1、October 19, 2021MERICS CHINA MONITORCOURSE CORRECTIONChinas shifting approach to economic globalizationAlexander Brown, Jacob Gunter, Max J. Zenglein KEY FINDINGS Chinas leadership is trying to strike a balance between securitization and remain-ing globally integrated. Beijings policy response to ne

2、w geopolitical realities will have profound implications for the trajectory of domestic reforms and Chinas future global economic integration. Chinas commitment to hedged integration with the global economy has not changed, despite the hostile international environment. But it is increasingly on Chi

3、nas terms in stark contrast to the old liberalization mantra. China needs to remain connected to the global economy to achieve its goals of becoming a modern, technologi-cally advanced, and prosperous country. China seeks to reduce its reliance on essential external inputs. Trade and invest-ment lin

4、ks are being reshaped to be more resilient and to further Chinas development goals. The role of international exchanges has switched focus from exports and foreign investment to accessing strategic technology and know-how. China aims to internalize global value chains and finance by leveraging its l

5、arge domestic market. Onshoring the production of critical inputs by foreign companies in areas vital for China builds economic self-reliance and contributes to developing indige-nous alternatives, bringing their technology and production within the CCPs jurisdiction. Contrary to some interpretation

6、s, the DCS is not universally bad news for foreign companies. Expansions in market access in non-sensitive areas or in sectors in which China aims to onshore value chains mean new opportunities. However, protectionism, securitization efforts, new cybersecurity rules, and efforts to build supply chai

7、n resil-ience are simultaneously pushing out some foreign companies. Beijings pursuit of managed integration means its treatment of foreign firms dif-fers according to the industry and its strategic priority. Its variable approaches can be summarized as follows: Protect market share where local comp

8、anies are globally competitive, such as in network equipment Onshore foreign technology where possible, for example in the chemicals sector Create new opportunities for non-sensitive foreign investment, like in the auto-motive sector Import foreign technology where necessary, such as aerospace compo

9、nents Integrate with global financial markets and promote the yuan abroad, for example with greater access to foreign financial service providers Chinas changing views on global economic integration means that foreign firms are granted access to a market that resembles a fortress that is currently b

10、eing re-inforced. Foreign operations in China are de facto on a pathway to becoming more like a local Chinese entity rather than integrated in global networks. They are not decoupling from China, but rather decoupling their China operations from their global ones.| 3CHINA MONITOR | October 19, 2021Q

11、UARANTINE MERICS PEOPLEDATATRADETECHNOLOGYINVESTMENTChina is rapidly pursuing technological self-reliance, which it aims to achieve by developing local tech where possible, onshoring foreign providers where necessary (as encouraged in the 14th Five-Year Plan) and importing sup-plies from abroad wher

12、e there is no alternative.Chinas already miniscule number of foreign residents (0.06% of the population) faces even tighter restric-tions on entering the country as a result of the pandemic. 73 percent of European com panies report a negative impact from COVID travel re-strictions.Investment into Ch

13、ina re-mains restricted in many areas, but restrictions in non-sensitive industries are generally being removed. China overtook the United States as the worlds top destination for new for-eign direct investment in 2020, attracting USD 163 bil-lion in investment.China strictly controls access to info

14、rmation through the Great Firewall, which blocks over 300,000 domains. Meanwhile, new data govern-ance rules demand extensive data localization from com-panies in China, and tightly restrict cross-border data transfers.Despite ongoing trade dis-putes, trade in goods is mostly open and unrestricted.

15、Chinas share of global trade has sky-rocketed from 2.6 to 10.4 percent between 2000 and 2020, with Chinas trade in goods and services exceeding USD 5 trillion in recent years.Sources: National Bureau of Statistics, EUCCC Business Confidence Survey, State Council, World Bank, United Nations Conferenc

16、e on Trade and Development, Cornell UniversityChinas economic fortress: Beijing is tightening control over international exchangesCross border flows are under ever greater scrutiny| 4MERICS CHINA MONITOR | October 19, 20211. CHINA ADJUSTS ITS APPROACH TOWARDS GLOBALIZATION AMID RISING GEOPOLITICAL F

17、RICTIONSChinas gradual integration into the global economy has fueled its rise for 40 years. Yet this once-axiomatic economic driver has recently become far more contested, and its place within the party-states strategic vision for future development is consequently less certain. In the past, optimi

18、sm about Chinas integration into the global economy helped prevent any major confrontations. But today global interconnectedness is increasingly seen as a strategic vulnerability in China (and elsewhere) as growing economic rivalry and systemic differences have thrown up political frictions. In resp

19、onse, Chinas leadership has adjusted their approach to international economic engagement with profound implications for the trajectory of domestic reforms and Chinas future global integration. The policy shift towards the Dual Circulation Strategy (DCS) set out by President Xi Jinping in April 2020

20、focuses on managing Chinas interdependence with the world by emphasizing indigenous innovation and self-reliance. The shift has generated concern among Western politicians and observers, as it disrupts long-held, largely tacit beliefs that the eventual outcome of Chinas integration into the world ec

21、onomy would be gradual convergence of its economic and perhaps even political systems with Western norms. However, dual circulation does not signal any return to pre-reform Mao-era isolation. Chi-nas leadership is adapting its approach to globalization to manage risks in a more volatile global setti

22、ng. Despite the seemingly profound changes, the shift does not represent a rad-ical transformation in Beijings views on globalization and opening up. Chinas embrace of globalization and the liberalization of its economy since the 1980s was always marked by caution and experimentation; it was a strat

23、egy of hedged integration. At each step, the CCP leadership was mindful of economic and political risks, careful to balance the countrys needs and fears as they evolved (see Exhibit 2, p. 5).1 Although the motivation and priorities for opening up have changed with Chinas economic development stages,

24、 the key building blocks include: Catalyzing economic reform: Propelling structural reforms, and pushing back against conservative vested interests Strengthening marketization and competition: Exposing Chinese companies to for-eign competition to improve domestic supply, productivity, profitability,

25、 and innovation Securing technology and innovation: Accessing foreign technology and know-how to enable economic development and innovation Attracting capital inflow: Foreign investment boosts domestic growth, upgrades indus-try, and improves efficiency in Chinas financial markets. Deepening economi

26、c ties: Strong trade and investment ties help expand Chinas eco-nomic power. Real and prospective of opening Chinas market (even if just partially) helps secure market access for Chinese companies abroad for exports and investment.| 5MERICS CHINA MONITOR | October 19, 2021Chinas engagement with the

27、world is also no longer only a one-way street. Whereas China previously had to reform its economy to attract foreign investment, foreign companies can no longer afford to miss out on Chinas vast market opportunities. Since 2010, China has expanded its economic footprint: Chinese companies are ventur

28、ing overseas and buying foreign entities. Chinas greater international ambitions most visible in the Belt and Road Initiative (BRI) launched in 2013 to connect and unlock new markets reflect its growing economic weight and are accompanied by a perception of liberal market economies as being in relat

29、ive de-cline, and potentially inferior to Chinas political and economic system. Nonetheless, Bei-jing still needs to secure access to foreign technology, know-how, and capital. The shifting landscape of global economic relations requires Chinas leadership to rethink its approach and is empowering co

30、nservative forces in China. Long-entrenched skepti-cism about Western principles of market forces (and democracy) is making a comeback. A greater focus on securitization, self-reliance, and perhaps most dangerously national-ism and ideology are fundamentally changing how China engages with the world

31、.Long-entrenched skepticism about Western principles of market forces is making a comebackExhibit 2Tension between the benefits and risks of global economic integrationKey motivations and concerns at different periods of Chinas embrace of globalizationSource: MERICS MERICS 2000s Access to foreign ma

32、rkets (lower tariffs abroad) Build up infrastructure Premature com-petition from in-ternational firms in the domestic market 2010s Strengthen the legal systemResource securityInvestment opportunities abroad Financial market reform and global integration Financial instabilityEnvironmental degradation

33、 2020s High-end manufacturing capabilities and innovationSelf-relianceMiddle income trap, decline in industrial com-petitiveness Technological dependency Economic containment 1980s & 1990s Access to foreign capital and industrial know how Leverage labor cost advantage Collapse of state-owned enter-p

34、rises Inflation Social upheaval and political instability FEARSCHINASNEEDSCHINAS| 6MERICS CHINA MONITOR | October 19, 20212. AMBITIONS AND VULNERABILITIES TIE CHINA TO THE WORLD ECONOMY Confidence and insecurity feature strongly in Chinese debates on how to pursue external economic engagement. This

35、contradictory mix is the product of Chinas current stage of de-velopment and reflects the fact that its overall economic power remains quite small. China has expanded its economic leverage in some areas, for example by consolidating global supply chains within its borders, and Chinese firms have att

36、ained leading positions in in-dustries such as telecommunications, high-speed rail, and digital technologies. Yet it is still weak in crucial areas, such as foundational technology and international finance, so it holds limited chokepoints over other advanced economies. Confidence stems from Chinas

37、economic dynamism and resilience. Chinas share of the global economy jumped from 4.0 percent in 2001 to 17.4 percent by 2020.2 GDP per capita growth averaged 8.1 percent a year in the same period.3 China managed to avoid significant financial shocks during the 1997/98 Asian Financial Crisis and Glob

38、al Financial Crisis in 2008/09. Beijing draws further evidence of the benefits of its economic model from the swift economic recovery after the Covid-19 outbreak in 2020.China has become increasingly emboldened in international affairs, which is often per-ceived overseas as an attempt to dominate ot

39、hers. Yet domestically this is viewed as China simply defending its core interests. China remains aware of its relative weakness. The sense of injustice suffered at the hands of imperialist forces in the “century of humiliation” from the Opium War to 1949 has been translated into a domestic politica

40、l strength as pushback from advanced economies is readily seen as a bid to undermine a “weaker” China.Beijing is already convinced that the United States is pursuing a policy of containment against China.4 Official narratives are dominated by the view that the United States and its allies are workin

41、g to stall Chinas rise and maintain a monopoly on core technologies.5 Deteriorating China-EU relations stoke these concerns. Scholars highlight the risks of Chi-nas dependence on other nations for technology and know-how as likely to hinder indus-trial upgrading and warn that foreign companies could

42、 leave.6 Conservative voices in the public arena have gained increased prominence amid economic antagonism. Previously, external pressure to conform with international expectations was a useful means to stimulate domestic reform; it is now seen as hostile. The leftist, statist wing of the CCP has lo

43、ng preferred a path of self-reliance; such voices feel vindicated by US moves against Huawei and ZTE threatening to cut off supply of high-end semiconductors. The self-reliance campaign, which has been running in the background for decades, has become a national priority that demands a “new type of

44、whole of nation approach (新型举国体制) ,” as announced in the 2020 Central Economic Work Conference.7 This means extensive government support for strategic industries, targeted mergers and acquisitions of critical foreign tech and tightened national security regulations.Nevertheless, Chinas approach to h

45、edged integration has not changed. Opening up re-mains essential when it is to Chinas advantage and also because Chinas dependence is widely acknowledged.8 Overall, Chinese intellectuals and policymakers remain committed to economic integration, but increasingly on Chinas terms in stark contrast to

46、the old liberalization mantra. Justin Lin Yifu (林毅夫) of Peking University contends that, should the US block access to certain high-tech products, supply would be maintained through trade with other advanced economies in Europe and Asia.9 Scholars such as Hu Ran (胡然) argue that complete tech decoupl

47、ing between the US and China is not possible.10China remains aware of its relative weakness| 7MERICS CHINA MONITOR | October 19, 2021Exhibit 3Despite Chinas extraordinary growth, its economic power remains limited in many areasExamples of Chinas economic confidence and insecurityDomestic economyGros

48、s Domestic Product (GDP), Purchasing Power Parity (PPP); current international USD trillionManufacturing superpowerShare of global manufacturing, value added (2019, percent)International financeShare of global payments by value in July 2021International tradeTechnological dependenceChinas trade defi

49、cit in semi-conductors (USD billion)Overseas investmentOutbound investment stock in 2020 (USD trillion)Source: World BankSource: World BankSource: SWIFTSource: General Administration of Customs, QianzhanSource: CIIESource: OECDSTRENGTHSWEAKNESSES82015202524.320.919.917.818.217.012.415.014

50、.5050030020020226.2192.4232.7202.8036912152.48.213.1ChinaUSEU010203040Rank 1: USD (39.4%)Rank 2: EUR (38.4%)Rank 5: CNY (2.2%)057.016.927.8USEUChinaUSChinaEUChina is the top trading partner of over 120countries and regions including the US, the EU and Japan. MERICS |

51、 8MERICS CHINA MONITOR | October 19, 2021The bottom line is that China needs to remain connected to the global economy to achieve its goals of becoming a modern, technologically advanced, and prosperous country. Chinas political ambition does not yet match its economic and technological reality. Rei

52、nforced global connections are vital to becoming more self-sufficient and upgrading the economic structure. Accordingly, Chinas leadership has developed a new blueprint for engagement with the world economy.3. THE DUAL CIRCULATION STRATEGY: CORNERSTONE POLICY FOR NAVIGATING GLOBALIZATIONS NEW REALIT

53、IESThe Dual Circulation Strategy (国内国际双循环 or双循环 for short, hereafter: DCS) is Chinas overarching plan for further economic development and managing global integration. It was first mentioned in a speech by Xi Jinping at a meeting of the Central Financial and Economic Affairs Commission in April 2020

54、. It seeks to address Chinas core challenges for the coming decades, ranging from external risks like protectionism and technological dependencies to domestic challenges like inadequate innovation capabilities, income inequality and envi-ronmental degradation.11 The DCS is enshrined in Chinas 14th F

55、ive-Year Plan for economic development, which includes a mid-term outlook until 2035.12The new flagship strategy marks a definitive break with the Great International Circulation Strategy pioneered by Deng Xiaoping which concentrated on export and investment-led growth. The key idea of the DCS is to

56、 strengthen the domestic market (internal or domestic circulation), while optimizing Chinas integration into global markets (external or interna-tional circulation).13 The two main goals are to: 1. Increase domestic consumption and innovation to become the chief drivers of economic development2. Red

57、uce the reliance on essential external inputs and supplement domestic economic activity through global integration3.1 Views on the DCS differ within Chinas elite Internally, an extensive debate has unfolded on how to interpret the DCS, with senior bureaucrats advancing their preferences on how to ac

58、hieve its broad goals. On one side are voices like that of former central bank advisor Yu Yongding (余永定), who calls for a “relatively independent and complete” Chinese industrial system. He high-lights the importance of upgrading manufacturing capabilities.14 Others, such as Vice Premier Liu He (刘鹤)

59、, stress market-oriented reforms as key to strong domestic circulation. Liu sees the DCS as an opportunity to implement more liber-al market reforms such as making more credit available to private businesses.15 Some prominent voices contend that the DCS provides momentum for further opening up. Form

60、er vice president of the State Councils Development Research Center, Wang Yiming (王一鸣), stresses the “obvious and significant” contributions of foreign compa-nies to Chinas technological progress and favors further relaxing restrictions on foreign investment.16 | 9MERICS CHINA MONITOR | October 19,

61、20213.2 Internalizing globalization to safeguard Chinas continued developmentUnder the DCS, trade and investment links are being reshaped to be more resilient and to further Chinas development goals. The role of the external circulation has switched focus from exports and foreign investment to acces

62、sing strategic technology and know-how. This equates to an attempt to internalize globalization, rather than relying on global supply chains. Self-reliance (自力更生), a key concept of the DCS, does not imply ceasing to engage with the rest of the world; it refers to the CCPs long-standing desire to mai

63、ntain control over its economic development (see glossary in annex).17 Although Chinas pursuit of targeted regional and global integration includes a role for free trade agreements, Xi Jinpings rhetoric of continued commitment to reform and opening up in international fora should be questioned.18 Th

64、e fact that China joined the Regional Com-prehensive Economic Partnership (RCEP) in 2020 and now wishes to join the Comprehen-sive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) reflects its need to secure vital trade links and avoid isolation, rather than any firm commitment to inc

65、reasing market access for foreign firms. Neither agreement was initiated by China, but participation in RCEP and CPTPP can bolster its central position in global trade networks.The DCS allows for more, selective openness as officials seek to attract foreign firms that can foster technologically adva

66、nced industries and boost competition, thereby accelerating the performance of Chinese firms. Foreign financial institutions are important to increase the efficiency of capital allocation. More broadly, China aims to absorb global value chains so that access to certain goods cannot be cut off by for

67、eign governments.China aims to absorb global value chainsExhibit 4China strives to spur economic growth through innovation and consumptionComparing the great international circulation strategy and the dual circulation strategySource: MERICSGreat international circulation strategyThe original model (

68、1990-2010)Dual circulation strategyChinas aspiration (2020 onwards)Key feature of Chinese economy: Labor advantage, investment and export led growthKey feature of Chinese economy: Domestic consumption and innovation led growthWorld economyChineseeconomyChinese economyFinished goodsHigh value goods,

69、outbound investmentRaw materials, technology, inbound investmentRaw materials, low value goodsWorld economyExternal circulationInternal circulationRelative importance to Chinas economic development MERICS | 10MERICS CHINA MONITOR | October 19, 20214. A BLEND OF NEO-MERCANTILISM AND LIBERALIZATION: “

70、DUAL CIRCULATION” OPENS SOME SECTORS, SECURITIZES OTHERSChinas state-planners recognize that current cross-border links could be weakened by the actions of foreign governments and are working to develop indigenous technologies, where possible, and onshore foreign providers where necessary. The end g

71、oal is to mitigate cross-border risks as soon as possible, then shift towards taking the technological high ground in global value chains and increasing the global position of the yuan. However, this should not be misunderstood as an all-encompassing effort there are a wide range of non-sensitive in

72、dustries where China is eager to expand market access and encourage for-eign investment to benefit local growth and development. The policy thrust simultaneously liberalizes certain areas of the economy, while tightening and securitizing others. 4.1 Technological self-reliance through local innovati

73、on and protectionismThe US-China trade war sent Chinas self-reliance campaign into overdrive, especially given restrictions on US technology exports to some Chinese firms. Foundational technologies remain largely imported or foreign made and hence outside Beijings control. Hundreds of billions of yu

74、an have therefore been allocated to support innovation, using traditional state-aid mechanisms like financing on favorable terms or subsidies and newer tools like state-guided funds or technology-focused stock exchanges. Policymakers are rolling out a suite of securitization measures, i.e., new rule

75、s to support both economic and national security the national security dimensions of economic re-lations. For example, national security reviews are now required for firms investing in ar-eas defined as Critical Information Infrastructure (CII). Typically, this covers any network equipment and relat

76、ed service agreements, as foreign providers are increasingly seen as unreliable. Reviews also extend to sectors that use such network equipment, for instance the banking sector where foreign banks are under pressure to localize their network equip-ment, service providers, and data management systems

77、. China also deploys less explicit tools that impact supply chains more broadly. There are unofficial yet growing demands in China for “Autonomous and Controllable” (A&C) tech-nology value chains.19 The implication is that in areas of critical technology, China aims to either develop indigenous prod

78、uction or to fully onshore foreign technology value chains as suppliers.The A&C principle appears to be spreading and has been adopted by politically savvy Chi-nese firms as a call to find local suppliers where possible. European industrial software providers have found themselves subject to growing

79、 scrutiny from government suppliers and private companies alike. Some have noted that, though current customers still prefer their software, local business leaders believe Chinese alternatives are bound to become necessary at some point unless foreign providers can prove their politically reliabilit

80、y. 4.2 The long-term goal: seizing the technological high groundIn late 2020, Xi Jinping called for work to increase other countries dependence on Chinese technology. He said China should tighten the reliance of international value chains on Chi-na and forge “assassins mace” (杀手锏) technologies upstr

81、eam inputs that would allow Beijing to credibly choke off foreign markets as a deterrence. Similarly, calls to strength-en the internationalization of the yuan and Chinas role in global finance are aimed at The US-China trade war sent Chinas self-reliance campaign into overdrive| 11MERICS CHINA MONI

82、TOR | October 19, 2021 reducing dependence, particularly on the United States financial system and the USD. Essentially, state planners want to gain the same kind of leverage over others that the US has over Chinas essential inputs. Doing so would balance out dependencies that Beijing is unable to e

83、liminate in the short-term, as the credible threat of retaliation would ratchet up the cost to other nations of any economic measures targeting China.4.3 Onshoring critical input production is a priority, though not always achievable The DCS does not aim for complete autarky. It is a policy upgrade

84、within Chinas well-estab-lished managed integration approach, balancing internationalization, and self-reliance.20 To solve the weakness of Chinas domestic economy, foreign technology and capital are needed. One strategy is to leverage the importance of Chinas domestic market for foreign companies i

85、n order to internalize global value chains and finance, bringing them within the CCPs sphere of influence. It is likely to produce highly selective and strategic market opening measures to foreign companies, based solely on ensuring their business activities support and advance Chinas domestic econo

86、mic development goals. As such, policymak-ers are not only removing investment restrictions for foreign companies, but also rolling out the red carpet to facilitate onshoring. For example, if foreign semiconductor companies wanted to invest in cutting edge operations in China, Beijing would not only

87、 welcome it, but would likely fast-track and incentivize such a deal. Despite policymakers desire to replace or onshore foreign technology, there are many com-ponents and supplies where this cannot be achieved anytime soon. Some technology is subject to control by foreign governments; for instance,

88、that of companies supplying the US military, such as airplane components, or those that fall under American export con-trols, like the most cutting-edge semiconductor tech. Meanwhile, other technology is tightly guarded against the risk of tech transfer or leakage in China by companies that refuse t

89、o onshore production of their most advanced components or products and prefer to export them instead. 4.4 Foreign investment in non-sensitive areas welcome if it adds to domestic circulation Many technologies are not sensitive enough to be subjected to national or economic se-curity concerns. These

90、are already seeing improved market access, as investment in these industries will support Chinas domestic growth and consumption. This is already taking place, as the most direct barrier to foreign investment, the Foreign Investment Negative List (which clarifies in which areas foreign investors may

91、 not invest in China, or can only do so under certain conditions, like equity caps and joint venture requirements) has been steadily reduced. Investment restrictions on the finance, downstream manufacturing, transportation, and infrastructure sectors have been progressively cut from the list, genera

92、ting at least some meaningful new opportunities for foreign companies.21 Seen in the context of technological self-reliance and securitization efforts, these opening measures have a wider significance within a broad parallel set of policy trajectories (see Exhibit 5, p. 12).Foreign technology and ca

93、pital are needed| 12MERICS CHINA MONITOR | October 19, 2021Exhibit 5China is pursuing selective opening up, while also tightening regulation around the flow of economic factors within China and across bordersNotable liberalization and securitization policies since 2018Source: Chinese government mini

94、stries and state media MERICS April 2018: Xi Jinping announces the establishment of a FTZ and Free Trade Port in HainanJuly 2018: Foreign investment negative list (FINL) removes restrictions on various sectorsJanuary 2020: Foreign Investment Law comes into force, allowing for reciprocal measures to

95、counter discriminatory moves against Chinese investors abroadJune 2021: Anti-Foreign Sanctions Law enacted, prohibiting organizations from helping to enforce discriminatory measures against PRC entitiesJanuary 2021: The updated Foreign Investment Security Review Mechanism comes into forceDecember 20

96、20: Export Controls Law comes into effectSeptember 2021: Data Security Law enters into forceSeptember 2020: Unreliable Entity List released, imposing retaliatory action against entities that comply with foreign sanctions on Chinese entitiesAugust 2021: The State Council issues regulations on Critica

97、l Information InfrastructureJanuary 2021: Rules on Counteracting Unjustified Extra-Territorial Application of Foreign Legislation and Other Measures releasedNovember 2021: Personal Information Protection Law takes effectOctober 2019: The State Council amends regulations on foreign invested insurance

98、 companies, further opens up the sectorJune 2020: FINL revisions removes more restrictions for foreign investorsNovember 2019: The State Council releases the Opinions on Further Improving the Utilization of Foreign InvestmentJune 2019: FINL revised to remove some restrictions on foreign investment i

99、n certain industriesJanuary 2020: The Foreign Investment Law enters into force, promising foreign enterprises “national treatment”April 2021: China ratifies its membership of the Regional Comprehensive Economic Partnership (RCEP)September 2021: China applies to join Comprehensive and Progressive Agr

100、eement for Trans-Pacific Partnership (CPTPP)20021Defensive economic measuresOpening measures| 13MERICS CHINA MONITOR | October 19, 20214.5 Beijings selective approach to foreign investorsBeijings hedged global integration strategy has brought variations in the degree of opening up by sect

101、or over time. Strict capital controls were used to maintain economic stability; the states chokehold over cyberspace is seen by the CCP as vital to social stability. A flurry of more recent changes has created a more politicized business environment, especially tight-er data control, and Beijings dr

102、amatic regulatory moves against Chinas own tech giants. Contrary to some interpretations, the DCS is not universally bad news for foreign compa-nies, as businesses across a variety of sectors stand to benefit from Chinas course correc-tion. Corporate strategy makers will need to identify how their c

103、ompany is positioned with-in Chinas development goals and changing market access regime. Broadly speaking, the treatment of foreign firms can be broken into five categories aligned with Beijings priorities.a. Protect market share where local companies are globally competitive: Chinas industrial poli

104、cies promote protectionism where Chinese firms are technologically competitive. The clearest example of this trend exists in telecoms and ITC, where network equipment suppliers Huawei and ZTE have become world-class competitors. China is willing to protect market share for its indigenous champions a

105、nd squeeze out foreign network equipment makers it once relied on, especially given that Chinas champions face US, European and Japanese restrictions. The dire situation is seen in Ericssons 2021 Q2 revenue down 60 percent year-on-year and its closure of an R&D center.22 b. Onshore foreign technolog

106、y where possible: For years, state-planners pushed foreign chemicals-makers into joint ventures (JVs) with Chinas state-owned enterprises (SOEs), blocking full ownership. Then, in 2018, BASF and ExxonMobil were granted approval for massive wholly owned projects in Guangdong.23 The shift was prompted

107、 by the refusal of foreign chemical manufacturers to risk technology transfer to local competitors through long-standing, though informal, JV requirements. Decision makers approved the projects, recognizing that it is better to have local production of critical upstream inputs necessary for Chinas i

108、ndustrial upgrading under party-state jurisdiction. c. Create new opportunities for non-sensitive foreign investment: The DCS presupposes consumption will take a greater share of Chinas economy; the automotive sector is a prime example of goods favored by Chinas growing middle class and hence chosen

109、 for fresh treatment. Onshoring high-end production and supply chains creates employment and tax revenue, plus the spillover benefits of skilled jobs and R&D investment. By removing JV requirements, China has attracted electric vehicle maker Tesla and truck maker Scania. Once investment in passenger

110、 vehicles is fully liberalized in 2022, Europes carmakers are likely to strengthen their positions boosting Chinas potential to evolve into a regional export base for major auto brands.24d. Import foreign technology where necessary: Replacing imports in the short term is out of the question in some

111、sectors for example aerospace so state planners must accept cross-border risks to develop downstream industries. Chinas first passenger narrow-body jet airliner, COMACs C919, is being developed by relying on foreign suppliers for crucial components (e.g., avionics, power, and airframe systems). The

112、project vision is to trim Airbus and Boeings share of Chinas passenger aircraft market.25 The end goal may be to onshore production of components, or develop indigenous providers, but for now, China must import these in order to develop its own aerospace OEM.The dual circulation strategy is not univ

113、ersally bad news for foreign companies| 14MERICS CHINA MONITOR | October 19, 2021e. Integrate with global financial markets and promote the yuan abroad: In recent years China has modified its capital controls to enable carefully managed integration with the global financial system. Better market acc

114、ess for foreign service provider like banks and insurers aim to foster better functionality, e.g., in risk management and capital allocation.26 Recent expansion of channels for foreign investors facilitates capital inflows that then fall under CCP jurisdiction, while also partially offsetting the lo

115、st access to foreign capital markets caused by both Chinas new restrictions on its companies listing abroad as well as the impending delisting of Chinese companies from US markets.27 Further opening is crucial to increase Chinas economic power and promote greater internationalization of the yuan, bu

116、t stability maintenance trumps the appeal of this goal and any relaxation has remained limited. 5. ECONOMIC SECURITY STRATEGY RISKS DECOUPLING AND TENSIONSChinas ideal relationship with the world would be to accelerate its economic and techno-logical strength while remaining highly integrated in the

117、 global economy, on its own terms. But the politicization of globalization and rising tit-for-tat emphasis on securitization are narrowing the corridors for Chinas global integration. As relations are being reset, the risks of mutual miscalculations are on the rise. Chinas turn towards self-reliance

118、 and greater assertion in the DCS feeds into an increasingly volatile setting in international relations. The resulting lack of trust is creating an environment where things could easily go terribly wrong with extreme implications on Chinas economic relations with Western liberal democracies and its

119、 own development. Hardline stances by either side could push Chinas economic development trajectory further towards boosting statist and protectionist voices and nationalist sentiment.China is attempting to increase its relative economic power in the world. But the forceful push might be premature;

120、Chinas dependence on technology, finance, and know-how re-mains high. Unrestricted access to foreign markets has been a major contributor to its eco-nomic rise and change in relative economic power. China runs the risk that the DCSs aims to secure a selective integration with the world will undermin

121、e its objectives and in-creasingly isolate it instead. Securitizing economic ties to achieve greater resilience comes at a price and risks harming Chinas own development. Political considerations are beginning to dominate economic policy an international trend which in China manifests as nationalist

122、 concerns about Western encirclement try-ing to hold Chinas rise back. A downward spiral of divergence and decoupling seems the most likely outcome. Every move by China to pursue self-reliance strengthens voices in lib-eral market economies to tighten Beijings access to foreign technologies, while e

123、very move by liberal market economies to restrict Chinas access to foreign technologies adds fuel to Beijings self-reliance campaign. Unless this nosedive can be arrested, and guardrails that manage decoupling can be developed, it is difficult to see a future for deep economic and technological inte

124、gration. European companies face a choice between being considered unreliable by the CCP or doubling down, further localizing operations, and contributing to Chinas strategic goals. The challenge will be to show their willingness to meet the expectations of the Chinese government while protecting th

125、eir global interests and long-term competitiveness. But the implications of missing out on Chinas vast market for growth, innovation, and scale are daunting.Every move by China to pursue self-reliance strengthens voices in liberal market economies to tighten Beijings access to foreign technologies|

126、15MERICS CHINA MONITOR | October 19, 2021Implications for EuropeThe latest data by the Chinese Ministry of Commerce shows that foreign direct investment (FDI) is up by 22.3 percent in yuan terms year-on-year in the first eight months of 2021. Euro-pean companies are expanding their presence in order

127、 to safeguard business opportunities in China at the same time that Chinese investment into Europe reached a 10-year low.28 Surveys by the European and German chambers of commerce in China indicate many firms intend to expand current operations and deepen localization.29 Strong investment figures sh

128、ould not be taken as proof that decoupling is not happening. Changing global dynamics and rapidly emerging tech divergence are forcing companies to create firewalled local solutions for China. A shift in the cross-border flow of people, ideas, and goods is already changing the setup of economic rela

129、tions between Europe and China. The DCS pushes the corporate mantra “in China, for China” to a new level. Foreign com-panies are localizing supply chains, data, and research to juggle the evolving compliance dilemmas in China, the EU, and the US.Chinas changing views on global economic integration m

130、ean that foreign firms are granted access to a market that resembles a fortress currently being reinforced. It comes at the cost of true economic interdependence with globally interlinked supply chains. Foreign firms are being pushed to adopt indigenous alternatives in all areas suppliers, services,

131、 per-sonnel, and partners. As a result, foreign operations in China are de facto on a pathway to becoming more like a local Chinese entity rather than integrated in global networks they are not decoupling from China, but rather decoupling their China operations from their global ones.European compan

132、ies in China can expect new challenges and opportunities as China shifts course. Some, like digital services and network equipment, will be driven out of the market over time. Others face growing opportunities, but with rising costs. Non-sensitive sectors like automakers and consumer goods and elect

133、ronics providers fit nicely into Chinas am-bition to expand domestic consumption. China will welcome sectors that can onshore their technology and supply chains to strengthen its industrial base e.g., chemical manufactur-ers or industrial machinery producers. All European companies will have to expl

134、ore how much they need to localize their supply chains, manufacturing and network equipment, software, data systems, and human resources in order to align with growing securitization. European political leaders will have to face the impacts of such corporate decisions. Lost economies of scale will c

135、ut into European jobs and global competitiveness. National secu-rity threats emanating from China will need to be confronted, and Europe will require its own onshoring and diversification process where key sectors are overly reliant on China. Diplomacy to rebalance the economic relationship must be

136、maintained. However, Europe-an decision-makers will need to consider how to mitigate the risks to economic interests and manage the ongoing divergence between China and the world, at least to the extent that China is willing to reciprocate and produce results.Foreign firms are granted access to a ma

137、rket that resembles a fortress currently being reinforced| 16MERICS CHINA MONITOR | October 19, 2021Annex: Glossary of termsTERM / PHRASEMEANINGHISTORICAL CONTEXT两头在外;大进大出 Great Interna-tional Circulation StrategyChinas export-led development model, us-ing its cheap labor force to become a major man

138、ufacturing hub, deeply integrated in global value chains. The strategy produced export-oriented manufacturing industries that imported components and re-exported finished goods.The phrase was coined by researcher Wang Jian (王建) in an Economic Daily article in 1988.30 It became the guiding principle

139、for economic development through the 1990s and early 2000s as China became the “factory of the world.自力更生Self-relianceThe term encapsulates the governments overarching goal of maintaining control over economic development by reducing reliance on foreign inputs. It usually refers to lessening depende

140、nce on foreign inputs in strategic areas, particularly those that could pose a risk to national security.Championed by Mao Zedong (毛泽东) as early as 1945 as a wartime necessity.31 It remained an important concept and influenced the policies of all Chinas leaders. Since 2018, Xi Jinping has placed ren

141、ewed emphasis on “self-reliance.”自给自足 Autarky / self-sufficiencyElimination of dependence on foreign countries (and their political influence), especially for food and industrial products. China may have aspired to achieve eco-nomic self-sufficiency in the past, but it was never entirely isolated fr

142、om the global economy in practice.Partially pursued by Mao Zedong after a period of dependence on Soviet aid in the 1950s and 1960s. China still trad-ed selectively with Western countries during those decades and was not fully self-sufficient.32自主创新 Indigenous inno-vationA concept with the goal to t

143、urn China into a technological powerhouse able to inno-vate independently and reduce reliance on foreign technologies. As a strategy, it re-fers to government efforts to support the development and production of high-end goods, especially technologies, by domes-tic firms in China.A key part of China

144、s science and tech-nology work since 2006. Gained prom-inence, and international pushback, with the “Made in China 2025” strategy and import substitution targets.33 It is included in the 14th Five-Year Plan.自主可控Autonomous and controllable (A&C)Refers to the goal of safe and secure industrial and sup

145、ply chains, that are less vulnerable to external shocks, by reducing dependence on foreign inputs. The term is also used in the context of cybersecurity, where security and reliability of informa-tion networks, products, and services is deemed a matter of national security. First discussed in a CCP

146、strategy for digitalization from 2006-2020, A&C principles have moved from being chiefly about cybersecurity concerns to being more all-encompassing of entire value chains. Use of the term in official documents has increased dramatically in 2020/2021.关键信息基础设施Critical Informa-tion Infrastruc-ture (CI

147、I)CII rules intend to enhance Chinas cyber-security across a wide range of industries. Companies covered by the measures are expected to tighten their cybersecurity and create internal review mechanisms. Similarly, regulators are to have tighter oversight over CII operators, and will over-see CII na

148、tional security reviews of both specific equipment/services, as well as their customers to ensure compliance. Found in the 2017 Cybersecurity Law, the regulations surrounding CII have grown in scope and complexity. As China proceeds to crack down on data governance, it is expected that further measures to tighten CII security will be released.