🗺️ The West Did Not Invent Decoupling—China Did

[Beijingwalker]

The West Did Not Invent Decoupling—China Did​

Beijing has long sought to gain a free hand by untangling its economy from the West.​

An illustrated portrait of Agathe DemaraisAgathe Demarais
By Agathe Demarais

Technicians wearing white protective suits conduct tests in a research laboratory in Ningbo, China.
Technicians conduct tests in a Ningbo Shuxiang New Materials research laboratory in Ningbo, China, on April 20, 2023. STR/AFP VIA GETTY IMAGES

FEBRUARY 1, 2024, 4:49 AM
There is a story told among Kremlin watchers: Shortly after Western countries first imposed sanctions on Russia in response to its invasion and annexation of Crimea in 2014, Russian President Vladimir Putin summoned his economic advisors. His question was simple: How was Russia doing in terms of self-sufficiency for food? Not very well, came the reply. The country was dependent on imports to feed its citizens. Putin went pale and ordered that something be done, fearing that sanctions could curb Moscow’s access to food staples.

Fast-forward to Russia’s full-blown invasion of Ukraine in 2022, and Putin no longer had to worry about food. In only eight years, Russia had become almost self-sufficient, producing meat, fish, and even decent-quality cheese.

Russia’s bid for food self-sufficiency long predates the currently fashionable debate over economic decoupling—recently rebranded as de-risking—both of which entail curbing economic reliance on unfriendly states. Contrary to what the political discourse might suggest, Western countries did not invent these policies. As the Russian example demonstrates, countries at odds with Western democracies have long been pursuing a de-risking policy to shield themselves from their potential foes.

Compared to Russia, China has an even longer track record of reducing economic reliance on the West in technology, trade, and finance. If there is an inventor and world leader of decoupling and de-risking, it is by all accounts Beijing.

Long before the United States imposed a flurry of controls on high-tech exports to China in recent years, Chinese leaders made technology the first pillar of their de-risking push. Beijing’s first investment plans in the semiconductor sector, for example, date back to the 1980s—with arguably mixed results, given that China never got beyond producing basic chips at the time.

China’s calculus is simple: Technology forms the backbone of economic and military superiority. Technological self-sufficiency, to Beijing, is therefore an existential imperative to survive and thrive.

China’s efforts to reduce its technological dependence deepened over the past decade. In 2015, two years before former U.S. President Donald Trump started bragging about cutting ties with China, Beijing released its “Made in China 2025” blueprint for self-sufficiency in key technology sectors—including semiconductors, artificial intelligence, and clean tech.

China’s view of technological self-sufficiency as an existential imperative has led to impressive progress in only a few years. In many high-tech fields, Chinese firms and researchers are either the unchallenged world leaders (notably in clean tech, where Chinese firms dominate the market for solar panels, wind turbines, and electric vehicles) or roughly on a par with their Western competitors (including in artificial intelligence, quantum computing, and biotech).

Semiconductors are an exception: When it comes to microchips, Western policymakers like to reassure themselves by noting that China still lags far behind the United States, Taiwan, and South Korea in the production of cutting-edge chips. While this is certainly true, Beijing may actually welcome the additional sense of urgency that U.S. export controls have fueled.

Chinese leaders also know that export controls can easily backfire. History shows that in the long run, unilateral U.S. export controls have almost always damaged U.S. firms by restricting their export revenues—which, in turn, curbs the amounts that they can spend on research and development to remain at the cutting edge. In other words, Beijing is playing the long game, hoping that Washington’s aggressive strategy will eventually backfire—and further help China’s bid to reduce its reliance on Western technology.

Finance is the second, long-established pillar of Beijing’s de-risking strategy. In that field, too, China’s efforts to cut ties with Western economies preceded U.S. and European plans to de-risk from Beijing. The most obvious example is that Beijing has never allowed significant foreign involvement in its domestic financial sector. The country’s financial markets are closed, with foreign investors owning only 4 percent of Chinese stocks and 9 percent of Chinese government debt. China has its own banking system that is almost entirely walled off from international finance, with non-Chinese investors controlling less than 2 percent of Chinese bank assets. And the capital controls that severely restrict the movement of funds in and out of the country are nowhere near being lifted.

Yet Beijing’s de-risking efforts in the financial sphere go much further than just keeping foreigners away. China’s leaders face an inconvenient truth: Reliance on Western financial channels may well be Beijing’s Achilles’ heel. Europe and the United States own the world’s dominant currencies and control access to global financial infrastructure, such as SWIFT, the global payment system connecting all banks, and Euroclear, one of the most important global depositories for securities.

Western financial dominance is what makes sanctions so powerful. Losing access to the dollar or to SWIFT is a virtual death sentence for most banks and companies, as Beijing saw after the Western decision to cut off Iran’s access to SWIFT in 2012.

 

[Beijingwalker]

In a preemptive bid to vaccinate itself against financial sanctions, China has developed a three-pronged strategy.

First, the country is pushing to develop cross-border payments in renminbi. The path will be steep, given the dominance of the dollar and euro for global trade. Yet China’s de-dollarization plans are making progress: The share of global payments settled in renminbi almost doubled in 2023, to nearly 4 percent—still a small number, but the direction of travel appears clear. Crucially, one-third of China’s foreign trade is now denominated in renminbi, offering Chinese firms some protection against Western sanctions. Despite all the chatter about a possible currency for the BRICS bloc—which comprises Brazil, Russia, India, China, South Africa, and five recently added nations—Beijing also hopes that the renminbi will become the currency of choice for trade among BRICS countries, similar to the way that it has become the most-used currency for Russia-China trade.

China’s alternative to SWIFT, CIPS (the Cross-Border Interbank Payment System), represents a second cornerstone of Beijing’s financial de-risking edifice. Launched in 2015, the payments network is much smaller than SWIFT. However, it connects most banks across the world and would provide a backup if SWIFT were to disconnect Chinese banks. Finally, China is also piloting cross-border transactions using digital currency with the United Arab Emirates, Thailand, and other countries. The road will be long for a Chinese digital currency to become global. But dominance may not be the point: China’s goal is to have alternative financial channels as a means of protection, which only requires them to be operational.

The third and final pillar of China’s de-risking strategy entails reducing reliance on unfriendly states for trade and as destinations for Chinese investment. The reasoning is similar to that of Putin when he worried about Russia’s food security back in 2014: Beijing sees overreliance on any country for trade flows as a weakness, since conflicts, pandemics, or geopolitical tensions can curb economic ties or disrupt supply chains. For an export-oriented economy such as China, excessive dependence on any given country for the imports of critical inputs or as a key export destination could be fatal.

China’s de-risking efforts in trade are more recent than those in tech and finance, roughly dating back to the first U.S.-China trade war in 2018. Yet a look at the latest statistics from Chinese customs shows that China has lately sped up trade de-risking, with a clear effort to diversify ties away from seemingly unfriendly Western states.

In the first 11 months of 2023, Chinese exports to the United States decreased by 8.5 percent compared to the same period in 2022, while those to the European Union dropped by 5.8 percent. Meanwhile, China’s exports to most emerging markets—including India, Russia, Thailand, Latin America, and Africa—rose. China’s efforts to decrease trade reliance on Western economies are paying off: In 2023, the countries of the Association of Southeast Asian Nations collectively became China’s biggest export destination, ahead of both the United States and EU.

China’s de-risking efforts also extend to the investment sphere. Data from the American Enterprise Institute shows that in the decade to 2014, the G-7 economies plus Australia and New Zealand absorbed nearly half of China’s outbound investment flows, excluding Belt and Road Initiative funds. By 2022, this share dropped to a mere 15 percent, with emerging economies such as Indonesia, Saudi Arabia, and Brazil attracting the biggest inflows of Chinese direct investment.

Similarly to China’s other efforts, the investment push toward emerging markets also predates the invention of Western de-risking plans. The shift became noticeable in the data in 2017, but the start was likely much earlier, since investment projects typically take several years to come to fruition.

All of this underlines that China’s de-risking push is far older and more extensive than U.S. and European efforts in the field. Yet discussions of China’s own de-risking strategy are conspicuously absent from the Western debate.

This is a serious flaw: Seen from Beijing, the Western push to decrease reliance on China is another reason to accelerate China’s long-established plans to prioritize technological self-sufficiency over reliance on cutting-edge U.S. technology, homegrown financial infrastructure over Western banking channels, and emerging markets over Western economies. Beijing’s long, systematic shift away from the United States and Europe is a prominent feature of Chinese economic policy, and it comes with huge consequences.

De-risking is a two-way street. Economic ties give significant leverage to the United States and Europe over Beijing, even if some will argue that the idea of economic interdependence leading to cooperation and peace crashed and burned with the Russian invasion of Ukraine. But the ongoing process of severing the links between China and the West will inevitably diminish the deterrence effect of Western sanctions threats, making the world—and the Taiwan Strait in particular—a less safe place.

This is exactly China’s strategy, with Chinese ambitions to annex Taiwan being one of the key reasons behind China’s plans for self-sufficiency in the first place. The United States and Europe did not invent de-risking—China did. And it very much looks like the most skilled practitioner in the field.

 

[Beijingwalker]

This is also what I observed and repeatedly pointed out in the old PDF, the west is all talk no show while China is always a silent doer.