Chinese Economic Insecurities: Where they Come From (and Why they Matter)

Chinese Economic Insecurities: Where they Come From (and Why they Matter) by Shaun Breslin February 2025 KEY TAKEAWAYS The size of the Chinese economy means that policy changes in China can have indirect implications for Europeans, even when Europe is not part of Chinese considerations at all. Many such policy changes have their origins in Chinese insecurities rather than perceptions of Chinese strength and power. The current Chinese leadership is more insecure about its grip on power the way that it projects itself to foreign audiences often suggest. Rhetorically at least, these insecurities are increasing as China’s leaders attempt the twin tasks of shifting both the basis of economic growth and also the basis of party legitimacy. Understanding the extent and nature of these insecurities can help others – and not just Europeans – prepare for the consequences of future policies designed to ameliorate them. 1 EuroHub4Sino Policy Paper 2025/1 Economic security Energy security Regime security Self-sufficiency Technological self-sufficiency Keywords https://doi.org/10.31175/eh4s.4e40 2 EuroHub4Sino Policy Paper 2025/1 Introduction In a previous EH4S Policy Paper published in June 2024, we outlined the origins, meaning and objectives of Xi Jinping’s emphasis on the need to develop New Quality Productive Forces. Other previous papers have discussed Chinese responses to both the US’s increasingly hawkish China policies, the de-risking/decoupling discourses more generally, and also focussed on China’s desire to increase technological self-reliance. While the individual focus of each of these papers are very different, there is a common thread that runs through them; the role that economic insecurities play in shaping not just debates in China about its economic future, but also policies designed to mitigate risks and create a more predictable, stable and sustainable future trajectory. The aim of this long read is to act as a supplement to these earlier more focussed papers by fleshing out in more detail the nature of these insecurities, how they have emerged and evolved, and what the Chinese leadership things it needs to do to address them. At times, China’s search for security can have very clear and significant impacts on Europe. The rather rapid emergence of DeepSeek in early 2025 as a much cheaper and yet still very effective alternative to pre-existing global leaders had an immediate (and almost panic driven) impact on stock markets, and a more fundamental impact on perceptions of what the future might hold. In no small part driven by Chinese responses to the potential of being cut it off from “global R&D ecosystems”, it the prospects of China attaining global leadership in key economic sectors (and perhaps even to use its economic clout to attain geostrategic political goals). Indeed, there is a strong argument for saying that what Chinese economic actors are doing overseas, including in Europe, are in large part driven by a desire to resolve Chinese 3 EuroHub4Sino Policy Paper 2025/1 European’s might not have the ability to do much (or even anything) to change the nature of many of these insecurities. And where there is some potential room for a European impact, there may well not be the desire to assuage Chinese concerns. But understanding the nature of what Susan Shirk back in 2009 called a “fragile superpower” should provide the basis for planning for a range of potential futures that are not all just built on an understanding of a strong, confident and immovable Chinese leadership. Why Insecurities Matter: The Consequences of Scale and Mass In 2007, the UK newspaper The Daily Mail ran a story about panic buying amidst rapid price rises in the cost of garden fence panels. The reason was in part a surge in demand due to bad weather over the winter, and in part a reduction in available supplies. Poor softwood harvests in Northern Europe explained some of this reduction. More important, though, was increased demand for wood from countries that were undergoing rapid economic transitions and seeing rapid urbanisation, construction and growth. Not surprisingly, China was one of the most significant of those rapidly changing economies, where timber consumption “increased nearly threefold” between 2000 and 2015. Similarly, Chinese demand was also part of the reason for a shortage of timber pallets in 2013-14, used to transport a whole range of different goods and commodities; though the flip side of this coin was a tripling of European softwood exports to China in 2013 alone. The introduction in China of environmentally driven restrictions on logging to prevent deforestation, most notably in 2017, only served to increase the importance of imports for China, and thus further increased China’s significance for global supplies and prices. As Russia is the main source of softwood lumber into China (including after the Ukraine invasion), it also has at least some impact on economic insecurities. For example, as argued in some detail elsewhere, the Made in China 2025 initiative that did so much to raise concern in Europe about Chinese global ambitions was largely inspired by Chinese insecurities; the Chinese economy was described as being big “but not strong”, with weak Innovation capability, and a heavy dependence on foreigners for “core technologies and high-end equipment”, with most Chinese enterprises unable to “operate globally” effectively. In addition to these effects, Europeans are also indirectly affected by economic shifts in China that are primarily driven by insecurities. Moreover, the argument here is that the current Chinese leadership is more insecure than the way that it projects itself might suggest, and also that these insecurities are increasing. What we see is a combination of concerns that emerge perceptions of national (in)security and the nature of the global order, and perceptions of economic (in)security built both on the nature of the global economy and also the nature of China’s own domestic growth model. Underpinning all of these insecurities, though, is the party’s view of its own grip on power and perceptions of political or regime (in)security. 4 EuroHub4Sino Policy Paper 2025/1 It is not exactly the world’s greatest insight to say that China matters in ways that most other countries don’t and cannot. Its sheer size alone might be enough. Or perhaps size plus increasing wealth is enough. Even when there is no direct China-Europe interaction involved and there is no Chinese intention try and influence or affect Europe, what Chinese consume – or indeed, at times don’t consume or consume less of – impacts on Europe and Europeans in different ways. Of course, the consequences of size or mass are then often compounded by the nature of the Chinese political economy, and the way that the state supports privileged domestic actors to create an uneven global playing field. Such measures include the provision of a range of different types of subsidies and tax breaks, easy access to cheap capital, currency and exchange rate controls, limiting market access for foreigners, and so on. That’s why “ensuring reciprocity, achieving a level-playing field, and addressing asymmetries in the relationship” have been “matters of priority” for the EU in its relations with China for many years. In addition to the frustrations of not being able to fully access the Chinese market to the same degree that Chinese actors access the EU, European producers can be disadvantaged in the home market too. As Kratz and Oertel have argued, the way that the state provides what they call a “protected home market advantage” can have (and indeed, already has had) had huge implications for European companies in some sectors when these protected Chinese companies internationalize their activities and take their commodities overseas[1]. Strategies designed to export Chinese overcapacity in some sectors have also already directly impacted on domestic producers in a number of economies, including in Europe. European security concerns and strategies too. Pretty much any other commodity could be chosen as an example of how Chinese growth impacts on Europeans in often indirect ways. For example, as Hansen and Wingender argue, China’s transition from a net food exporter before it joined the WTO to the world’s biggest importer has transformed global agriculture. In addition to its impact on prices of key commodities, they argue that increased Chinese demand alone is the cause of a massive diversion of land to crop production across the world, which will have huge long term global environmental consequences. As too does the above mentioned increase in wood and other “forest based” imports into China, which maybe ironically were in part driven by local environmental concerns within China itself. Much has been written about China’s impact on global energy trade and pricing. China accounts for around 18 per cent of the global trade of both oil and coal and 16 per cent of the global gas trade. Quite simply, “China’s centrality to global oil demand growth this century” has become a major determinant of the price of oil for everybody on the planet. For example, the stimulus measures announced in China in September 2024 were directly credited (if that’s the right word) for an almost immediate increase in global oil prices (and as a result, of the prices of iron and steel too). 5 EuroHub4Sino Policy Paper 2025/1 This was also a period when maintaining export growth faced considerable political challenges too. Though the international response to the Tiananmen crackdown in 1989 had proved to be rather shallow and short lived, access to the US market for Chinese exporters was dependent on China being granted Most Favored Nation status by the US every year. As it turned out, this was always granted, and China gained permanent access to the US market in 1999 as part of the process of gaining WTO entry (in 2021). Indeed, trying to take politics out of trade relations was one of the reasons that China’s leaders pushed to join the WTO in the first place; to take disputes out of the hands of politicians and into the hands of technocratic and legally bound trade experts instead. But until 1999, China’s leaders could never be certain of that. In addition, the second half of the 1990s also saw the emergence of energy security concerns in China. Although China had switched from being a net exporter of oil to a net importer in 1993, this was initially not really seen as a problem. This is because, crucially, there is a difference between (self) sufficiency and security. There is no inherent insecurity in being dependent on either imports or foreign markets at all if you are confident that those supplies will keep coming and those markets will remain open. And such confidence – or the So what happens in China indirectly impacts on Europe even when there is no clear intention to target Europe at all because of the size, scale and mass of the Chinese economy. It also has a direct but secondary impact when the primary Chinese objective is not to do things to Europe, but to do things overseas to reduce Chinese insecurities. Which then leads to the twin questions of what are the nature of these insecurities, and where do they come from? The nature of Chinese economic insecurity The evolution of the Chinese discourse As Wang Zhengyi has outlined, the specific concept of “economic security” (经济安全) was not a feature of Chinese academic or policy debates until the second half of the 1990s. Until then, concern with generating economic growth on the one hand and issues relating to security on the other hand largely evolved and were discussed in two separate domains with very little cross-fertilization. The Asian Financial Crisis of 1997 is typically credited with starting a Chinese debate over the nature of economic (in)security, as it highlighted how quickly (and unexpectedly) China’s hoped for trajectory of economic growth could be derailed by events outside its control. Foreign investment (not least from the rest of Asia) had rather rapidly become a major engine driving the growth of Chinese exports in the earlier part of the decade, and the concern now was that both investment and exports would now decline. And as China’s most influential trade official, Wu Yi, put it at the time, this was not a case of worrying about “exports for exports’ sake”, but instead a “political issue …. critical in helping the nation reform State-owned enterprises, create jobs and promote social stability”. 6 EuroHub4Sino Policy Paper 2025/1 Typologies of Insecurities To sum up then, what we might call economic security with Chinese characteristics entails a bundling of three different types of insecurities. National (in)security: Those concerns that relate to the nature of the global order, and China’s place within it. Most clearly, the fear that for political reasons, other countries might do things that make it harder or even impossible for China to get what it wants and needs (resources, commodities, markets) so that China’s leaders can run the economy in the way that they want to want to run it. This includes fears of military blockades, sanctions, tariffs, investment screening and other punitive actions. There has also been concern that the US is trying to establish relationships with its allies designed to drive a wedge between them and China with important economic (as well as broader security) concerns. And at times that the US is trying to build regional economic structures like the Trans Pacific Partnership that would “exclude China from regional economic affairs”. Economic (in)security: Which can be divided into two halves. The first half relates to the nature of the global economy, and what we might call “normal” (which means non-politically motivated) economic vicissitudes that all economies face. This includes fluctuations in the price of key commodities, and at times the supply of them too. We might also include here conflicts and other geopolitical uncertainties that do not directly involve China, but have potential economic consequences for China (and indeed, for all global economies). Conflict in the Middle East is an obvious case given China’s energy concerns; hence the increased interest in playing a diplomatic role in the region. There has also been growing concern with the impact of piracy in the South China Sea and off the Horn of Africa as China’s global economic presence increased. Perhaps most clearly of all, though, is the spillover effect of economic problems elsewhere that China simply cannot control. In particular, economic crises elsewhere lack of it – is the key to the spread of Chinese economic insecurities and anxieties. In the case of oil, as the volume of imports increased, then the question of whether these supplies could be guaranteed increased too, not least because of the “Malacca Dilemma”. With so much of China’s oil imports passing through the narrow Straits of Malacca on the way (and indeed, with many Chinese exports to Europe going the other way too), then what would happen if a hostile state like India or the US hindered or blocked sea lanes for political/security reasons? Hence the expansion of “resource diplomacy” in and with Africa and other developing countries in a search to diversify sources of supplies (preferably to places where trade was not already dominated by companies from the West). 7 EuroHub4Sino Policy Paper 2025/1 Whatever the true number, China’s leaders have certainly acted at times as if they think that economic growth was too dependent on exports. And this meant that China’s economic fortunes were even more vulnerable to the sort of politically motivated action outlined under national (in)security above. There is also a concern that as the significance of exports has declined, growth has become too dependent on investment instead. Not least because in the period after the financial crisis as expanding investment was seen as a key means of maintaining growth during global economic turmoil. Political/Regime (in)security: Crucially, both national and economic insecurities were part and parcel of a more fundamental and existential insecurity relating to the nature of the Chinese political system. In the post Mao era, the party went to great lengths to establish the idea that generating growth was a key indicator of its wisdom and effectiveness. Growth (and announcing that growth targets had been met and exceeded) thus became a crucial part of its strategy of justifying and legitimating its monopoly on power. Quite simply, then, if growth could not be maintained, then the party ran the risk of failing to meet the benchmarks, standards and expectations that it had set for itself, and communicated to the Chinese people. And while many political parties lose elections when the economy isn’t doing well, this is not an option in a one-party state where it is the entire party-state political system that is at stake. Mitigating risks As the growth of concern about over-reliance on investment and China’s changing strategy in the Middle East both clearly show, Chinese economic insecurities (and the responses to them) are not static. So nearly three decades after the emergence of the economic security have twice had a profound impact on Chinese thinking; as already noted, first in 1997, and then again when the Global Financial Crisis led to Chinese exports falling dramatically and suddenly in November 2008. This brings us directly to the second half, which is the nature of the Chinese (political) economy. There has been considerable debate over how important exports have been for Chinese growth. If you just count exports as a percentage of GDP, then in 2007 (ie: just before the global financial crisis), then the figure was 40 per cent. But this ignores the high degree of imported components in Chinese exports at the time. So adjusting the calculation to take this into account, then the value added of net exports to GDP in 2007 was only 20 per cent; which to be fair is still not insignificant. To complicate matters even further, though, this ignores the domestic spillover effects of trade; if you build a new port and infrastructure to access it, this does not count as trade, but is clearly a trade driven growth. Factor this back in and you could argue that trade related growth was as high as 50 per cent of GDP in 2007. 8 EuroHub4Sino Policy Paper 2025/1 Overseas investment has increased access to and often control over a range of resources, and also diversified the sources of supplies in many cases. This includes oil supplies, with Russia and Angola now two of the top three suppliers, with a rapid expansion of refining capacity also playing a role. Even so, oil from the Middle East still plays a very important role, and countries like Australia which have had a fractious recent relationship with China supplies more than half of Iron Ore and Coal imports. At times, China has used export controls for commodities deemed to be essential for domestic economic growth and the transformation into a new type of economy built around the promotion of new productive forces (as detailed in a previous EH4S paper). Starting in 2008, China has also become an active actor in anti-piracy operations too. China’s leaders have become an active promoters of forms of regional integration that promote their interests, and actively pursued and promoted Free Trade Agreements (FTAs). At the time of writing, alongside the FTA with ASEAN as a whole and the Regional Comprehensive Economic Partnership (with ASEAN, Japan, South Korea, Australia and New Zealand), 17 bilateral agreements were in place (19 if you include the FTAs with Macao and Hong Kong), there was one Service and Investment agreement (with Belarus) and 12 FTAs were under negotiation. It has also developed a range of institutional mechanisms to pursue its economic (and other) agendas with different regional groupings that span the globe (as explained in detail in a previous EH4S paper). Amongst other things, the Belt and Road Initiative is meant to open up new markets, suppliers, trade routes and production networks. More recently, major Chinese producers (particularly if they have a large US market) have diversified their production bases to “bypass market access or trade barriers”. Chinese Insecurities Today The external environment The USA and the EU are notably absent from the list of Chinese FTA partners. And despite joining the WTO in 2001, access to these two important markets remains a concern in China. This is not really surprising for a number of reasons. Not recognising China as a market economy within the WTO in 2016 (as many assumed would automatically happen after 15 China’s leaders have been proactive in trying to reduce uncertainties and insecurities. We have already noted the move to increase technological self-reliance, and to make more of the high tech components that drive advanced modern manufacturing at home. Even before the launch of DeepSeek, there was already evidence that it had made considerable progress in some high-tech sectors. The Australian Strategic Policy Institute’s 2024 Critical Technology Tracker calculates that China had become the global leader in 57 of its 64 tracked technologies in the 2019-23 period (up from leading in just three at the start of the millennium). discourse in China, how do things stack up today? This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. The terms on which these article have been published allow the posting of the Accepted Manuscript in a repository by the author(s) or with their consent. Deed - Attribution 4.0 International - Creative Commons This EuroHub4Sino Policy Paper contains links to external third-party websites. These links to third-party sites do not imply approval of their contents. EuroHub4Sino has no influence on the current or future contents of these sites. We therefore accept no liability for the accessibility or contents of such websites and no liability for damages that may arise as a result of the use of such content. The project “European Hub for Contemporary China (EuroHub4Sino)” has received funding from the European Union’s Horizon Europe research and innovation programme under grant agreement number 101131737. Co-funded by the European Union. Views and opinions expressed are however those of the authors) only and do not necessarily reflect those of the European Union or European Research Executive Agency (REA). Neither the European Union nor the granting authority can be held responsible for them.