The mounting economic and technological conflict with the United States is hitting China’s economy at a difficult time. Harsh retaliation by China aga
The increasing intensification of the economic and technological conflict with the United States (and its allies) is hitting the economy of the People's Republic of China at a time when it is also struggling with major internal challenges. These include a persistent crisis in the real estate sector, a difficult financial situation in many municipalities, weak consumer demand and low investment by private domestic and foreign companies, which are being held back by a loss of confidence in the government's willingness to reform economic policy and major uncertainties regarding the development of the external economic and foreign policy environment. In this situation, harsh retaliatory measures against U.S. economic sanctions and restrictions, such as the U.S. ban on imports from China’s Xinjiang region, the CHIPS and Science Act with a prohibition upon grantees to invest in China and in particular the export controls on high-end chips and restrictions upon US-persons working in the semiconductor industry in China, would only exacerbate China's internal economic problems. They would likely lead to further uncertainty and loss of confidence, especially among foreign companies and investors, and further reduce their propensity to invest.
Statements made by the Chinese leadership during the National People's Congress (NPC) in March 2023 and plans adopted there indicate that the government has by then given priority to addressing internal problems in its economic policy. At the same time, the leadership is stepping up efforts to enhance the security of China’s industrial and supply chains and its self-reliance in science and technology, in order to make China less vulnerable to external challenges.
Promoting consumption and private investment
As to overcoming the weakness of China’s economy, boosting domestic consumption and strengthening private investment activity are seen as particularly critical. The political leadership is therefore seeking to regain the confidence of consumers and, above all, of private domestic and foreign companies and to reduce uncertainties in the business and investment environment. The new Prime Minister Li Qiang used an international press conference on the sidelines of the NPC to present himself as a business-friendly reformer. He confirmed a further opening of China’s economy to foreign companies and announced to promote the growth of private enterprises. He also emphasized the great opportunities that China's huge market offers to both domestic and foreign companies. In line with this, the government's 2023 Economic and Social Development Plan, which was adopted by the NPC, announces numerous measures to strengthen domestic consumption and promote private investment. The development of private firms and the private sector are explicitly mentioned as government goals. At the same time, the plan refrains from explicitly mentioning ideological terms with mostly negative connotations among private entrepreneurs and foreign investors, such as corporations’ "shared responsibility for common prosperity" or "dual circulation". This indicates that the Chinese government is willing to weaken ideologically motivated prescriptions, at least temporarily, in order to counteract the loss of confidence and the great uncertainties on the part of private companies and the accompanying weakness in investment activity. However, the plan repeatedly emphasizes the need for more central coordination and control, which is likely to be less well received by the private domestic and foreign companies.
To promote foreign investment, the government plan emphasizes a greater opening of the modern service sector. It also explicitly emphasizes the importance of promoting foreign investment in the manufacturing sector, however. The aim here is not only to attract higher-quality investment projects, but also to discourage foreign companies from reducing investment in China. The Chinese government also intends to continue to promote the establishment of research and development centers by foreign companies in China; however, unlike in the 14th Five-year Plan, the 2023 plan does no longer mention promoting the participation of foreign companies in national technology projects. It can be assumed that this reflects an even stronger emphasis on national security and autonomy in promoting technological development. In contrast to foreign investment in China, Chinese direct investment abroad is hardly mentioned in the 2023 plan. Their promotion is mentioned only in connection with cooperation for exploring overseas mineral resources.
With regard to the external environment, President Xi warned that the "comprehensive containment, encirclement and suppression of China" pursued by the U.S.-led West poses unprecedented severe challenges to China. Accordingly, in its 2023 plan, the government specifies "achieving industrial and supply chain security" as an important policy goal. Shortcomings and weaknesses in China's industrial and supply chains must be addressed and remedied rapidly, the plan insists. China's leading position in key technology industries (new energy vehicles, 5G and photovoltaics) should be consolidated. A functional transport of goods via important seaports and airports should be ensured to further help expand China's position as a strong trading nation. And to secure the supply of raw materials, increased efforts should be made to explore and develop mineral resources both in China and abroad.
As a further response to the increasing external challenges, the promotion of China’s "technological innovation capability and self-reliance in science and technology" – which was already specified as a primary goal in China’s 14th Five-year Plan (2021-2025) – is given even higher priority by the Chinese government at the NPC 2023. Stronger coordination, guidance and control by the central political leadership as well as substantive and far-reaching institutional reforms in the area of science, technology and innovation policy should enable China to successfully compete in the intensifying global technology competition and to stand its ground against external attempts at containment and suppression. The newly founded Central Commission for Science and Technology is intended to ensure the focused leadership of the Communist Party in the field of science and technology. The Commission oversees the implementation of the party leadership's directives by the Ministry of Science and Technology and coordinates science and technology policies with other civilian and military policies.
Increasing security of supply chains and self-reliance in science and technology
Increasing the security of China's industrial and supply chains and its self-reliance in science and technology may be seen as a primarily defensive policy aimed at safeguarding China's economic and social development against external challenges. At the same time, however, it can also be seen as means to strengthen China's ability to prepare for possible future countermeasures against perceived "containment policies" of the West. President Xi's unusually strong and direct criticism of the U.S. policy and the new Foreign Minister Qin Gang’s warning (also expressed on the sidelines of the NPC), that a confrontation would be inevitable if the U.S. continued on this path, should therefore also be understood as a warning of potential economic countermeasures and must be taken seriously. By hinting at its own existing and further expanding strengths in important fields of technology and, more recently, by announcing export controls for selected raw materials, China is signaling and sharpening its options for concrete countermeasures.
This text is a summary and update of the authors’ article “Wie China internen und externen wirtschaftlichen Herausforderungen begegnen will” published in German in “Wirtschaftsdienst: Zeitschrift für Wirtschaftspolitik.”