Tag: china

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China’s First Market-Oriented Ecosystem

In this blog post, I summarize the emergence of a market-oriented ecosystem in rural China following Baochan Daohu in the late 1970s, as detailed in the 1996 book “How Farmers Changed China” by Zhou Kate. While the book discusses the topic of market creation, I intentionally use the term “market-oriented ecosystem” to bridge with Ulrich’s Market-Oriented Ecosystem in a follow-up blog post.

I encourage you to read my previous blog post, A Brief History of Baochan Daohu, to understand its significance.

In summary, following the CPC’s victory in the Chinese civil war, the party took control over land and agricultural production by placing it in the hands of local cadres (party loyalists). Unlike the farmers, who had managed food production thousands of years prior, local cadres were unfamiliar with managing land for food production. The cadre’s technical incompetence, combined with the disincentivized farmers, planted the seeds for food production output below expectations.

Farmers held the local cadres responsible for the millions of deaths during the Great Leap famine. Slowly, the farmers tried to regain control over the land and food production process to ensure subsistence at the very least. Mao’s death in 1976 enabled farmers to pursue family autonomy further, and efforts ultimately led to the Deng Xiaoping government formally recognizing and encouraging Baochan Daohu.

Baochan Daohu Generates Surpluses

At its core, Baochan Daohu is about generating surpluses from production activities. Just like for any business, a well-functioning operating model generates surpluses. The surpluses have two effects:

  1. When your operating model generates surpluses, your basic needs are covered. That is certainly the case when you have a high surplus, but also when you have a low surplus.
  2. When your operating model generates consistent surpluses, you can “trade” and “reinvest” them.

The implication of the first effect is significant for the farmer. When farmers regained control over the food production processes, they also controlled their own food production. The farmers felt incentivized to generate food surpluses that cover their family’s basic needs and, preferably, a little extra just in case.

The implication of the second effect is essential for the emergence of markets. All that you don’t consume, you can exchange for things you don’t produce, like food products or money. It also encourages specialization and diversification to make surplus produce more attractive or of higher value. That facilitates searching for better production processes, including biological and technological innovation. 

“When the basic production quota was fixed, and farmers were allowed to keep or to sell the rest of the harvest, farmer’s incentives soared, leading to the greatest sustained increase in productivity per worker and hectare in Chinese history”

How the Farmers Changed China, p77

Dealing with the State Procurement System under Tonggou Tongxiao (统购统销)

I explained the system of Tonggou Tongxiao (统购统销) in a previous blog post.

After the approval of baochan daohu, the farmers quickly started dealing with the state apparatus directly rather than dealing with the local party representatives. The state would issue a production quota at a fixed price to the farmer. Then the farmer would sell this directly to the state procurement station.

Farmers were mandated to ensure sufficient production to meet the quota and sell at the fixed state-mandated price. Farmers could sell to the state at a higher state-fixed price or market prices for goods produced more than the production quota. For goods produced where there wasn’t a production quota, farmers could also choose where to sell.

From the market perspective, the new arrangement institutionalized three distinct price levels:

  1. Tier 1: state price for the portion of the produced goods that fall within the state-mandated production quota
  2. Tier 2: state price for the portion of the produced goods that fall outside the state-mandated production quota
  3. Tier 3: market price for the portion of the produced goods that fall outside the state-mandated production quota

The new market dynamics quickly caught up with the state. The state found it increasingly more challenging to procure highly valued goods for which the state price was lower than the market price. In addition, farmers flooded the state procurement stations with low-value goods like grain and cotton, for which the market price was lower than the state price. That didn’t necessarily cost the state cash, as they refused to buy or issued IOUs. However, it did create a surplus problem rather than the scarcity problem from before.

Take the example of grain.

The state offered two prices: one price for the quota production and a higher price for the above-quota production. This incentivized farmers to produce more than the agreed-upon quota. The farmers could sell the above-quota output to the state or on the market. Due to the surge in production, the market price for above-quota grain would fall below the state price for above-quota grain. Thus, farmers would try to sell the above-quota grain to the state at a higher-than-market price.

From a business point of view, the product mix of below- and above-quota production determines the average selling price (ASP). To achieve a higher ASP, the farmers would heavily invest in rapidly and intensely increasing the output to sell nearly all the products at above-quota prices to the state. Ultimately, the state had to lower the purchasing prices for certain goods to disincentivize overproduction. The state sometimes even implemented a fengding or selling cap.

峰頂 (fēng dǐng) = peak

On the surface, this may look like a significant wealth transfer from the state to the farmers since the state would pay, on average, more for every ton of grain produced. However, the state balanced the wealth gain by the farmers with state-controlled price increases for the raw material inputs such as fertilizers. So, while farmers could sell grain at a higher price, their production costs also increased.

The State’s Perspective Under Tonggou Tongxiao (统购统销)

From the state’s perspective, one could argue it had the perception of being in control because the state could set production quotas, below- and above-quota pricing, and reserve the right of purchase refusal or utilize non-cash payments. However, the state apparatus was much less flexible in dealing with ever-changing market conditions. Thus, creating marketing problems. For example:

  1. The state did not have sufficient staff to deal with the increased production output, thus creating dissatisfaction with the farmers who had to wait for days to sell their produce.
  2. The state did not have sufficient warehouse capacity to store all the production outputs. That resulted in significant waste, especially for perishable goods.
  3. While the state offered price flexibility to the rural farmers for purchasing the output goods (above-quota purchasing prices), they did not have the same flexibility for selling the input goods to the urban industrial sector. So, the more the state purchased at above-quota prices, the less it made by selling at subsidized prices to the urban industrial sector.
  4. The state commercial sector could not meet the farmers’ increasing consumer goods needs.
  5. While the state increasingly purchased grain at above-quota prices, it continued selling it to the urban population at subsidized below-market prices. That caused a budgetary crisis where the more they bought, the more they lost.

It is important to remember the mechanism with which the state subsidized the urban population: hukou and danwei. I discussed these topics in my previous blog post. In short: Hukou links a person to a place of residence, and Danwei links a person to a place of work. Urbanites would receive coupons and subsidies through both Hukou and Danwei registrations.

More open markets could reduce the pressure on the state budget by allowing state actors to purchase at market prices if those fell below the above-quota or below-quota prices. However, free markets don’t align with the government’s ideology. That said, the government’s desire to reduce its debt eventually led to more tolerance for markets.

Either way, as they did in the past, the farmers tested the boundaries of what’s allowed and started opening up their own markets. They had every incentive to do so. After all, if you’re trying to sell perishable goods to the state and the state cannot keep up with the purchase, you either find a way to sell elsewhere or your goods rot.

In 1985 the government sought to alleviate the financial burdens by ending the procurement system and replacing it with Paigou.

派购 (pài gòu) = unified purchase

Paigou (派购)

Under Paigou, the state contracted with individual farm families to set a sales quota. That allowed the state to always purchase at a low price and regain control over production and marketing. Naturally, it reduced the incentives for farmers to sell to the state.

So, the state instituted Sanguagou. Under this scheme, the state provided 30% of the agricultural inputs at subsidized prices. However, that was not enough of an incentive, not in the least because the state provided the Sanguagou coupons through the sometimes corrupt cadres.

三掛勾 (sān guà gōu) = the three hooks

The state did achieve to lower grain production. As a result of the supply reduction, it increased its market value, and thus market prices rose above the state purchasing prices. That allowed the state to lower its total expenditure on grain. However, since the market price exceeded the state price, it also made the farmers desire ever more selling to the market instead of the state.

The most effective way to escape the grip of Paigou was the development of the rural industry, the service sector, and commercial trade activities.

Business Model Disruptive Innovation in Market Economy

So, here’s the status quo in 1984:

  1. The state owns all land but allows farm families to contract the land use intended for agricultural production.
  2. The farm families must fulfill state-mandated production quotas and sell at a state-mandated price enforced by the local party cadres.
  3. Farmers can use the land for other means if they fulfill the quota. Furthermore, they are allowed to sell surplus production.
  4. The state purchases the farmers’ agricultural goods at a low, fixed price, then sells them to the subsidized urban population. The state also sells subsidized agricultural inputs to the farmers to help maintain a low agricultural production cost.

For the farmers looking out for their families, the most attractive place to sell their goods is at the market, as the market price is generally higher than the state price. Thus, the land used to produce commercial crops increased much faster than the land used for state-procured crops.

The attractiveness of selling on the open market incentivized farmers to look for new ways to be successful. One of those ways is through the garden economy or tingyuan jingji, which could include any of the following: two gardens (vegetables and fruit), two pens (fowl and livestock), one fish pond, and one small factory. In one 1986 survey cited in the book, 85% of farm households argued cash income as their principal reason for raising pigs.

庭院经济 (tíngyuàn jīngjì) = garden economy

While farmers flooded the market with their produce, many traders emerged. These traders visited the market solely to buy goods to then resell. They tried to leverage the price arbitrage that existed between regions. The state initially forbade the practice of trade, though, as the author points out in the book, one could argue that the practice is already out of hand when prohibition is needed. The state didn’t legalize long-distance trade until 1983

Either way, the market dynamics quickly spread from local trade between the rural population to trade between rural merchants and the urban population. That gave rise to a class of trade-specialized farmers: the rural merchants. Perhaps unexpectedly, Chinese farmers were the first class to own private cars, trucks, and tractors.

Rural merchants became formidable competitors of the urban state sales organizations for six reasons:

  1. Thanks to lessons learned from operating under baochan daohu, they pay close attention to operational profitability and consumer dynamics. They are entirely market-oriented.
  2. They are more knowledgeable than their urban counterparts about the product, particularly agricultural and perishable goods. This product know-how translates into better sales tactics.
  3. They are directly responsible for their losses, so they pay attention to the management of the goods.
  4. They have more flexibility to purchase high-quality goods at lower prices when supply exceeds demand.
  5. Their operating costs are generally lower than state actors due to lower overheads
  6. They are intrinsically motivated to work hard and build better and more comfortable lives for themselves and their families

In business terms, we could say that the farmers provided a better sales experience with better products at a lower cost. That’s a business model disruptive innovation strategy.

From Business to Market-Oriented Ecosystem

The rise of rural merchants and increased economic activity promoted rural specialization and diversification. Furthermore, it also created a market for rural services and industrial goods in addition to rural agricultural goods.

Included in the rural services are transportation, construction, and marketing services. Transportation services enabled farmers to deliver their products to ever more-remote customers. Construction services allow farmers to build new facilities tied to their business operations, for example, warehouses and small factories. Marketing services enabled farmers to trade at markets more effectively.

The farmers initially traded at the Jishi or market town in the countryside. However, over a decade, the jishi evolved from a place of local trade to a place where farmers and urbanites went to buy goods. Slowly, the jishi took over from state-planned markets as the primary source where people, farmers and urbanites alike, would go to purchase their food.

集市 (jí shì) = market

In 1983, sales at jishi represented 14% of all retail sales. In 1989, 70% of the goods sold in the cities were at jishi.

The success of the jishi was also favorable to the state for two reasons:

  1. The state-controlled grocery stores offered subsidized food. The more urbanites purchased their food at the jishi, the less they required subsidized good. So, the less the state had to subsidize.
  2. The state collected taxes on sales done at the jishi

The local jishi eventually expanded to a variety of different types of markets. Those include roadside markets near the cities, specialty markets which focus on specific products, and wholesale markets where you could go and buy nearly everything.

In addition to the sale of goods, farmers also pioneered in private restaurants and inn-keeping. This primarily served the needs of the rural merchants who needed a place to sleep and eat will traveling around to different markets. A key side-effect of the farmer-driven development of services industry that I want to quickly mention is that the more general availability of food decreased the power of the state-issued food ration coupons in the cities.

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A Brief History of Baochan Daohu

In this blog post, I summarize the history of Baochan Daohu, the household responsibility system, as detailed in the 1996 book “How Farmers Changed China” by Zhou Kate. In a follow-up blog post, I will also cover the emergence and evolution of markets as described in the same book.

The book’s central thesis is that rural farmers and not the party elite were the main driving force behind’s China’s rise from the ashes of the civil war mid-20th century to a world-leading economic power. While I’m not the right person to judge the accuracy of the thesis, I want to share some of the insights from the book about grassroots Chinese entrepreneurship within the environment of early communist rule.

Before Communism

Before the communist victory in the Chinese Civil War, most Chinese people were self-sufficient for their daily needs. Chinese families ran independent family farms that provided daily food and sometimes surpluses which were traded in the village. They generally avoided centralized structures for organizing everyday life. This open class system was around for thousands of years.

Tonggou Tongxiao (统购统销)

Following the victory in the civil war,  the Communist Party of China (CPC) took control of the country. It began to organize food production through agricultural and land reforms (1950-1953), which removed the family from the nexus of local organization and decision-making.

The CPC installed loyal cadres as party representatives to run the villages. The cadres executed agricultural reforms to create a more equal land distribution and increase food production. The reforms included the formation of farming cooperatives (communes and later production teams), which brought together small farmers to share resources and increase efficiency. This replaced the family unit as the organizer of food production.

Most importantly, while the state allocated land for farmers’ use, it denied them ownership and control. Before the farmers could even start enjoying the fruits of the land reform, their autonomy was further reduced by the introduction of Tonggou Tongxiao, or the Public Grain Procurement System.

统购统销 (tǒnggòu tǒngxiāo) = unified purchase and sale

Under the Tongou Tongxiao, the government required farmers to sell their grain at a fixed price to the state. No private merchants were allowed to deal with grain. This ensured the state had enough grain to feed the urban population and the army. The government also used the proceeds from selling surplus grain on international markets to fund industrialization and other development projects.

Through a business model lens, one could say the state forced input prices to stay low while selling industrial goods at a high price (jiandaocha). The surplus value (800 million yuan between 1953 and 1978) extracted from the market was used for industrial development.

剪刀差 (jiǎndāochā) = price scissors

The local farmers communicated with the party via the local cadres. Thus the local cadres had enormous power over the local population. They were sometimes referred to as tuhuangdi (土皇帝, tǔhuángdì) or local emperors.

When faced with the difficult situation of lack of control of your destiny and the feeling of oppression by the local party cadres, why not simply move for better opportunities?

In the mid-1950s, many farmers left their villages to find city work. Since cities were unprepared to deal with such an influx of migrants and the state needed the farmers to produce the grain for food, the state issued four documents to stop the flow of rural-urban migration. This system is known as Hukou.

户口 (hùkǒu) = household registration system

Hukou & Danwei (户口 & 单位)

The Hukou system, also known as the Household Registration System, is a system of household registration to register and identify individuals based on their residence.

Under the Hukou system, every individual is registered in a specific location, either rural or urban, depending on their family’s registered location. This registration determines their access to public services such as education, healthcare, social welfare, and housing.

The Hukou system divides the population into two categories: rural and urban. Rural residents are often excluded from many of the benefits of urbanization, such as access to better-paying jobs, social welfare, and education. They are often subject to discrimination in urban areas. Effectively, it made the Chinese village become a closed society.

With an urban hukou, one received Liangpiao (food rationing coupons). People without this coupon, such as rural migrants, couldn’t buy food in the city. Without an urban hukou, one couldn’t get housing in the city. Rural migrants had to get a letter of introduction from their commune cadres to stay in a hotel.

粮票 (liáng piào) = ration card

Urbanites also had a Danwei or registration for the urban work unit. The danwei linked a person to a place of work in the city. Under the danwei system, workers were not only employed by their workplace but were also provided with social welfare benefits such as housing, medical care, and education by their workplace. In addition, workers were expected to participate in political activities and study sessions organized by their danwei.

单位 (dānwèi) = work unit

The Danwei provided job security or, as it was often referred to: Tiefanwan (铁饭碗, tiěfànwǎn) or an iron rice bowl.

The polarity of the Chinese society, with, on the one hand, the cadre-bound farmers who were obliged to produce grain for the state and, on the other hand, the subsidized urbanites who received plenty of support from the state, was fertile ground for the eventual changes.

Baochan Daohu (包产到户)

Baochan Daohu is the practice of turning grain production over to the household. While many credit Deng Xiaoping with the introduction of the practice, in the book Kate Zhou argues that this transition involved an unplanned struggle between the farmers and the state that started decades before the official party policy.

包产到户 (bāochǎn dào hù) = household responsibility system

The book breaks down four phases of baochan daohu.

  • Phase 1: 1956-1957
  • Phase 2: 1961-1962
  • Phase 3: 1967
  • Phase 4: 1977-now

To recap the status quo: the agricultural reforms placed land under collective ownership, transferring it from the household to the local party cadre. The party cadre was responsible for managing food production and meeting the central government’s quotas. Families became members of the production team, brigade, and commune. Food distribution was according to the work points earned, ultimately dependent on the cadre’s decision-making.

Phase 1: 1956-1957

Following collectivization, farmers pressed for greater autonomy, including the freedom to engage in sideline production and marketing.

The term baochan daohu first appeared in Zhejiang Daily on January 27, 1957. It contained four elements:

  • Baochan daodui: output quotas for the production teams
  • Zeren daohu: each household responsible for the production quota
  • Dinge daoqiu: the output of land was fixed, and anyone responsible for the land would decide how many work points a worker could receive
  • Tongyi jingying: production and distributive decisions were made by the team leaders

This approach spread rapidly in parts of the Zhejiang province. It became known as the la niu tui she movement. However, the political response by Mao to this idea was quick and was framed as a capitalistic idea of a “nouveau riche” farmer. Eventually, the political movement led to an expansion of the collective system in 1958 and gave rise to the People’s Commune

Phase 2: 1961-1962

The Great Leap famine fundamentally changed the relationship between the state and the farmers as the farmers held the local cadres responsible for the famine. This opened the door for a renewed policy towards the rural people and a push for agricultural reforms. In various locations, local cadres experimented with different approaches. Two examples:

  • Sanbao yijiang (三包一奖, sān bāo yī jiǎng) ,or 3 contracts plus reward, was a system where the production team contracted with the production brigade to produce a certain quantity of grain at a certain cost with a certain labor force. Any surplus was retained as a reward.
  • Zeren tian (责任田, zérèn tián), or responsibility land system, was a system where commune members received work points according to the output of the land, and there was unified distribution within the collective.

An important note is that these systems did not provide rural people with freedoms beyond the scope of field management. Crucial decisions about farming were still handled at the brigade level.

The local successes were communicated to the central leadership and were initially met with support. A 1960 emergency directive from the central government called on production teams to have sanbao yijiang. It permitted farmers to have limited private land (5%) to produce sideline products. Deng Xiaoping supported the zeren tian system ~ “no matter whether the cat is black or yellow, the cat is good as long as it can catch mice.”

In July 1962, Mao launched an attack against zeren tian at a party conference. He launched the Socialist Education Movement (1962-1965), stripped provincial leaders supporting zeren tian of power, and forced farmers back to collective farming.

Phase 3: 1967

Farmers took advantage of the chaos of the Cultural Revolution (1966-1967) to press for the expansion of the household and the market. This took the form of civil disobedience and even armed struggle. However, not much is known about the extent of the protests. Many of the demonstrations were organized by a local central figure, allowing the party and local cadres to counter-act with precision.

The organized attempt to force collective farming during the Cultural Revolution was successful.

Phase 4: 1977 – Now

Following the Cultural Revolution, farmers’ resistance to collective farming took a silent but daily form. As the state pressed back against a farmer’s desire for independent agriculture, the movement went underground and on the defensive. Despite the many central government initiatives to increase the growth of grain production through the introduction of modern technology, grain production growth grew at low single digits. It did not keep up with population growth.

Mao’s death in 1976 gave farmers a new opportunity to pursue family autonomy. Unlike the previous attempts, the farmers did not try to organize or make demands from the central governments. Instead, they succeeded by making individual deals with local cadres and giving them more than they expected.

The idea is to incentivize the local cadres to allow family farming. The cadres would receive a significant percentage of the production surplus in return for more autonomy. This bargaining strategy worked best in poor areas where local cadres didn’t live in good conditions.

The combination of the corruptibility of local cadres and unorganized farmer’s individual deals allowed to break the collective dike. While the movement was not organized, baochan daohu spread through informal networks across villages. An important role is played by women whose marriages voiced their preferences.

This form of baochan daohu was different from the three previous versions:

  1. Farmers didn’t ask for land ownership. They didn’t riot. They didn’t fight the local cadres
  2. Farmers didn’t organize. They made individual deals with cadres.

This is a SULNAM: Spontaneous, Unorganized, Leaderless, Non-ideological, Apolitical Movement.

After baochan daohu, the family head again became the dangjiaren (master of his own house).

当家人 (dāngjiārén) = head of family

The response from local and provincial governments was supportive of baochan daohu. However, the support took different forms. Often the governments would initiate reforms that mimic the effect of baochan daohu without formally adopting shared practices.

The response from the central government was not supportive. At the Third Plenum of the 11th Party Congress in 1978, the state specified that baochan daohu was illegal. Note that Deng Xiaoping was deeply involved in drafting the resolution.

It was not until 1981, when Chen Yizi (陈一咨), a research fellow and government adviser, submitted a report about the impact of baochan daohu to the reform leaders, that the central government would consider supporting the practice. The report, titled “The Dawn for the Rural Area, the Hope for China – Report of a Survey on the Implementing of ‘Baochan Daohu’ in the Rural Area in Anhui Province,” provided evidence that baochan baohu improved productivity and the living conditions for all. After reading this report, on May 31, 1981, Deng Xiaoping discussed the “baochan daohu miracle” with a few senior leaders.

Deng and his reform leaders facilitated the spread of baochan daohu in 1983, following the evidence of increased productivity. In January 1983, the central government formally recognized baochan daohu and encouraged its development in rural China.

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Xi Jinping’s 10 Concentric Circles of Core Strategic Interest

globe in close up

In this blog post, you can find a summary (with additional notes) of Xi Jinping’s 10 Concentric Circles of Core Strategic Interest as outlined by the Honorable Kevin Rudd in his book The Avoidable War which is likely the most important book I’ll read this year.

It takes courage to not only provide, in great detail and in a respectful manner, careful context to the current mindset of Chinese political leadership but to do so with neither the cynical view of the inevitability of Thucydides’ Trap nor the naive view that things will simply find a way to work themselves out for the best.

I’m not in the position to argue the merits of the proposed Managed Strategic Competition framework, but I certainly subscribe to its aspirations and long-term goals. The book’s an excellent read for anyone who thinks understanding China’s goals is relevant to their business today and in the future.

I don’t claim any ideas or insights provided in this blog as my own. I’m merely providing the summary and notes for those looking for a primer. If you want more context on this topic, please go buy the book.

#1 – Centrality of Xi Jinping & CCP

The underlying axiom of Xi Jinping’s leadership is as follows: to ensure a prosperous future for the Chinese people, the Chinese Communist Party (CCP) must remain in power indefinitely, and Xi Jinping is the only person capable of leading the CCP.

The axiom predicates on Marxist-Leninist ideology that proposes the establishment of a socialist dictatorship by the people as a prelude to achieving communism, as opposed to the (capitalist) dictatorship of the elite.

To understand the CCP and Xi, you must accept they are True Believers of the ideology, just like the Soviet leadership was under Stalin.

Sidenote on Stalin, to quote biographer Stephen Kotkin: “But from the secret archives, what we’ve learned is that behind closed doors when these guys didn’t expect anyone to overhear, they talked like Communists: of class warfare, kulaks, global imperialism, finance capital. It was not just about personal power, careerism, and control. They were, to a great degree, true believers. There was a deep intellectual and emotional commitment to Marxism. This applies in spades to Stalin.” https://www.pushkinhouse.org/blog/interview-with-stephen-kotkin

Once you accept that the ideology is fundamental to Xi and the CCP’s worldview, you can frame the CCP’s existential struggle to remain in power. From this perspective, it’s only natural to understand that the party is haunted by the 1991 fall of the Soviet Communist Party. China is now one of only four remaining communist countries next to Cuba, Laos, and Vietnam. And, by far, the most significant power.

The obsession with the fall of the Soviet Communist Party and viewing it as a great tragedy also aligns with Xi’s friend Vladimir Putin’s perspective on the matter. It seems like something Xi and Putin can intellectually and perhaps emotionally bond over.

It also deserves to be mentioned that the CCP has deeply studied what caused the fall of the Soviet Communist Party. Long story short, the fall is attributed to weak men unable to stop the forces that brought down the party. The CCP has vowed this will not happen to China, which naturally requires strong men to lead the country.

That isn’t to say there have never been discussions inside China about whether it should transform into a multi-plural social democracy. Discussion took place since Deng Xiaoping was in power. However, after decade-long consideration, in 2001, the CCP concluded that there should be only 1 party and that a single-party system was fundamental to the long-term survival of China. Note that the CCP came to this conclusion long before Xi Jinping rose to power.

Under Xi, however, there’s been a transition to a more forceful ideological nationalism. The Chinese system used to be described softly as “Socialism with Chinese Characteristics.” However, Xi frames the system as part of “China’s historical greatness, across its dynastic history, always lay in strong, authoritarian, hierarchical Confucian governments.”

On a personal level, Xi Jinping aspires to secure his leadership position and legacy to the level of at least Mao Tse-tung but definitely surpassing Deng Xiaoping.

This is already the case with Xi Jinping’s speeches and writings, formerly adopted by the CCP as Xi Jinping Thought, similar to Mao Tse-tung Thought and exceeding Deng Xiaoping Theory.

The CCP identifies Five Poisons as the five main perceived threats to the stability of CCP rule as follows:

  • Uyghur supporters of the East Turkestan independence movement
  • Tibetan supporters of the Tibetan independence movement
  • Adherents of the Falun Gong
  • Members of the Chinese democracy movement (including Hong Kong)
  • Advocates for the Taiwan independence movement

They are a thread because (1) they provide an alternative vision of China, and (2) they operate inside and outside China.

A short word on the United States: Xi and the CCP see the United States as the only force capable of stopping China’s inevitable rise to global superpower. This preoccupation with the United States as the primary blocking object standing between China today and China’s future permeates throughout Xi’s strategic and tactical analysis ranging from reunification with Taiwan to transforming into a self-sufficient domestic economy.

The distrust of the United States is rooted in the complex history of post-Qing China and the CCP’s rise to power. Below is a timeline with the most relevant events:

  • 1882: US Chinese Exclusion Act prohibits all immigration of Chinese laborers for 10 years. It was the only law ever implemented to prevent all members of a specific ethnic or national group from immigrating to the United States.
  • 1911: Xinhai Revolution against the Qing emperor under the lead of Sun Yat-sen, then studying and raising funds in the United States
  • 1912: the founding of the Republic of China by Sun Yat-sen’s KMT
  • 1917: United States enters World War I and calls upon China to join and send troops to the front. China agreed with the understanding that the German territories in the Chinese province of Shandong would be returned to China after the war was won
  • 1921: the founding of the Communist Party of China (CCP)
  • 1921: “big three” reject all of China’s demands at Versailles to appease Japan, leaving China disillusioned to the core
  • 1922: The United States fails to support Sun Yat-sen’s newly formed government, even though it is modeled after American democracy, against the local warlords. This forces Sun Yat-sen to call upon Moscow for strategic support.
  • 1923: Soviets help establish friendly relations between KMT and CCP to defeat the warlords and unify China
  • 1925: Sun Yat-sen, the founder of the Republic of China, dies and is succeeded by Chiang Kai-shek
  • 1928: the reunification of China following the defeat of the last of the warlords during the Northern Expedition
  • 1929: KMT and CCP are preparing for civil war; with KMT looking to the United States and CCP looking to the Soviet Union as respective allies
  • 1931-1937: United States assistance fell short of KMT military and financial needs against the Japanese invasion and communist insurgency. In the end, the United States withdrew support for KMT, fearing direct conflict with Japan. This resulted in enormous losses of Chinese lives fighting against the Japanese.
  • 1946: US fails to clarify to what extent it would help the KMT against the CCP in the civil war. It stops military and financial support for the KMT and misguidedly aims to reconcile nationalists and communists. Meanwhile, the Soviet Union continues its military support for CCP.
  • 1946: US fails to sufficient distance itself from the KMT to make CCP (Mao) believe it is a reliable ally; therefore, Mao concludes the Soviet Union is the only reliable ally
  • 1949: Founding of the People’s Republic of China (mainland) and retreat of the KMT and its Republic of China to Taiwan
  • 1949-1960: further deterioration of China-US relationship
  • 1971: Nixon and Kissinger’s “Opening to China” + Zhou Enlai’s “Ping-pong diplomacy” was positively received by Mao Tse-tung. Positive reception predicates on
    • Deterioration in Sino-Soviet relationships post-Stalin, creating a threat on China’s northern border
    • Economic implosions of the Great Leap Forward and Cultural Revolution
    • DOES NOT predicate on CCP’s reappraisal of western values or ideals, but pure pragmatic survival
  • 1972: Shanghai Communique representing the United States’ first diplomatic negotiations with PRC since its 1949 founding
  • 1979: formal diplomatic normalization
  • 1979: US Taiwan Relations Act
  • 1989: US sanctions following Tiananmen Square are only temporary
  • 1989: Final agreement on the Sino-Soviet border after 300 years of dispute revitalizes the Sino-Soviet relationship
  • 1991: Fall of the Soviet Union; CCP politically and ideologically horrified about the implosion of Soviet communism, however, sees upside that this eliminates Soviet long-term threat to national security. This eliminates a key strategic rationale for the Sino-US relationship since 1970.
  • 1996: China launches missiles into waters around Taiwan to discourage democratic elections prompting the US to respond by showing political and military support
  • 1997: Asian Financial Crisis prompts Chinese thinking to reappraise the benefits of the laissez-faire, free-market, anti-state approach by the IMF
  • 1998: Chiang Mai Initiative was proposed by China as an alternative to the American-led IMF when stabilizing measures are needed
  • 1999: US-guided missiles strike the Chinese embassy in Belgrade during Balkan War. The US claims accident: China claims deliberate attack
  • 2001: China admission to the World Trade Organization, opening up global markets
  • 2001-20xx: US “war on terror” post-9/11 helps China to position itself on the international platform as a reasonable counterweight against Western aggression
  • 2008: Financial crisis originating in the United States is to China:
    • (1) proof of the weakness of the capitalist system
    • (2) proof that the weak American system can cause damage around the world
    • (3) opportunity to position itself as the engine of global economic recovery

#2 – Maintaining and Securing National Unity

Suppose we accept the CCP’s core belief that they must remain in power to ensure the long-term survival of China. In that case, it is logical to accept that anything that would challenge this power represents an existential threat to the CCP and the Chinese people.

Taiwan

This alternative is no better exemplified by Taiwan because it represents a parallel, successful, functioning, democratic version of the Chinese society built by the CCP post-civil war. Furthermore, Taiwan has also proven it is possible to transition from a single-party authoritarian state to a multi-party democratic state with minimal bloodshed. Therefore, Taiwan is not only an alternative vision of China but also a blueprint for democratic transition.

China’s approach to Taiwan has been under the motto “One Country, Two Systems,” which is also used for Hong Kong and Macau. The underlying idea is that the countries would naturally transform into a single system through economic entanglement over time.

However, this is a historic miscalculation that not only China but also the West made. The West expected that the economic integration of China with the world economy would lead to a natural transformation into a modern liberal Western democracy. Similarly, China hoped that the economic integration with Taiwan would lead to a natural transformation into a One China.

The expectation that economic integration leads to political assimilation is also present in today’s Europe Union, which is under constant stress (as evident during the 2014 Financial Crisis).

Of course, neither happened.

If anything, the economic fruits borne from the increased economic interaction are always seen as evidence that the system in place is, in fact, successful. So, China believes it has proof that the Chinese system works, and Taiwan believes it has proof the Taiwanese system works.

In addition to the false idea that economic integration automatically leads to cultural and political assimilation, there’s also the aspect of national identity developing over time. Taiwanese people born and raised in the 1950s and 1960s may still feel strongly connected to the Chinese identity through family ties. However, this is much less so for Taiwanese born in the 1980s and 1990s, as they have much less personal experience with the mainland Chinese identity.

In other words, the feeling of national unity isn’t present because there’s no shared national identity. Hong Kongers feel Hong Kongese, and Taiwanese feel Taiwanese.

This directly threatens the CCP’s need to maintain and secure national unity and resulted in the 2019 actions in Hong Kong. The protests and China’s response popped the bubble of any Taiwanese believing in the “One Country, Two Systems” mantra.

From China’s perspective, that leaves only a few options available to force the reunification with Taiwan: political isolation, economic debilitation, or military coercion.

Political isolation is an ongoing process with China systematically peeling away Taiwan’s international partners with the promise of economic benefits.

Economical debilitation is an ongoing process, both direct and indirect. A direct approach is exemplified by China’s ban on its citizens traveling to Taiwan as individual tourists in 2019. Indirectly, China can use its position within international institutions to prevent or slow Taiwan’s international trade growth.

Military coercion is not currently on the table but is inscribed in China’s anti-secession law as a means of last resort in case all possibilities for a peaceful reunification are completely exhausted. https://www.mfa.gov.cn/ce/ceus/eng/zt/999999999/t187406.htm

Tibet, Xinjiang, Inner Mongolia, Hong Kong, & Macau

Taiwan’s situation is unique, to say the least. In addition to the specific historical setting, it’s the only region separate from the mainland by sea. That distinguishes it from the situations in Tibet, Xinjiang, Inner Mongolia, Hong Kong, & Macau, which are connected to the mainland.

Xi and the CCP have identified three evil forces threatening national unity: splitism, extremism, and terrorism. It utilizes these three forces to justify its actions in any of these regions.

The observation that a slow, gradualist approach to reunify Taiwan and Mainland China has failed, combined with the emergence of a solid national identity in Hong Kong and Taiwan, has made China take more active steps in ensuring national unity.

In 2019, when Hong Kong protestors took to the streets against a draft extradition law, the Hong Kong government, backed by China, forcibly struck down the protests. It eventually enacted the Hong Kong National Security Law. This effectively ended the “50 years period of one country, two systems” principle, which China had agreed to as the condition for the peaceful handover of Hong Kong from the United Kingdom.

Similarly, in Tibet, Xinjiang, and Inner Mongolia, the Chinese government has acted with increased aggression to impose a unified Chinese national identity and culture upon the local population. The CCP considers the regions potential sources of “three evil forces” threatening national unity: splitism, extremism, and terrorism. It utilizes these three forces to justify its actions in any of these regions.

Xi is indifferent to the solid and sustained international reaction against Chinese actions in or against Taiwan, Hong Kong, Tiber, Inner Mongolia, and Xinjiang. He believes that the national security imperative of “complete security” is more important than any foreign policy or reputational cost to the regime.

Furthermore, Xi is encouraged by the fact that the rest of the world is, to various extent, dependent on the Chinese economy. Thus, he believes international political reactions are primarily symbolic, largely superficial, and entirely temporary. This understanding is supported by the fleeting nature of the political and economic sanctions following the 1989 Tiananmen. It was re-reconfirmed by the reaction to the 2019 Hong Kong crackdown.

#3 – Growing the Chinese Economy

Xi’s understanding of modern economic theory is allegedly relatively limited. While he is primarily driven by Marxist-Leninist ideology, Xi understands that ensuring economic prosperity is fundamental to political legitimacy and national unity.

The relationship between an authoritarian regime and its people is often described as an unspoken, unwritten social contract. In this social contract, the people accept giving up their freedoms in favor of economic growth and higher living standards. However, as Stephen Kotkin points out about Putin’s Russia, “There is no contract. The regime doesn’t provide the economic growth, and it doesn’t say, Oh, you know, we’re in violation of our promise. We promised economic growth in exchange for freedom, so we’re going to resign now because we didn’t fulfill the contract.” https://www.newyorker.com/news/q-and-a/stephen-kotkin-putin-russia-ukraine-stalin

It’s crucial to frame the economic discussion within the context of Xi’s first core strategic interest of staying in power. Therefore, economic prosperity is merely a practical tool to secure national unity; unity is a prerequisite for ensuring CCP remains in power. While Xi recognizes economic prosperity is a powerful and primarily peaceful tool, economic prosperity is not the only tool available to safeguard national unity.

Furthermore, Xi also believes for China to defend itself, it must build power that isn’t reliant on external partners, systems, manufacturing, or technology.

Xi has identified Five Major Challenges when it comes to the economy:

  1. How to maintain economic growth to provide employment and support rising living standards while …
  2. … maintaining the optimal balance between state and market without ceding party political control to entrepreneurs
  3. How to better distribute the benefits of economic growth, so economic inequality is reduced
  4. How to impose carbon constraints to deal with environmental challenges without harming economic growth
  5. How to manage the external economic pressures from the United States on trade, investment, and technology

Under Xi Jinping, China’s political economy has undergone four transitions. I will briefly cover the first three and provide more detail with the fourth.

Pre-Xi: “Reform and Opening-Up”

The Pre-Xi economic strategy was designed under Deng Xiaoping and focused on rapid GDP growth to join the developed world as quickly as possible. The model turned China into the world’s manufacturing powerhouse as it focused on labor-intensive, low-wage manufacturing for export. It was characterized by high levels of state investment and a significant role for state-owned enterprises (SOEs). Any environmental impact resulting from the rapid economic growth was largely ignored.

2013-2015: “Adopting The Decision.”

Following the appointment of Xi Jinping as the General Secretary of the Chinese Communist Party in 2012, the first phase of Xi’s economic transition began with the adoption of “The Decision.” The Decision was a set of sixty decisions related to specific economic reform.

A key decision was to let the market forces play a decisive role in the economy. This follows the economic success resulting from engaging with an open, international free market during the previous three decades,. Furthermore, the party would encourage rapid expansion of private enterprise in the services, financial, and technology sectors as the new engine of economic growth. Of course, SOEs still played a significant role in ensuring Party control over the economy. Lastly, the party would uphold new principles of environmental sustainability.

2015-2016: “Deleveraging.”

The Great Deleveraging was sparked by the 2015 Chinese Financial Crisis, caused by the proliferation of private margin-lending to invest in speculative assets. Xi interpreted the cause and effect of the crisis as ideological confirmation that reckless expansion of capital is harmful to society as a whole.

Among the many measures taken to stabilize the equity markets include a general halting of 2013 market reforms favoring a more market-oriented economy and imposing tighter capital controls.

2019-2020: “Return to 2013.”

Halfway through 2018, it was clear that economic growth was slowing significantly. The reason was two-fold.

First, the actions taken during and after the 2015 Chinese Financial Crisis made it more difficult for the private sector to acquire the capital and business confidence needed to expand domestically and globally. By 2018, the private sector was responsible for 90% of job growth, 80% of urban development, 70% of technological innovation, and 50% of the country’s taxation. The US-China Trade War and tariffs also played a role.

Xi offered a multilayered response to the 2018 economic growth challenges.

  1. First, the new “Institutional Economic Reform” represents a partial return to the 2013 blueprint.
  2. Second, reiterating the centrality and importance of private enterprise as China’s principal economic growth engine
  3. Third, the internationalization of specific industries allows for foreign competition to enter the market with the goal of improving the domestic effectiveness of the credit-allocation system for private enterprise
  4. Fourth, internationalization of trade, investment, and IP standards to resolve the ongoing US-China trade war
  5. Fifth, Financial stimulus to artificially prop up the economic growth

2020-now: “New Development Concept.”

The 2018 US-China Trade War profoundly affected Xi. It confirmed his personal bias and fear that external US power could undermine China’s growth strategy. This experience has sharpened Xi’s pre-existing economic worldview in a more ideological, conservative, and nationalist direction.

The New Development Concept is Xi’s economic strategy with which he aims to guide China through an increasingly dangerous world. It is meant to “ensure our survival” through “foreseeable and unforeseeable storms.” Xi understands that national power relies on economic as well as military power.

The ideological root of this economic strategy goes back to 2017 when Xi announced the Principal Contradiction facing the Communist Party had changed. “Principal Contradiction” is a key theoretical term in old-school Marxist dialectical materialism. Xi’s use of it illustrates once more that he’s a True Believer in communism.

Since 1981, the principal contradiction the party had identified and worked to resolve was “the ever-growing material and cultural needs of the people versus backward social production.” It was resolved with the central task to generate rapid GDP growth by reform and opening up.

In 2017, Xi identified the new principal contradiction: “the ever-growing people’s need for a better life versus unbalanced and inadequate development.” It is to be solved with a more balanced, better-quality development across regions and sectors.

The New Development Concept is rooted in Xi’s fondness for the real economy of physical goods and assets over Xi’s disgust for the fictitious economy of speculation and financialization. This is another ideological Marxist perspective that considers that the fictitious economy produces noting of material value while extracting wealth from the middle-to-low-income class.

The new economic strategy also serves Xi’s core priorities of protecting China and the CCP against external or internal opposing forces. The New Development Concept rests on three main pillars forces that can be summarized as follows:

  • Common prosperity: prioritize security, political stability, and economic equality over rapid individual wealth accumulation
  • Dual circulation: prioritize societal cohesion over economic efficiency
  • Self-sufficiency: prioritize national self-sufficiency over the benefits of open international exchange

Prioritize national security, political stability, and economic equality over rapid individual wealth accumulation.

This opposes directly Deng Xiaoping’s economic strategy of rapid GDP growth, which allowed “some people and some regions to become prosperous first, for the purpose of achieving common prosperity faster.” Deng’s strategy is best captured with his slogan, “to get rich is glorious.”

Xi Jinping realizes that private wealth accumulation may lead to alternative sources of power than the party. Preventing wealthy individuals from becoming too powerful suppresses rising internal, opposing forces from materializing. This is best illustrated with the broad crackdown on technology firms exemplified by the public humiliation of Jack Ma..

Xi no longer cares what the billionaire class thinks is the best direction for China. He no longer cares if they lose money as he pursues his core national strategic priorities.

Prioritize social cohesion over economic efficiency

This force aligns with the priority of the second core strategic interest of national unity over the third core strategic interest of growing the economy.

Xi Jinping realizes it’s not safe to rely solely on the expectation of continuous economic growth as glue to hold the nation together. Likely, the experiences of the 2015 Chinese Financial Crisis, the 2018 Trade War, the 2018 Economic Growth Slump, the paradox of a communist society with great income inequality, and the increasing dissatisfaction of the Chinese youth with the economic injustices have led Xi to conclude that a more robust, unified social cohesion is required to hold the nation together in case the economic growth falters (as this would be a sign of the CCP breaking the unwritten, unspoken social contract).

The refocus on social cohesion and shared culture falls under “Common Prosperity.” It has materialized in different ways, from the crackdown on video games and entertainment celebrity worship to the plans for cultivating masculinity in schoolboys. Furthermore, there’s an ongoing discouragement on exposing Chinese youth to international culture, including banning foreign teaching materials. Xi Jinping wants the Chinese youth to show nationalistic virility and become patriotic, productive citizens. He utilizes a mix of paternalistic, Confucian, and Leninist morality.

The Common Prosperity goal is positioned as completing Deng Xiaoping’s economic strategy of “first some get rich as a shortcut to achieving common prosperity.” Xi, therefore, places himself above Deng Xiaoping, as he aims to achieve what Deng couldn’t.

While Xi no longer cares about the billionaires, he does understand that private enterprise is not only a key driver for the economic growth engine but also an important source of wealth distribution

  • Primary: market wages
  • Secondary: state spending
  • Tertiary: (forced) philanthropy

Prioritize national self-sufficiency over the benefits of open international exchange

The desire to ensure national self-sufficiency mirrors Mao Tse-tung’s obsession to eliminate all vulnerabilities to any pressure from the outside world. The desire to achieve self-sufficiency goes hand in hand with the vision of a dual-circulation economy.

The dual-circulation strategy is a conscious reversal of Deng Xiaoping’s “great international circulation.” It aims to increase economic growth mainly by (1) meeting consumption demand from the growing domestic middle-class (internal circulation) and (2) transitioning the global economic engagement from labor-intensive, low-wage manufacturing for export to high-value imports and exports (external circulation).

The desire for self-sufficiency and the transition away from low-wage manufacturing is best exemplified by the Made in China 2025 national strategic plan.

Where China cannot be self-sufficient in the short term, Xi aims to diversify its economic engagements to minimize the power of a single trade partner. That primarily means economic decoupling from the United States. The economic decoupling debate centers around five main topics: trade, investment, technology, capital, and currency.

Trade

  • China aims to be less reliant on export for GDP growth and shift focus to domestic consumption
  • China aims to reduce the relative importance of the US for export while staying the most important import partner for the US. It will diversify its export to European Union, Japan, Korea, Indonesia, Southeast Asia, and Belt-and-Road Initiative countries.
  • China has signed Regional Comprehensive Economic Partnership (RCEP) and is an applicant to the Comprehensive Progressive Trans-Pacific Partnership (CPTPP)

Foreign Direct Investment

  • China aims to further reduce reliance on US FDI, even though FDI as a whole is still relatively small in China. For example, by increasing FDI with European Union through the China-Europe Comprehensive Agreement on Investment (CECAI)
  • China accepts (temporary) market reforms and the entrance of international competition in specific industries where it sees a need

Technology

  • China missed out on the first three industrial revolutions (fossil fuel, electricity, digital) and aims to be the first mover of the fourth revolution (artificial intelligence)
  • Made in China 2025 + New Generation Artificial Intelligence Development Plan
  • Key battlegrounds: data for algorithm development, advanced semiconductor manufacturing, and commercial application

Capital Markets

  • US and China capital markets are too intertwined to suggest east decoupling
  • China is still eager to have access to the large US capital market, whereas the US is taken active steps to prevent China from access

Currency

  • Maintain the managed float of the Renminbi as a tool to help achieve economic goals
  • Limited role of the Renminbi as global currency due to refusal to open the country’s capital account and free float. While the RMB is part of the IMF SDR basket, only 2% of global reserves are currently held in RMB
  • China aims to have a first-mover advantage in the digital space with the international digital RMB, becoming the preferred reserve currency in the developing world (as opposed to the US Dollar). The ultimate goal is that the international RMB is the basis of geo-financial and geopolitical power to protect China from external pressures

#4 – Environmental Sustainability

Everyone’s aware of the high environmental cost of China’s rapid economic growth in the past third-five years. So are the Chinese. Over the past decade, there’s been an increasing demand from the Chinese to have a clean environment as part of the unwritten, unspoken social contract between the Chinese Communist Party and the Chinese people.

Three overarching core strategic interests of the CCP drive the necessity to focus more intensely on environmental issues.

  1. The ability to which the party can provide a clean and sustainable environment for the people adds or subtracts to the political legitimacy of the ideology
  2. A rising global focus on climate change can put China in a vulnerable position; thus, it’s in the party’s interest to safeguard the country from any political or economic impact of climate change
  3. The party can legitimately position China as a global citizen or even global leader if its success with its Green Belt-and-Road Initiative after the abandonment of coal diplomacy in 2021

The party realizes environmental devastation threatens the future of China’s economic development and, ultimately, national security.

Furthermore, the party realizes that the absence of the United States at the forefront of the climate change debate provides two opportunities. One, it puts China in a favorable negotiation position vis-à-vis the United States. Two, it helps demonstrate China’s capability for global leadership.

#5 – Modernizing the Military

Military power is fundamental to ensuring domestic security and projecting global power. Under Xi, China aims to become a “peer competitor of the United States in all areas. This shall guarantee that:

  1. The perceived historical failure of the Red Army to step in against the anti-communist revolution in the Soviet Union will not be repeated in China
  2. China cannot be forced by the United States in any arena or dispute
  3. China can use its ability to provide security through its military power as leverage with third-party nations, similar to the United States

Under Xi, the military has undergone a distinct modernization. China now sees informationized warfare as the fundamental condition for the successful prosecution of modern warfare.

Under Xi, the original time plan for achieving a “world-class” military has been brought forward from the original 2035 target to 2027. Bringing forward the date may hint toward an early military attack on Taiwan or may just be a way for Xi to encourage military leaders to show more decisive leadership.

The term “world-class” is defined explicitly in Chinese strategic literature as one that can compete effectively with any world-class adversary overall, possessing a strength and deterrent capacity to match them. It implies the military should have transregional and transcontinental force delivery capabilities.

A critical part of addressing the challenge of informationized warfare is the establishment of the PLA Strategic Support Force (PLASSF). The PLASSF is a regional command structure for strategic support which integrates all of China’s space, cyber, reconnaissance, and electric warfare capabilities.

Under Xi, the ground force (PLA) has been reduced in size and budget. It has three priorities: supporting an amphibious assault on Taiwan, dealing with threats in China’s western theatre (i.e., India), and dealing with domestic and foreign terrorist threats.

Contrary to the ground forces, the PLA Navy (PLAN) has significantly increased in size and budget. That’s only logical considering China sees the next major threat coming from the sea rather than land. This includes conflicts in the East China Sea, South China Sea, Taiwan, and access to the Pacific.

The PLA Air Force (PLAAF) has also increased in size and number, primarily to support its naval activities.

Xi also created a new PLA Rocket Force (PLARF), which integrates China’s nuclear and rocket capabilities. Its goal is to become the fourth force on equal footing with the ground, air, and naval forces.

Under Xi, China’s nuclear policy has shifted from “minimum deterrence” (to avoid Soviet blackmail) to rapid expansion (in case of scalation with the US). Its operational policy has also shifted from “no first use,” meaning to launch a nuclear weapon after surviving a nuclear attack, to “launch on warning,” meaning to launch a nuclear weapon as soon as a likely nuclear attack is detected.

Additionally, China does not clearly understand the United States’ redlines concerning nuclear warfare. Also, considering its limited nuclear arsenal, China is uninterested in discussing arms control with the US and Russia.

China’s defense operations are centered in the Central Cyberspace Administration Commission (CCAC). Its forces are split across three main agencies: PLA, Ministry of State Security (MSS), and Ministry of Public Security (MPS). The PLA focuses on military network warfare. The MSS focuses on gathering any type of military or civilian information. The MPS focuses exclusively on domestic affairs.

China’s military space program falls under the direct control of the Central Military Commission (CMC), and its operations are directed by the PLASSF.

The current evaluation of the overall US-China military balance is that China is closing the capabilities gap faster than anticipated. China is stronger closer to its shores, and strength declines as proximity to the mainland increases. However, this may change in the near future.

In simulated war games, the US is losing a battle over Taiwan in multiple scenarios. That gives China increased confidence should it see military intervention as necessary. The balance is unclear in the East China Sea against Japan and the US. Therefore, China will likely pursue a less aggressive road in the short term. In the South China Sea, where the US has no treaty obligations other than the Philippines, the balance clearly favors China, hence its continued aggression.

China also has the advantage that its form of central, authoritarian government can marshal the complete economic resources more easily.

China’s primary challenge to continued military modernization is budgetary. The military budget is already 10% of the overall budget. Thus further increasing is difficult. Furthermore, China’s budget is heavily reliant on proceeds from a continued fast-growing economy which is under pressure after a shift away from private enterprise.

Additionally, China may have awakened the American bear from long strategic hibernation with its recent actions.

Lastly, due to the limited recent real-world battle experience, it remains unclear whether the Chinese military is capable of fighting and winning wars.

#6 – Managing Neighboring States

China’s core strategic interest today is to reduce and eventually eliminate any significant threats along its border. Its strategic approach has been influenced by a careful study of the history of America’s Monroe Doctrine and its “spheres of influence” concept. Since the late 1980s, China has looked to modernize its policies toward its neighbors, prioritizing economic growth and culminating in the 2003 Good Neighbor Policy.

The Great Wall of China represents a historical recognition that defense along the border is fundamental for national security. However, while the Great Wall protected China from land invasions, it did not prevent the series of sea invasions from bringing the century of humiliation. This historical awareness is reflected in China’s military transformation under Xi.

China also has the modern understanding that national security is not just a matter of military preparedness but also requires political and economic diplomacy. China aims to develop and maintain positive and accommodating relationships where possible and compliant relationships if necessary.

A brief overview of China’s current relationship with its neighbors:

Russia is a “useful strategic asset” as China sees itself as the superior force but presents itself and treats Russia as its equal. The main driving force of the relationship is the personal relationship between Xi and Putin. Being on good terms with Russia is essential for China as it provides security on its Northern border, allowing it to focus on its Western and Southern borders.

India is a “problematic neighbor” as the border disputes remain a fundamental source of ongoing struggles. While bilateral relations improved during the Trump administration as countries were looking to hedge against the demise of the US, recently, US-India relations have improved again. While initially hesitant, now with more conviction, India is also a member of the Quad. The Quad is a strategic security dialogue between Australia, India, Japan, and the United States to counterbalance Chinese security domination in the Indo-Pacific region.

Japan is a “problematic strategic neighbor” as it’s a US-allied force in the East China Sea and is increasingly strongly aligned with democratic Taiwan. There is also an ever-present historical backdrop of the Japanese atrocities in China during the Second World War. During the Trump era, Japan sought to normalize relations, notably regarding managing the North Korea threat, but China misplayed its hand. Now relations are again deteriorating due to China’s diplomatic errors.

North Korea is an “all-weather ally” because it is a neighbor that will always be there. China has supported North Korea despite Xi and Kim’s difficult relationship. The Trump admin’s actions toward North Korea gave China a surprising opportunity to position itself on the international stage as a global leader.

South Korea is a “historic good neighbor” because of its shared cultural heritage and similarities. China believes this shared heritage will, over time, bring South Korea back within its direct sphere of influence. There’s a generational change in South Korea that feels less emotionally connected with the West post-Korean civil war. The pull of China’s economy, the growing anti-Japanese sentiment, and the recognition that China does not support armed reunification of the Korean peninsula have pushed South Korea in the direction of China.

Laos is a “Chinese satrapy.”

Cambodia is a “Chinese satrapy.”

Thailand is a “soon-to-be-former US ally” as its relationship with the United States has deteriorated after the 2014 US sanctions following the military takeover of Bangkok.

Myanmar is a “continued good neighbor” as China practices a pragmatic diplomatic approach with the changing government. The 2021 military coup was an annoying setback to the relationship after China had invested significantly in building the relationship with Aung San Suu Kyi.

Vietnam is an “open play neighbor” as it’s hedging its geostrategic bets against either China or US security risks. The relationship between Vietnam and China will always be against the historical backdrop of the border war of 1979.

Malaysia is a “good neighbor” with which China has normalized relations after a series of controversial Belt-and-Road Initiative projects

Singapore is an “open play neighbor” as it is a military partner of the United States. But after a formal reset of diplomatic relations in 2018, it is more sensitive to Chinese interests.

The Philippines is an “open play neighbor” despite being a formal US treaty ally. The Philippines is constantly re-aligning and re-positioning itself towards China and the United States to both benefits economically from China and maintain its historic security ties with the United States.

Indonesia is a “crucial neighbor” as it’s the main strategic battleground between the United States, China, Japan, and Australia for strategic influence and access to the South China Sea. The Indonesian government prioritizes economic development for its large, growing, tech-savvy population over military security support, which plays in the hands of China. China sees a great opportunity in closer collaboration with Indonesia and even offered it a seat in the BRICS grouping.

Xi identifies three mega-trends that are moving Southeast Asia steadily in the direction of China:

  1. The size and proximity of China’s economic footprint in the region provide an excellent incentive for SEA countries to, at the very least, maintain positive diplomatic relations with China.
  2. China’s strategic shift in the South China Sea from aggressively pursuing its sovereignty claims to prioritizing diplomacy based on joint economic development has alleviated some sources of hostility from SEA countries.
  3. Post-Obama, the United States has been largely missing militarily, politically, and economically from the region. Especially after it abandoned the Trans-Pacific Partnership (TPP) free trade agreement.

#7 – Securing China’s Maritime Periphery in East Asia & West Pacific

Whereas China considers the continental periphery “problematic,” it sees the maritime periphery as outright “hostile.” This view is, of course, rooted in the experience of the past 180 years where China remained exposed to Western aggression from the United Kingdom and France during the Opium Wars, Japan between 1895 and 1945, and the United States preventing China from taking back Taiwan.

China sees the region as strategically aligned against China; therefore, its primary objective is to fracture US alliances. America, without its alliances, would be considerably weaker. China claims these military alliances are a relic of the Cold War.

A militarily-politically weakened United States would yield sufficient doubt in American commanders about the possibility of winning an outright war against China. In China’s eyes, this doubt would cause the United States to simply not enter a war, even if provoked. Not over Taiwan, not over territorial claims in the East China Sea, not over territorial claims in the South China Sea. This fits nicely into Sun Tzu’s expression, “The supreme art of war is to subdue the enemy without fighting.”

Eventually, China aims to displace the United States as the dominant force in the Asia-Pacific region and push back US forces beyond the second island chain.

China uses two main tools to achieve this objective.

  1. Grow its military force such that, if needed, it can overwhelm the United States and their allies
  2. Leverage the economic appeal of the Chinese domestic market to build diplomatic relationships that undermine American leverage

One response from the West is the Quad. The Quad is a strategic security dialogue between Australia, India, Japan, and the United States that aims to counterbalance Chinese security domination in the Indo-Pacific region.

The Quad’s mantra is “to advance a free and open Indo-Pacific. Its spirit is “to strive for a region that is free, open, inclusive, healthy, anchored by democratic values, and unconstrained by coercion.”

There’s also a Quad+ which includes South Korea.

Despite a rocky start in the mid-2000s, due to changing strategic circumstances in the region, the Quad has revived since 2017. Since 2017, the Quad has evolved from an informal framework of cooperation to discuss regional security to, possibly, a future institutionalized security framework.

China’s response to the Quad has changed several times from initially marginalizing the forum as nothing more than a “headline-grabbing idea” to a “small clique aiming to start a new Cold War” warranting full-scale political attack.

Most recently, China has again pivoted on the Quad topic away from efforts to attack its members (“kill one to warn one hundred”). China now focuses on deepening strategic interactions with ASIAN countries through RCEP and CPTPP trade agreements. Essentially, the strategic aim is for China to “go bigger” than the Quad to preserve its regional influence.

A brief overview of China’s current relationship with its South Pacific neighbors:

Australia is a “pro-American neighbor,” which China sees as a middle-rank trade and investment partner. China is primarily targeting Australia to dislodge the Quad and reduce the US influence. However, it is met with significant pushback. This eventually resulted in a currently very strained relationship.

New Zealand is “America’s soft underbelly” in the Pacific as in the 1980s, it severed its post-war alliance with US and Australia. New Zealand was China’s first free trade partner in the developed world. However, New Zealand has deep historical and cultural ties with Australia. It has somewhat reluctantly joined the cause to oppose China’s punitive actions against Australia. Nevertheless, New Zealand is looking to increase defensive cooperation with China stating China is now firmly part of the international rules-based order.

Pacific Islands are “strategically important partners” for multiple reasons. First, the microstates historically have been politically aligned with Taiwan. Breaking the alliance weakens Taiwan’s international diplomatic status. Second, the microstates control a vast area of mineral and energy reserves that China wants to access. Third, it also has significant-sized fisheries, which China wants to tap into to feed its seafood-hungry population. Fourth, it provides China with a place to develop intelligence, security, and communications facilities to monitor activity in the Pacific.

The Pacific Islands have, historically, always relied on Australia as a proxy of the United States for support. However, Australia’s recent disregard for climate change action has put a strain on the relationship. Climate change is an existential threat for the Pacific Islands as rising sea levels could submerge the nations. China sees excellent alignment with its domestic environmental and climate change challenges and is looking to leverage this political opportunity. Additionally, China always leverages the economic angle as it does in all its diplomatic relations.

#8 – Securing China’s Western Continental Periphery

Beyond Asia, Xi’s priority is to project strategic, diplomatic, and economic power across Eurasia and the Indian Ocean to reach the Middle East, Africa, and Europe. China has used several institutional tools, including the Shanghai Cooperation Organization (SCO), the Conference on Interaction and Confidence-Building Measures in Asia (CICA), and of course, most recently, the Belt-and-Road Initiative (BRI).

The BRI consists of a trans-Eurasian Silk Road Economic Belt and a Maritime Silk Road across the Indian Ocean, through the Red Sea, to the Mediterranean. The BRI aims to accomplish a couple of goals:

  • Enhancing economic exchange with Europe and the Middle East
  • Securing a more benign strategic environment
  • Weening off American strategic influence
  • Stabilizing Islamic central and South Asia
  • Build up new markets to mitigate any potential future economic threats from the United States

The United States has recently pushed the Build Back Better World (B3W) as an alternative to BRI. However, for many countries in the developing world, BRI provides a better option. That’s because B3W typically targets higher standards, greater governance, value-driven, and sustainable projects. On the other hand, BRI has fewer demands on good governance or financial returns and is typically the only infrastructure funding program available.

It’s almost as if China’s employing the theory of disruptive innovation to geopolitics by providing a lower-cost alternative for access to capital.

The other side of this coin is that many BRI projects are not great investments from a financial perspective, causing several major projects to default. This has put the future prospects for BRI under question domestically. It may jeopardize future projects should a slowing domestic economy put further financial constraints on China’s budget. That said, within the Chinese framework, the “current leader cannot be wrong,” meaning moderating investments is the only likely course of action.

While BRI is an important economic framework, it does not represent the majority, let alone the totality of Chinese efforts.

BRI Central Asia

In Central Asia, security is the highest priority for China, given it may be a source of extremist support for the Muslim Uyghur. China’s leading BRI partner is Kazakhstan

Central Asia is an important new market for Chinese construction and infrastructure companies as the domestic demand slows.

China carefully balances the BRI framework against the Russian Eurasian Economic Union (EEU). Fortunately, it has developed a great sense of diplomatic touch and accommodates Russia’s sensibilities in the region. Furthermore, Russia and China have a shared concern over the long-term Islamization of the wider region.

BRI South Asia

Pakistan is China’s all-weather leading BRI partner in South Asia. It has a great interest in preventing the country from becoming a failed state following the economic decline and political instability. Furthermore, it is also concerned about further Islamizing Pakistani politics and preventing it from becoming a breeding ground for radical Islamist groups supporting the Uyghur population.

The China-Pakistan Economic Corridor (CPEC) is the main economic development plan, with the Port of Gwadar as the endpoint. Via CPEC, China aims to assist Pakistan in building energy, road, port, industrial, and telecommunications networks to support the rest of the BRI network. The Port of Gwadar is available to China on a 40-year lease. It will serve dual use of commercial and military purposes.

China’s main concern is that the region is notoriously unstable. So far, the Pakistani government has not been able to sufficiently guarantee the safety of CPEC investments.

Afghanistan is an even more problematic situation for China. After the chaotic US retreat, China is left by itself to help stabilize the country. However, China has a long-standing policy of non-interference. That implies respecting the sovereignty of any government and prioritizing cooperation regardless of ideology or politics. However, it is a national security concern to not have Afghanistan become a home base for Xinjiang separatists.

Therefore, it is uncertain how far its political and military engagements should go with the sovereign governments and Russia to ensure regional security and stability.

BRI Indian Ocean

The Indian Ocean is of primary national security concern, given that 80% of China’s oil imports pass through the Strait of Hormuz and the Strait of Malacca. To ensure security, the PLA has developed China’s “string of pearls, ” a series of ports across the Indian Ocean to support the long-term projection of Chinese naval power. These pearls are located in Bangladesh, Cambodia, Djibouti, Myanmar, Pakistan, and Sri Lanka.

With this approach, China is emulating the US playbook of rolling out a global network of port facilities and airfields capable of supporting a blue-water navy.

So far, partners have been very accommodating to China’s needs.

BRI Middle East

China is challenging and supplanting the United States as the region’s most important external power. However, China has no interest in replacing the United States as the principal external power.

Its principal concern is to secure its long-term energy supply. To do this, it has set up major joint venture investments across the region. Fortunately, the Gulf states are aware that business with the United States is declining due to domestic fracking. Therefore, China is becoming a more important buyer. It has also invested significantly in the high-technology industry (e.g., Israel) and the financial sector (participating in wealth funds)

As usual, China leverages its economic power to build and strengthen diplomatic relationships. But China’s non-interference foreign policy has also proven exceptionally successful in this challenging region. It has built friendly relationships across the region by constantly trying to distance itself from regional disputes and not taking sides.

Xi has successfully outflanked the United States in the Middle East at virtually every turn:

  • It has leveraged its economic strength and buyer power to secure better deals for its future energy needs
  • It has leveraged its economic strength and supplier power by providing access to Chinese goods, including military equipment
  • It has leveraged the region’s need to balance the reduction of US exports
  • It has leveraged the US’s poor handling of regional conflicts in the past decades
  • It has leveraged its non-interference foreign policy to make friends with states who are enemies (“the friend of my enemy is also my friend”)

The question remains whether China can continue its non-position-taking policy when binary choices have to be made in the future.

#9 – Increasing Chinese leverage across Europe, Africa, Latin America, and the Arctic

China’s global strategy is to increase its economic, foreign, and security policy influence across all regions. That includes Europe, Africa, and Latin America, considered important markets for Chinese goods, especially to mitigate reduced access to the American market.

Furthermore, China is always looking to secure a long-term supply of commodities and sources of foreign direct investment and capital flows.

Lastly, with its strong relations across the developing world, China can pull unprecedented political and diplomatic leverage in international institutions like the United Nations.

Europe

China has long looked at Europe through the pragmatic lens of win-win economic opportunity and engagement. This has only accelerated after the US-China trade war of 2017.

China recognizes that Europe constitutes a region with an extensive range of diverse cultures, each with a strong urge to maintain its own diversity. It has tried to leverage these differences with a divide et impera approach focused on smaller states. It aims to leverage the smaller states’ disproportional power in EU and NATO institutions to fracture unity on core questions. Examples are Hungary and Greece, but also China’s 16+1 summit mechanism.

A primary concern for China is that it sees Europe as the last remaining defender of global human rights norms. This is deeply problematic for China because it challenges the CCP’s domestic and international political legitimacy. If China could neutralize Europe’s unity on human rights, it would be a victory.

China also aims to reduce or extinguish Western confidence in the Western liberal-democratic tradition. That has been a long-term objective of the party, given it would provide a definitive answer to whether liberal democracy is the inevitable political destination for all humankind.

Europe has long sought to develop a cooperative relationship with China, culminating in the near agreement on the EU-China Comprehensive Agreement on Investment (CAI). However, this was put on hold in 2021. Europe’s concern with China is primarily:

  • China’s domestic market is still largely closed to European business, despite China’s access to European markets
  • China’s foreign direct investment into Europe is still minimal
  • China’s state-driven approach to the acquisition of technology presents national security concerns
  • The distinct difference in citizen privacy laws and their enforcement
  • National security concerns related to 5G technology 
  • China’s close collaboration with Russia and its positioning as a global security provider

Currently, there are three groups within Europe concerning the discussion on the geopolitical future of Europe.

The first group wants Europe to focus on strategic autonomy, staying neutral in the US-China struggle for global domination, and maximizing Europe’s economic opportunities.

The second group sees a crystal-clear division between the Western liberal democracies and China. It proposes aligning Europe with the United States and other Western nations against authoritarian states like Russia and China.

The third group sees nothing wrong with China’s conduct and suggests we can learn something from them. It proposes Europe should develop closer relationships with the future global superpower.

Latin America

There’s not a long history between China and Latin America, primarily due to the implication of America’s Monroe doctrine. However, since 2001 China has increased its visits to Latin America, which has only accelerated during Trump’s administration.

China’s regional interests include further diplomatic isolation of Taiwan (Panama, Honduras) and, of course, its economic interest. China sees Latin America as another excellent market for Chinese exports and a trading partner to secure a long-term supply of raw materials like oil, iron, ore, copper, and soya beans.

Xi has faced significant internal and external criticism for its support of Venezuela. The domestic criticism is that Venezuela has defaulted on a substantial quantity of loans which puts the sustainability of China’s loan strategy into question. External criticism is that many regional governments see Venezuela’s instability as a potential cause of mass immigration across the continent. However, Xi has pointed out that Venezuala is the “all-weather ally” in Latin America.

China has displayed a remarkable ability to balance the long-term strategy against short-term headwinds. A prime example is how they dealt with Brazil’s Bolsonaro. Bolsonaro directly attacked China during his 2018 presential election campaign, stating, “China is not buying from Brazil, China is buying Brazil.” Yet one year later, during a state visit to Beijing, he exclaimed the two economies were “born to walk together.”

Generally, the region has been accommodating Chinese diplomacy despite America’s warning of China as the “new imperial power.” Latin America seemingly welcomes China as a counterweight against the United States as it provides more leverage against the former sole superpower.

Africa

Africa has a long history of supporting China, rooted in Mao Tze-tung and Zhou Enlai’s leading role in the Non-Alignment Movement. African countries have never really been part of the American sphere of influence as they were mostly (negatively) influenced by the European colonial and post-colonial powers. Similar to Latin America, China provides African nations with the leverage it never previously had to stand up against European forces.

China’s economic interest in Africa is vast and deep. First, it sees Africa as a long-term energy and raw materials supplier. Second, it considers a growing billion-strong consumer market for Chinese goods in Africa.

Chinese political interest in Africa is rooted in the presence of African nations in international institutions like the United Nations. Via its diplomatic ties, Africa typically provides China a reliable block of votes in any multilateral forum whenever Chinese interests are at stake.

China’s ideological interests in Africa are to showcase its development model as superior to the West by proving the model also works in a non-Chinese setting. Xi Jinping has declared to “welcome Africa abord the express train of China’s development.” Ultimately, succeeding in China supports the global ideological ambition of delegitimizing liberal-democratic capitalism.

China’s investment interests focus on creating a win-win outcome that delivers tangible economic benefits to both parties. FDI typically comes with a lot fewer requirements than Western investment. Western investment generally has additional requirements that include the promotion of open democracy and free market mechanisms. It also requires ensurances to deliver on the promise. Even with the higher barrier to access, Western investment projects are often criticized for ineffective, strings-attached, and unpredictable investment. Despite the fewer requirements, China’s FDI still falls significantly behind that of individual European states. Furthermore, only 5% of China’s aid is from “non-loan” investments. That causes some to worry about potential debt-trap diplomacy.

China’s security interests primarily protect the Chinese citizens and investments in the region. However, China has set up a China-Africa peace and Security Initiative to broaden the security collaboration. Generally, African nations don’t seem to mind the increased presence of the Chinese military.

Arctic

In 2013 China became a permanent observer of the Arctic Council. Xi declared China to be a “polar great power.” China’s primary strategic interest in the arctic appears to be two-fold. First, tapping into the energy and mineral reserves that will be unlocked by global warming. Second, the emergence of a new maritime shipping route connecting the Atlantic and Pacific oceans. For this purpose, China has invested resources into jointly developing with Russia the Arctic Silk Road

Antarctica

China’s ambitions in Antarctica are primarily scientific activities for now. However, it appears China is also looking at exploitation sometime in the future. This is currently not allowed under the Antarctic Treaty.

#10 – Rewriting the Global Rules-based Order

Post World War 2, the United States and its allies constructed a liberal international rules-based order, including establishing the institutions required to manage it. Below is a brief list:

1944 Bretton Woods Conference

  • IMF = International Monetary Fund
  • WB = World Bank
  • GATT = General Agreement on Tariffs and Trade (later WTO)
  • WTO = World Trade Organization

China was present at the Bretton Woods conference but represented by the Nationalists under Chang-Kai Shek and not the communists. Russia was also present but refused the ratify the agreements stating they were mere “branches of Wall Street” and opposed the communist ideology.

1945 San Francisco Conference

  • UN = United Nations

China and Russia were present as inaugural members of the United Nations, with both having a permanent seat in the UN Security Council.

1948

  • UDHR = Universal Declaration of Human Rights
  • NATO = North Atlantic Treaty Organization

China, under the CCP, had always claimed it wasn’t included when the rules-based order was set up. Until recently, it was not in the position to challenge these rules, but now it is. China prefers the rules-based order versus the alternative, which is chaos (e.g., revolution). Before 2014, China showed little interest in playing a more significant role in international affairs. This is symbolized by Deng Xiaoping’s expression, “Hide your strength, bide your time, never take the lead.”

Since 2014, Xi Jinping has declared a new era of Chinese multilateral activism and has said China should “strive for achievement.” Under Xi, China has three approaches to challenging the existing liberal rules-based order.

First, grow support in the developing world to secure changes to existing norms and values that are inconsistent or offensive to Chinese interests and values.

Second, increase the influence within the existing institutions by increasing funding and installing Chinese or China-friendly candidates in senior leadership positions.

Third, create its own network of new multilateral institutions outside the framework of the existing institutions. This already started before Xi with the Chang-Mai Initiative (CMI) and Asian Monetary Fund (AMF) and has accelerated with, for example, the Belt-and-Road Initiative (BRI), Silk Road Fund (SRF), New Development Bank (NDB), Asian Infrastructure Investment Bank (AIIB), Shanghai Cooperation Organization (SCO), and Conference on Interaction and Confidence-Building Measures in Asia (CICA).

Xi has been helped tremendously in all three approaches by the systematic American withdrawal under the Trump administration.

Another angle to changing the global rules-based order is one of international standard-setting and regulatory frameworks. We are familiar with the topic of 5G telecom, where China aims to set the new international standard for telecommunication by directly supporting its national champion Huawei. Other examples include replacing the TCP/IP communications network architecture with New IP. But technology is not the only sector where China aims to lead the world toward new, China-friendly standards.

Generally, China has three approaches to imposing its standards for international regulator frameworks.

  1. If possible, simply have the superior proposal
  2. If possible, have a dominant global market share within the target segment such that your framework becomes the de facto standard
  3. If needed, leverage diplomatic ties to enforce the adoption of your proposal (even if it’s not equivalent to the Western proposal)

Xi is not entirely clear on what a new order should look like but has clarified that China will not simply replicate the current US-led order. Furthermore, there is no “grand blueprint.” Instead, Xi’s process of establishing a new global order follows the typically Chinese iterative trial-and-error process.

However, it is crucial to remember that Xi is fundamentally a True Believer in Marxism. When Xi declares China is in the process of building a “community of common destiny for all mankind,” it’s important to frame this within the Marxist-Leninist worldview, which sees state socialism as a superior governing mechanism to liberal-democratic capitalism.

Practically, China will continue to work on transforming the existing global governance system and offering Chinese Wisdom as an alternative perspective.