economies that some countries are ditching the US dollar and accepting the yuan in settlements for trade. Most recently, Saudi Arabia is said to be finalizing a deal with China to settle oil transactions in yuan.


Equally noteworthy is that around 70 central banks around the world held the yuan in their foreign-reserves portfolios in 2019, according to the People’s Bank of China (PBOC), the country’s central bank. That number is sure to expand as China’s economy continues to grow. Another factor prompting countries to hold yuan is fear that they may be the next target of US sanctions.


Challenges to yuan as world currency

However, some would argue that the internationalization of the yuan to the extent that of the greenback will be challenging, primarily because of China’s governance and development architectures. Single-party rule, lack of universal suffrage, and absence of an orderly and peaceful transfer-of-power mechanism cause some concern over China’s political stability.


Another challenge is that the yuan is not fully convertible, thus posing a problem for cross-border fund transfers. And China’s economic development model is not in sync with neoliberalism, including the way in which the yuan is evaluated. For example, the PBOC applies administrative measures to determine the US-yuan exchange rate.


Political stability

Political stability is important in determining acceptance of a currency because that implies minimum political risk. Case in point is the US dollar.


The US seems politically chaotic with the two major parties battling each other, culminating in nothing getting done or creating divisions between ideological or racial groups. But its governance system of “checks and balances” – equal power among the executive, legislative and judicial branches – keeps everyone “honest.”


For example, the president can only implement policies that are within the power given him or her under the constitution. And the Congress controls the purse, limiting the president’s power.


Simply put, there is no reason to believe that the US government will collapse any time soon, regardless of its policies that may suggest otherwise. This is one reason that the American dollar will continue to be a safe haven for the world’s investors and savers. The greenback has proved to be a good storage of value.


So the question is, can China deliver the same level of confidence for the yuan? Many in the West would say no.


But the Communist Party of China seems to be able to sustain if not increase its popularity among the Chinese population, garnering a more than 90% approval rate, as Harvard University found. A primary reason for that high level of support is the CPC’s resilience and adaptability. That is, the party has kept “reinventing” itself since Mao Zedong’s days, responding to the people’s needs and wants.


So if the party continues to evolve, it will likely be in power for a very long time. Indeed, one can even argue that the CPC is one of the very few political parties in the world, including the West’s, that actually fulfill their fiduciary duties.


For example, the CPC vowed to eradicate dire poverty, and it did. In the West, governments talk about poverty reduction or climate change, but have not “walked the talk.”


From this perspective, the CPC has shown that a single-party system can achieve political stability. In this sense, the yuan is an acceptable medium of exchange and storage of value, paving the way for it to become a world reserve currency.


Economic reform, currency convertibility

China is taking a gradualist approach in economic reforms and floating its currency freely to avoid costly policy mistakes and prevent external shocks.


In many ways, China is still on the learning curve regarding economic reforms, particularly transforming its social market economy to a private market economy. Maintaining state-owned enterprises and banks has acted as an economic and social stabilizer because they offered affordable prices and prevented financial-system collapses.


To dismantle SOEs and SOBs without a clear orderly transformation mechanism would be unwise. Privatizing SOEs, for example, could spike energy or transportation costs. That, in turn, could lead to economic dislocation and social discontent.


With regard to not freely floating the yuan, that is largely meant to sustain export growth and prevent foreign hedge funds from attacking the renminbi. A freely floating yuan could very well cause an appreciation of its value, with China thus losing a pricing advantage.


An undervalued yuan would make attacking it difficult, particularly when China has more than $3.25 trillion in foreign reserves. Besides, China’s international debt is less than $2 trillion, so it has more than enough to meet its foreign debt obligations.


Taking the analysis to its logical conclusion, the yuan as a reserve currency at par with the US is a question of when, not if.


By Ken Moak for the Asia Times






Neighbors, Partners, Competitors: Driver...

Neighbors, Partners, Competitors: Drivers and Limitations of China-Russia Relations
Over the course of the last thirty years, China and Russia have demonstrated that their partnership is resilient and expanding. Any pragmatic leadership in the Kremlin—even a democratic one that seeks to improve ties with the West—will try to maintain stable and friendly relations with China, just as any pragmatic Chinese leadership will do with Russia.

“While not being a military and political alliance, such as those formed during the Cold War, Russian-Chinese relations exceed this form of interstate interaction. They are not opportunistic, are free of ideologization, involve comprehensive consideration of the partner’s interests and non-interference in each other’s internal affairs, they are self-sufficient,” reads a joint statement adopted by the Chinese and Russian leaders Xi Jinping and Vladimir Putin during their virtual summit on June 28, 2021 commemorating the twentieth anniversary of the Treaty of Good Neighborliness and Friendly Cooperation.


Despite obvious diplomatic finesse, this official formula has a ring of truth to it. In the thirty years since the collapse of the Soviet Union, China and Russia have vastly improved their relationship. They have managed to resolve a territorial dispute that had dogged ties since the Sino-Soviet border conflict of 1969; Beijing and Moscow are engaged in a multifaceted political dialogue; and trade between the two neighbors has seen a fourteenfold increase since 2001. Thus, when Xi and Putin characterize the relationship as “the best it has ever been,” this depiction is correct—at least for now.


There are, however, multiple limitations to the China-Russia entente, not to mention headwinds that could disrupt this partnership in the future.



There are four major drivers behind the improved China-Russia ties. First, both countries want to maintain peace along their 4,200-kilometer border, and do not want to go back to the years of costly and risky confrontation. Overcoming that confrontation took a resolute effort by political leaders in the Kremlin and Zhongnanhai going back to Mikhail Gorbachev and Deng Xiaoping, and since 1989, Beijing and Moscow have been remarkably consistent. By 2006 the territorial dispute was fully resolved, removing the major irritant in bilateral ties.


Moreover, since China’s population is rapidly aging, and its economy provides better employment opportunities at home compared to the depressed Russian Far East, Moscow’s fears about China’s demographic expansion to that part of the country have been significantly allayed. Good markers of this changed attitude are the Vostok 2018 military drills that included a large contingent of Chinese troops for the first time, as well as infrastructure projects to link the two banks of the Amur River border by bridges. The sheer distance between Moscow and Beijing serves to ease the security concerns of both sides, including the Russian leadership’s fears over Chinese intermediate range missiles. Nor are there any countries in between Russia and China that are as significant to the Kremlin’s sense of security and national pride as Ukraine or Belarus on Russia’s western flank.


Second, the two economies naturally complement each other. Russia has a huge endowment of natural resources, but needs technology and capital. China is, in many ways, the opposite, which means there is a potential to explore these synergies. Beijing has pledged to decarbonize its economy by 2060 but switching power generation away from coal to natural gas is part of China’s strategy to achieve that target. Trade between the two neighbors has grown from $10.7 billion in 2001 to nearly $140 billion in 2021 and is set to expand more with existing projects like the Power of Siberia gas pipeline reaching full capacity of 36 bcm/year and the launch of new projects like Power of Siberia 2 with 50 bcm/year capacity. Beijing wants to ensure access to commodities transported over secure land routes from a friendly state, while Moscow wants to decrease its dependency on European markets and monetize Russia’s natural resources before the global energy transition takes its toll on hydrocarbon prices in coming decades.


Third, despite significant differences between their domestic political setups, both China and Russia are ultimately authoritarian regimes. They don’t interfere in each other’s domestic politics, and issues like the imprisonment of the opposition leader Alexei Navalny in Russia or Beijing’s human rights record in Xinjiang and Hong Kong never poison the exchanges between the two governments. Moreover, as two permanent members of the United Nations Security Council, Beijing and Moscow cooperate on multiple issues such as global internet governance, with both leaderships sharing an outlook and pushing back against the United States and its allies. Cementing the political dimension of the relationship is the strong personal bond between Putin and Xi.      


The complementary economies, the need to maintain peace along the border, and the authoritarian nature of the two regimes are the three internal drivers of the China-Russia rapprochement that would force the two sides to move closer to each other even with the West out of the picture. It’s the parallel confrontation with the United States, however, that is driving Beijing and Moscow even closer together and amplifying the effect of those three factors.


Russia and China trade arms, are developing new weapons together, and have expanded the scope of joint annual military drills. They both engage in parallel disinformation campaigns against the West. Amid U.S./EU sanctions against Russia, Moscow is increasingly reliant on its neighbor as an alternative source of capital and technology to withstand Western pressure, while Beijing’s money targets members of Putin’s inner circle in order to win more friends for China in the Kremlin. In a similar way, Beijing turns to Moscow for support on weapons design and has tapped into Russia’s pool of IT talent to help the embattled tech company Huawei, which recently tripled the number of its research staff in the country. Putin and Xi’s drive to make their countries great again and push back against the American global leadership is another ingredient in the secret sauce of the China-Russia entente.



Despite the bilateral relationship reaching new depths, there are several significant factors limiting Chinese-Russian cooperation. Most importantly, both countries are extremely sensitive about their strategic autonomy, and therefore will seek to avoid entering into legally binding security guarantees with one another like those that knit together NATO or the United States’ alliances in the Indo-Pacific. The two countries also have different global security interests. For example, China is not incentivized to support Russia’s annexation of Crimea, the war in eastern Ukraine, or Moscow’s military operations in Syria and Africa. By the same token, Moscow has few reasons to support China on Taiwan beyond paying lip service to the One China policy, or on the nine-dash line in the South China Sea.


As two independent great powers, China and Russia are also engaged in espionage against each other. In 2020 and 2021, evidence mounted over the level of Chinese spies’ aggression in Russia, including hacking attempts aimed at stealing designs for the latest weapons systems. Despite the professional concerns of the Russian counterintelligence community, these activities are unlikely to cause an overly emotional response in the Kremlin, as Moscow firmly believes that every great power will inevitably conduct espionage, even against its closest allies. The degree of mutual mistrust between the Chinese and Russian intelligence and secret services will, however, most likely prevent deeper cooperation on sensitive issues like joint information warfare against common adversaries.


There are also obstacles to expanding economic ties between China and Russia. The Russian investment climate is becoming increasingly hostile for foreigners, and historically Russia has not been a major investment destination for Chinese companies. Constantly changing rules, rampant corruption, and state dominance in many lucrative sectors make Russia a very hard place for Chinese companies to invest in, despite the burgeoning bilateral trade relationship.


In addition, U.S. economic sanctions against both China and Russia complicate their cooperation even further. Ever since the United States and the EU levied sectoral sanctions against Russia, Chinese commercial banks have been extremely cautious in providing loans and services to Russian entities, partly due to their limited exposure to the Russian market, and the scarcity of resources available to do compliance for existing or prospective Russian clients. Large-scale loans from Chinese political banks for major projects like Yamal LNG are more an exception driven not only by market considerations, but to a large extent by politics.


In a similar vein, Russian imports of Huawei cellphones have collapsed in the wake of U.S. export restrictions against that company, and Moscow generally has become more cautious in deepening its partnership with Huawei to develop 5G communications in Russia. Politically driven efforts to expand bilateral trade in the countries’ national currencies are also facing headwinds due to capital controls in China, causing frustration among Russian oligarchs who want to diversify away from Western capital markets, and among Russian officials who want to safeguard trade with Beijing against potential U.S./EU sanctions.


Taken together, these political and economic limitations will serve to prevent China and Russia from forging a full-fledged anti-Western alliance, as well as slow down plans for joint economic projects. 


Potential Friction

There are several issues that could push the relationship toward a more confrontational direction in the medium- to long-term. The key factor here is the rapidly growing strategic asymmetry between the two parties. Across numerous metrics, China is poised to either expand its lead over or close the gap with Russia. Later in this decade, for instance, China is projected to possess a significantly larger and more potent nuclear deterrent than its present-day posture, and its expanded investments in overall military capabilities will likely generate significant advantages over Russia’s navy, air force, and army.


In economic terms, Moscow is increasingly reliant on Beijing. China’s share in Russia’s external trade has increased from 10.5 percent in 2013—right before the war in Ukraine—to nearly 20 percent this year, and is set to increase even further in the coming years, as Western sanctions and the energy transition in the EU take their effect on Russia’s economic exposure to traditional partners in the West. Meanwhile, Beijing’s economic dependency on Moscow is hardly growing: Russia’s share in China’s trade stands at 2.4 percent at the end of 2021.


The bottom line is that Russia needs China more than China needs Russia. Over time, as the strategic balance tilts increasingly in Beijing’s favor, Chinese leaders could become tempted to use this growing leverage to coerce Russia into accepting commercial agreements benefitting Beijing more than Moscow or making more explicit gestures of support for China’s foreign policy decisions. They could even take a hardliner stance against Russia on issues over which the countries disagree.


On trade and investment, China increasingly has the stronger hand in dictating the terms of commercial deals. Whereas Beijing is diversified in terms of its imports of energy resources, in Asia, the Russian gas monopoly Gazprom is set to operate expensive pipelines that only serve Chinese customers, while Rosneft, the state-owned oil giant, is also heavily reliant on the Skovorodino-Mohe oil pipeline that ships 30 million tons a year to China only.


If Beijing opts to temporarily halt imports via these pipelines or threatens to terminate contracts altogether, China will be able to switch to new import sources, while the Russian energy companies will be hit very hard. This asymmetry may enable Beijing to renegotiate existing contracts and seek lower prices from Gazprom and Rosneft, while Moscow will have limited options for pushing back. There was a recent precedent for such developments in 2011, when Rosneft offered China National Petroleum Corporation a discount of $1.50 per barrel because of a contractual dispute. As Moscow’s customers are projected to become less reliant on Russian hydrocarbons over time, China’s influence over Russia will grow even larger.


Of course, Russia is no stranger to commercial disputes and the use of market power to extract economic concessions. Moscow’s experience on the European gas market is a good example, with Gazprom customers in the EU taking advantage of low prices and Gazprom’s vulnerability to push for compensation and contract reviews over the last decade, and Moscow taking its revenge during the European energy crunch. These developments will have prepared the Russian leadership for the eventuality of China becoming tempted to play its stronger hand due to altered market conditions, and the Kremlin is unlikely to be overly emotional about any commercial concessions it may be forced to grant its neighbor.


A potentially much more disruptive scenario for the China-Russia partnership could see Beijing using its economic leverage over Moscow to secure some major adjustments to Russian foreign policy in the Indo-Pacific, specifically with respect to its relationships with China’s rivals in the region: India and Vietnam. For many decades going back to Soviet times, the Kremlin has been trying to cultivate deeper ties with Hanoi and New Delhi, particularly through arms sales.


Russian weapons sales to India have grown significantly in the last five years, accounting for 23 percent of Moscow’s global arms exports between 2016 and 2020, while arms sales to Vietnam have been steadily growing since the mid-1990s.


Historically, China has viewed Russia’s arms trade with India and Vietnam as an irritant, but has refrained from elevating the issue to become a major strain on the bilateral relationship. However, China’s recent successes in closing the gap with Russia in terms of military technology support Beijing’s broader attempts to rapidly extend its security presence in the South China Sea and along its border with India, which has caused serious friction with Vietnam and India. Amid this rapidly shifting security landscape, Beijing has the opportunity and rationale to pressure Moscow to limit its partnerships with India and Vietnam. Although China is not presently in a position to coerce the Kremlin to abandon arms sales to these two countries, it might be increasingly tempted to do so in the future.


As China’s assertiveness grows, so do Beijing’s ambitions in its shared neighborhood with Russia in Central Asia. Over the last few decades, Beijing’s economic clout in the region has grown dramatically in tandem with increases in Central Asian exports of raw materials to the vast Chinese market.


Despite China’s growing influence in Central Asia, Moscow has managed to find ways to co-exist with Beijing thanks to a significant overlap in bilateral interests. Both powers want to see the region stable, secular, governed by authoritarian rulers, and not hosting U.S. troops. Russia and China have developed a division of labor, in which Beijing’s demand for commodities and infrastructure investments has been the key economic driver for regional development, while Moscow has remained the key external security guarantor. China has also opted not to challenge the Russian-led Eurasian Economic Union with its Belt and Road Initiative, while Beijing and Moscow have even found ways to symbolically link the two frameworks.


Still, China’s security footprint in the region is gradually growing, with more arms deals and military aid to Central Asian nations, as well as two facilities built in Tajikistan by the Chinese People’s Armed Police to patrol the Wakhan corridor that links China and Afghanistan. The carefully crafted co-existence formula could be jeopardized if Beijing continues to push for a bigger security role for itself in Central Asia, for example, through deployments of private military companies. So far, however, Moscow and Beijing have demonstrated a remarkable ability to compete in a way that is not disruptive to the joint pursuit of shared interests. The Kremlin is aware that strong anti-China sentiment in the region, particularly in Kyrgyzstan and Kazakhstan, is a factor that will significantly limit Beijing’s freedom of movement on regional security issues. Still, a stronger push to deepen security partnerships with Russia’s treaty allies without even notifying Moscow may be an irritant.


The Arctic is another region where Russia and China cooperate and compete at the same time. Moscow is a member of exclusive Arctic Council, which possesses a unique legitimacy over Arctic governance. Despite multiple sources of conflict with other members, including the United States and other NATO countries, Russia has a keen interest in preventing outside powers from having a say in Arctic affairs.


Although China is an observer in the Arctic Council and thus has no voice in setting the rules for regional governance, it has officially defined itself as a “near-Arctic state” and is actively seeking ways to become more involved in scientific research and the commercial exploration of natural resources. Russia is China’s biggest partner in this endeavor through two separate cooperation agreements to develop Russian-led LNG projects in the Arctic: Yamal LNG and Arctic LNG 2.


So far, Beijing has not sought to use these investments as leverage to co-opt Russian support for its broader objective of exerting greater influence in Arctic governance affairs. That could be a consequence of Moscow’s successful attempts to mitigate risk by raising financing from non-Chinese investors. Attempts by Beijing to leverage Moscow’s dependence on Chinese assistance in the Arctic can’t be ruled out, however, particularly if there are new Western sanctions targeting Russian economic efforts in the region.


Finally, despite the legal settlement of the territorial dispute between China and Russia, historical issues might come back to haunt the relationship in the future. As Beijing’s power grows, so does the assertiveness of its leadership and the strong nationalist feeling among the population, rooted in the narrative of reemerging after the “century of humiliation” that followed China’s defeat in the Opium Wars. Imperial Russia was one of the colonial powers that took advantage of China’s weakness back then to gain control over territories in the Far East that the Qing rulers considered part of their empire.


So far, Beijing has demonstrated little desire to address the national perception of the problematic chapters of China-Russia history. Problems are toned down in the official media, but never fully resolved, and the memory of Russia’s predatory behavior is preserved in history textbooks and museums. Dormant anti-Russian sentiment is present in Chinese society, and becomes visible online when triggered by events like the celebration of the 160th anniversary of the city of Vladivostok, which prompted a wave of angry criticism by Chinese netizens.


With China growing ever stronger than Russia, and the nationalist emotions of China’s society and leadership playing a bigger role in Beijing’s foreign policy (as evidenced by the “wolf warrior diplomacy” phenomenon), historical issues are likely to become a factor in the relationship once again. Stronger Chinese nationalism, if directed at Moscow, is likely to fuel a revival of Sinophobia in Russian society too, complicating the relationship even further.


Over the course of the last thirty years, China and Russia have demonstrated that their partnership is resilient and expanding. Despite several limiting factors, Beijing and Moscow have so far sought to cooperate in areas where there is significant complementarity of interests while carefully addressing sources of mutual concern. Any pragmatic leadership in the Kremlin—even a democratic one that seeks to improve ties with the West—will try to maintain stable and friendly relations with China, just as any pragmatic Chinese leadership will do with Russia.


The key variables that will determine the future of the increasingly asymmetrical bilateral relationship are China’s growing assertiveness and nationalism, and whether Beijing will seek to manage relations with Moscow in the same careful way as it does now, or whether it will use its growing leverage to seek concessions from a weaker partner. On the Russian side, the level of anti-American obsession and the progress of domestic reforms will be the key variables in defining the future of ties with China.


Source: Carnegie Moscow Center

How Will China Deal With the Taliban...

How Will China Deal With the Taliban in Afghanistan?

Even before the Taliban took control of Kabul, China started deepening diplomatic ties with the group, hosting a Taliban delegation in July. Since then, Chinese officials have said that Beijing respects Afghans’ right to decide their future, implying that the Taliban’s victory reflects the people’s will.



What kind of relationship will Beijing have with the Taliban?

Beijing’s relationship with the Taliban will be twofold. First, it will be mercantilistic. China will seek to revive business ventures inside Afghanistan, which the Taliban is likely to support because investment will provide badly needed revenues. The Afghan economy is fragile and highly dependent on Western donors’ foreign aid, which will almost certainly be cut off. So any sort of investment, especially if it is not accompanied by lectures on human rights, will be welcome.


Second, the relationship will depend on each side not interfering in the other’s internal affairs. For Beijing, that means the Taliban cannot export extremism into China’s troubled Xinjiang region, which shares a tiny border with Afghanistan, or condemn the Chinese government’s policies in that region. For the Taliban, it means China will not question the group’s human rights abuses unless Chinese citizens are involved.


In some ways, Afghanistan under the Taliban is China’s perfect partner: dysfunctional, dependent, and happy with whatever China can do for it.


What are the Chinese government’s interests in Afghanistan?

The economic interests are important but not decisive. At the end of the day, Afghanistan is an insignificant market and has only a few sources of raw materials.


Much has been made of Chinese projects in Afghanistan, but these have been limited in scope. Even in stable countries, many Chinese projects that are announced, including those through the Belt and Road Initiative, are often not completed. So it is unlikely that China immediately becomes an investing juggernaut in Afghanistan.


Instead, China’s goal is likely to be at least as much political as economic. Beijing aims to head off any potential support for Muslims in Xinjiang that could come from Afghanistan.


And perhaps most importantly, China’s engagement in Afghanistan can show other countries how China supports regimes: with few questions asked as long as they support Chinese interests.


Does China view the chaotic withdrawal as an example of U.S. decline?

Chinese politics remain opaque, but it is clear that one important faction of the ruling apparatus holds that the United States and the West are in decline. This line of thinking is found in Chinese think tanks, academia, and government. It is not unchallenged, but those who argued, for example, for cooperating with the United States in Afghanistan will be weakened, and those who see the West as in decline will be emboldened.


It will also become easier for China to argue that when push comes to shove, the United States is unreliable—it talks a good talk but will walk away when it loses interest. Those in China who cautioned that the chaos of the past few years was mainly due to one unusually disorganized administration will find their voices weakened. Instead, it will be easier to argue that the United States is in a secular decline.


China pressed the previous Taliban regime to end support for Islamist extremism. Does it have similar concerns now?

China is fighting what it calls a war against extremism in Xinjiang and argues that international extremist groups have aided Islamists there. There is little evidence for this—certainly not in recent years—but China is wed to this story, so leaders will have to push the Taliban not to admit extremists back into Afghanistan and especially not to allow the country to become a haven for extremists, like it was in the late 1990s. The Taliban will likely agree to this because it needs the investment and because China is much more powerful now than it was twenty years ago.


Of course, for China, recognizing the Taliban makes for strange optics: fighting Islamists at home but embracing them abroad. But it shows that China could be the ultimate realpolitik nation.


How likely is it that Beijing and Washington will work together to promote stability in Afghanistan?

In theory, this could work because they both want to fight terrorism. In reality, however, it is hard to see how the United States can now be engaged in any meaningful way in Afghanistan. It just walked away from its best option for promoting stability there, effectively deciding instead to turn the country over to the Taliban (even if the takeover was sooner than expected).


At the same time, the United States is unlikely to pursue business interests there—one can imagine sanctions being imposed after the first human rights abuses are reported. Thus, the United States will basically be absent from Afghanistan’s future, allowing countries such as China and Pakistan to pursue their interests unilaterally.



Source: By Ian Johnson for the Council on Foreign Relations



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