It is taking steps to make itself less vulnerable to further sanctions though its assessment of its own relative strength may be under review in light of the west's relative success in isolating Russia. JL
James Areddy reports in the Wall Street Journal, image Thomas Peter, Reuters:
It wasn’t missed in Beijing that when confronting Moscow, “the Western powers moved with tremendous alacrity and as a united front.” China’s much larger economy is more difficult to cut off than Russia’s. (But) , “One lesson China is taking is it remains vulnerable to financial, economic and technological sanctions.” China has pumped billions of dollars into semiconductor production, stockpiled grains and oil, and established international links to its financial system. At the root of the push is fear of getting blocked out of Western economies by penalties the U.S. and European Union have thrust at Russia.Like his predecessors who built the Great Wall to thwart foreign threats, Chinese leader Xi Jinping is raising ramparts to make his nation more self-reliant, a mission Russia’s war in Ukraine has made more imperative.
China has pumped billions of dollars into semiconductor production, stockpiled grains and oil, and established international links to its financial system. At the root of the push is the fear of getting blocked out of Western economies by heavy penalties of the sort the U.S. and European Union have thrust at Russia.
No stranger to the bite of U.S. sanctions, China could face more significant ones in the case of a military confrontation with the U.S., perhaps over Taiwan, or if Beijing offers pivotal assistance to Moscow during its war in Ukraine.
It wasn’t missed in Beijing that when confronting Moscow, “the Western powers moved with tremendous alacrity and as a united front,” says Eswar Prasad, the International Monetary Fund’s former China division chief and now a professor of trade policy at Cornell University.
China’s much larger economy is more difficult to cut off than Russia’s. Nonetheless, Mr. Prasad says, “One lesson that China is probably taking from the fallout is it remains vulnerable to financial, economic and technological sanctions.”
During Mr. Xi’s time in office, three successive U.S. administrations have leveled sanctions at China, including Huawei Technologies Co. and companies with alleged military ties as well as officials and entities Washington holds responsible for human-rights abuses.
Each move has appeared to deepen Mr. Xi’s quest for self-reliance.
A day after Russia launched its Ukraine invasion, which quickly triggered Western sanctions, an editorial in the Communist Party’s People’s Daily said, “Independence and self-reliance ensure that the cause of the party and the people will continue to move from victory to victory.”
Better defenses
In contrast to Russia’s weak manufacturing sector and an export base dominated by commodities like oil and gas, China has large scale and broad reach in production. “This is China’s advantage,” crowed a March commentary in the nationalistic tabloid Global Times.
China supplies a third of the world’s textiles, more than 27% of its electronics and almost 20% of the machines, according to data from Harvard’s Center for International Development. It is virtually the only exporter of rare-earth metals necessary to make items from night-vision goggles to batteries for electric vehicles like Teslas.
A Russia-style retreat from China wouldn’t be easy for the American economy. A U.S. Chamber of Commerce-Rhodium Group report last year estimated that if half of the U.S. investment in China were abandoned, it would cost American companies $25 billion annually in lost profits, with the aviation, chemical and medical sectors particularly hard hit, on top of a $500 billion hit to the U.S. gross domestic product.
Wang Wen, executive dean of Chongyang Institute for Financial Studies at Renmin University in Beijing, argues that multilateral coordination would be too unwieldy against an economy 10 times the size of Russia’s and that Beijing would power through the challenge, much like it did during the Trump administration’s trade war.
Awareness is growing in Washington that the power of U.S. sanctions is also being eroded by the possibility they are being overused. Over 1,000 China-linked entities appear on sanctions lists maintained by U.S. government agencies.
The Treasury Department alone manages 37 separate sanctions programs and last year said the system has been reviewed in the face of “technological innovations such as digital currencies, alternative payment platforms, and new ways of hiding cross-border transactions [that] all potentially reduce the efficacy of American sanctions.”
Ray Dalio, founder of hedge fund Bridgewater Associates who has argued China is rising at the U.S.’s expense, says that if Russia sanctions help bring an end to the war in Ukraine, it would enhance U.S. leverage. However, Mr. Dalio wrote in April, “If they are not effective, we will risk seeing America lose its most unique and greatest power—its control over the world’s reserve currency and capital-markets system—as others increasingly escape it.”
Historical blueprint
As a young nation, the U.S. found itself on the receiving end of sanctions—and turned the situation into a coming-of-age moment.
It declared war on Great Britain—the War of 1812—in part over its seizure of American merchant ships to block American trade with France. “Before the war, there’s this idea of dependence on Europe, and after the war there was emergence of independence and national identity,” says historian Walter R. Borneman.
China has its own historical blueprint: Mao Zedong’s striving for self-sufficiency was borne from the deep economic trouble after the civil war that brought the Communist Party to power in 1949. Poverty followed as the strategy backfired, but all subsequent Chinese leaders have adopted some elements of Mao’s inward-looking vision.
Still, China’s post-Mao leaders also opened to global trade and investment. A fierce nationalist, Mr. Xi has increasingly borrowed Mao-era terminology of “self-reliance” to describe his core defensive strategy.
“Xi Jinping’s version of self-reliance is certainly more focused on domestic production and domestic technology than we saw from other Chinese leaders in the reform era,” says Neil Thomas, New York political consultancy Eurasia Group’s regional analyst.
Supply lines
As tension in Ukraine pushed up grain prices, Mr. Xi applied the self-reliance calls to domestic food production. “Who will feed China? China needs to be self-reliant and support itself,” Mr. Xi thundered to legislators in Beijing in March.
In practice, what self-sufficiency has meant for China, the world’s biggest trading nation, is finding alternatives to imports or creating dependable supply lines.
U.S.-China Business Council figures show 10 U.S. states each exported over $1 billion in oilseeds and grains to China last year for a total of nearly $22 billion. China also relies on imports for many fruits, vegetables and seeds.
Its biggest import bill is for oil, with 70% of its needs coming from overseas. However, the sources are nations in the Middle East and Africa that have benefited from China’s development financing and political support, along with Russia.
Partly to protect supply lines, China has poured massive financing resources into helping poor but resource-rich countries build ports and railways under Mr. Xi’s Belt and Road Initiative. Derek Scissors at Washington-based think tank American Enterprise Institute says such links would provide Beijing limited insurance if the U.S. imposed very substantial sanctions.
Under a wartime scenario in which the U.S. might sanction China’s banks, for instance, countries would face a choice of maintaining good relations with Beijing and getting cut off from the dollars they need for trade. “In a serious case, most of the Belt and Road peels off,” says Mr. Scissors.
Paper wealth
Ultimately, the dollar is the choke-point that makes U.S. sanctions effective.
On paper, China is exceptionally rich with little international debt and $3.2 trillion in foreign-exchange reserves. But how much of that money China could access during a conflict with the U.S. was thrown into doubt when the U.S. Federal Reserve and other leading central banks froze about half of Russia’s $600 billion in reserves after its invasion.
To raise the attractiveness of its own currency, Beijing has lowered barriers to stock and bond investments in China, while it has taken steps to develop networks for money to move around the world in ways that could avoid the dollar.
The People’s Bank of China’s Cross-Border Interbank Payment System is designed to rival the dollar-based money-transfer system known as Swift. China is also working with other central banks to make a digital version of its yuan acceptable in other countries.
China’s UnionPay credit card, which boasts more users than Visa, has become a go-to network for Russian banks. Yet, analysts say China’s parallel financial systems aren’t used by enough other nations to provide a viable alternative to escape from American sanctions.
And Mr. Prasad said Beijing stands at a dangerous point in its financial-market liberalization, since foreign institutional investors have pumped in enough money to inflict pain if a loss of confidence prompts them to race for the exits but not enough where the state has much leverage over them and their home governments.
Corporate connections
After Russia’s invasion, hundreds of multinational businesses, including fast-food chains, auto makers, oil giants and banks, signaled partial or full pullout from Russia. Many are more embedded in China.
No major shift followed former President Donald Trump’s 2019 urging that American companies explore alternatives to doing business in China, according to a recent study focused on electronics and machinery produced by Paulson Institute’s MacroPolo think tank.
While the share of U.S. imports of such equipment originating in China dropped to 32% in 2021 from a peak of 42% in 2018, the study said the change primarily reflects a China exit of the lowest-value-added assembly activities.
China has also tightened its legal defenses against foreign economic pressure. New “blocking” statutes include an Anti-Foreign Sanctions Law that provides a legal basis to retaliate against individuals or companies that hurt Chinese national interests in responding to sanctions imposed by another nation.
The so-far unused measures allow China “to punch back” on sanctions, according to a summary of the statutes published by Washington think tank Peterson Institute for International Economics. Co-author Mary E. Lovely, an economics professor at Syracuse University, said that without a very substantial breakdown in Sino-U.S. relations the likelihood is low China would pull the trigger and hit an American company.
Technology shortfall
High technology like semiconductors may be China’s largest vulnerability, where it remains highly dependent on the U.S.
U.K.-based Oxford Economics researcher Innes McFee calculates that since about a quarter of China’s technology exports depend on components sourced abroad, the U.S. and EU would be affected if they cut off China from such supplies, but, he says, the annual impact on China’s economy would be three times worse.
Complex manufacturing of solar panels and the dozen steps needed to make batteries used in electric cars is within China’s capabilities, but it depends on foreign expertise for more advanced science-based applications like producing jet engines and mastering the software that runs equipment to make semiconductors, says Dan Wang, a technology analyst at China-focused research service Gavekal Dragonomics.
“China is not bulletproof,” he says.
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