MOSCOW, 11 Oct 2021, RUSSTRAT Institute.
The People’s Republic of China has successfully completed the first strategic phase of the global program of radical modernisation of the state. At a ceremony marking the centenary of the Communist Party of China, Xi Jinping, General Secretary of the CCP Central Committee, announced the “achievement of the centenary goal” of building a middle-class society in China. Specific final figures are given in the White Paper “China’s Epic Path from Poverty to Prosperity” published by the State Council of the People’s Republic of China.
The next strategic step is to build a “great unity society” in China. Its goal is a deep reorganisation of the country’s economy and public administration. It should ensure a harmonious combination of market instruments with the system of strategic state planning, as well as strengthen the balance between a high material standard of living and socialist socio-social norms of society.
In fact, we are talking about the further development of the process of forming a unique Chinese model of “market socialism”. According to the Russian leadership, it will have to absorb the best qualities of the market and planned economies, as well as mutually compensate for their inherent shortcomings.
At the same time, it is noted that the construction of the “society of great unity” is only the next stage of the global integrated program, which is planned to be completed by 2035. More than six months ago, in March 2021, the RUSSTRAT Institute already considered this problem in the context of the next decade. The time has come to take another look at China’s development prospects in monitoring mode.
The change of orientation is already accompanied by a number of radical steps in the political and economic spheres, which clearly indicate serious changes that await geopolitics and geoeconomics in the next decade and a half. The purpose of this report is to analyse their nature, focus, and expected outcomes.
China’s economic prospects for the next 10-15 years
China is rightly considered the main “factory of the world” and the main contender for achieving indisputable dominance in the world economy. Formally, this representation is correct.
Although in terms of nominal GDP, China ($14.72 trillion in 2020) is still inferior to the United States ($20.6 trillion), but the Chinese economy ($24.142 trillion) has already indisputably surpassed the American economy in terms of purchasing power parity. Its share in the total global economy has reached 18.33%, while the same share of the US is 15.9%. Then there are: India – 6.76%, Japan – 4.03%, and Germany – 3.41%. Russia ranks sixth in this ranking (3.11%). Although, if we take into account the results of the European Union, as an economic association with a total GDP of PPP of $16.1 trillion, we must recognise the third place behind it.
China also holds a leading position in terms of foreign trade. At the end of 2020, it amounted to $4.65 trillion (an increase of 1.5% compared to the result of 2019). This includes exports of $2.59 trillion (an increase of 3.6%) and imports of $2.06 trillion (a decrease of 1.1%). The foreign trade balance is positive – $535 billion, or 11.5% of the country’s foreign trade turnover.
Against the background of the total US foreign trade turnover of 3.835 trillion ($1.43 trillion – exports, 2.405 trillion – imports, a decrease of 13.01% and 6.31%, respectively, compared to 2019) China has already achieved unequivocal leadership, which will only increase. This is already causing a rapidly expanding economic and geopolitical tension in relations with the United States.
However, the effect of large numbers remains behind the scenes, and inattention to it leads to distortion of the final conclusions. China’s share of the global economy is growing not because Beijing is trying to “buy up the whole world” by all means. This result is due to an increase in the size of China’s own economic weight, while the share of foreign trade in the country’s total GDP, on the contrary, is decreasing.
The stage of achieving the status of a “world factory” in China began in 1970, when foreign trade formed only 2.52% of national GDP, and in 1987 it reached 12.1%, then 21.5 (1994), and at the peak in 2006 it was 35.6%. Further growth continued only in absolute figures of foreign trade turnover, calculated in monetary or in-kind terms, while in the structure of GDP, its contribution began to decline steadily. In 2010, it formed only 26.1%, in 2018-19.5%, and by the end of 2020 it fell even more – to 18.1%.
On the one hand, this confirms the statements of the Chinese leadership about improving the level of material well-being of the country’s population and its success in overcoming poverty. The average statistical nominal monthly income per capita in China in 2018 was US $4,161, while the real income was US $3,850, which is 1.38 times higher than in 2015 and 2 times higher than in 2011.
But on the other hand, it means an accelerating shift of the main weight of the Chinese economy from the external to the domestic market. In other words, China continues to be the largest “factory on the planet”, but it begins to work more and more for its own population, and not to meet the needs of residents of foreign countries. Exports in the average Chinese enterprise account for only 20% of total sales, and this share continues to decline.
However, the geographical structure of China’s foreign trade has also undergone significant changes over the past decade. If in the middle of the first decade of this century, more than a quarter, and for some product groups, more than 40%, of Chinese exports accounted for the United States, and another 15-18% – for European countries, then in 2020 only 17.4% of Chinese goods and services went to the United States.
But the second largest export partner of China was Hong Kong (10.5%), the third – Japan (5.5%), the fourth – Vietnam (4.39%), the fifth – South Korea (4.34%). The rest of Asia accounted for 2.32%, which is slightly less than the share of “rich” Germany (3.35%), the Netherlands (3.04%) or Britain (2.8%).
Thus, it can be seen that, while China continues to be the largest player in international markets, it clearly shows a tendency to increase the “coverage” of Asian countries, and a gradual cooling of interest in the key global markets of Europe and America until recently.
Strategic program “Belts and Roads”
The conclusion of the previous section is confirmed by a noticeable decrease in the media activity of China in the direction of supporting and “pushing” the program for the formation of a transcontinental logistics corridor to Europe. Beijing is certainly not giving up on it, but the general nature of its attitude towards the Belt and Road initiative shows a significant change.
Since 2015, China has moved from the global struggle of “expanding the supply channel of goods” to exporting capital to finance point-to-point projects at already “captured” borders. If at the peak of promotion in everything related to the “Belt and Road”, China invested 56.5 billion out of $118.2 billion in annual exports of its capital, then after the “surge” in 2018 (52.8 billion), further investments began to decline. In 2019, only $30 billion was invested, and in 2020 – only $17.79 billion.
Roughly speaking, everything that China wanted to get under the Belt and Road strategy, it has already received. Further expansion of the formation of “free economic zones” at key points of the formed logistics network is expected. That doesn’t require record capital investment anymore.
At the same time, the total volume of Chinese direct investment in 2020 even increased by 3.3%, reaching the level of $132.9 billion. This money now goes mainly to expanding Chinese control over mineral deposits in the 58 countries that China was able to reach thanks to the formation of the logistics structure of the “Belt and Road”.
According to official data from the Institute of International Markets at the Academy of the Ministry of Commerce of the People’s Republic of China, as of December 2020, China already had contracts concluded for geological exploration, the development of proven deposits and providing the process with local logistics and energy for a total of $141.5 billion.
From this figure, 80% of expenses are spent on practical projects, the rest is spent on the formation of leasing mechanisms for the supply of Chinese equipment and other high-tech industrial products, as well as research and professional maintenance.
Separately, it should be noted that China has stepped up the development of offshore outsourcing schemes, the growth rate of which is 3.8% per year. Moreover, even in the context of the ongoing economic and sanctions war with the United States, the volume of solid outsourcing orders from America in China in 2020 increased by 17% and reached $155.6 billion. And within the framework of the “Belt and Road”, their volume amounted to 136 billion, or 8.9% more than the result of 2019.
Thus, China’s total trade turnover with 150 countries participating in the Belt and Road Initiative exceeded $9.2 trillion over five years, including $1.35 trillion in 2020.
This leads to two conclusions. Firstly, there should be no further radical development of the Belt and Road initiative in the next 10 to 15 years. Among other things, this concerns the prospects for a radical increase in transit “Chinese” cargo turnover along the Northern Sea Route.
Its development will first require improving the logistics infrastructure, so that the main line provides tangible economic advantages in terms of ease of use and cost over existing logistics options “to Europe”. And only then will China agree to reorient significant volumes of cargo to the NSR.
Secondly, to date, within the framework of the Belt and Road Initiative, Beijing has already formed a fairly large-scale source of foreign economic income, which makes it possible to gradually reduce China’s interest in accessing the US consumer market. Thus, China has ensured a fairly high stability of its economy from US sanctions. And it will increase it in the coming decade.
China, commodity markets and “green energy”
Strictly speaking, China, in the new realities, implements the model of a colonial economy, when the “greatest factory in the world” seeks to buy mainly primary raw materials, the maximum, the results of its low redistribution, and sell industrial goods with a high share of the cost of labor of Chinese workers in its final cost.
Already in 2006, China ranked first in terms of the share of exports of high-tech products in the world, reaching a size of 16.9%. At that time, the United States had 16.8%, while Japan had 8%. By 2030, Beijing intends to increase its rate to 28-33%.
This is confirmed not only by the consistently high positive balance of China’s foreign trade, but also by the fact that foreign trade accounts for 36% of the total value added of the entire Chinese economy. For reference, in the United States, this figure is 11%, in Japan-18%.
China currently consumes 59% of the world’s cement, 47% of aluminium, 56% of nickel, 50% of coal, copper and steel, 27% of gold, 14% of oil, 31% of rice, 47% of pork, 23% of corn and 33% of cotton.
The announced plans of the Chinese leadership to maintain 5.5% of the annual economic growth rate, as well as further increase the material standard of living of its population, lead to the conclusion that the share of China in world resource consumption, and therefore in the volume of their imports, will only increase in the near foreseeable future.
However, in addition to success, this prospect threatens China with a number of interrelated problems, primarily in the energy sector.
Any industrial economy requires a lot of energy. At the end of 2020, China had 2200.58 GW of installed generating capacity. Including: thermal power plants accounted for 1245.17 GW, hydroelectric power plants – 370.16 GW, nuclear power plants – 49.89 GW, wind farms – 281.53 GW, solar – 253.43 GW. That is, coal accounts for 56.58% of the installed capacity in China’s energy system, and it generates 5.174 million GWh of electricity, or 67.8% of the total volume of its generation in the country. Hydroelectric power stations “give” another 17.76%. Atom accounts for 4.8%, wind for 6.1%, and solar for 3.4%.
At the stated rate of economic growth, by 2030 it will be necessary to receive at least 20% more electricity per year than it has today, and by 2050 its demand will increase by 1.8-2 times. Moreover, if the country has three decades to develop to the far frontier, then the declared next stage of improving the welfare of Chinese society covers less than one decade, which does not allow us to count on the success of modernising the energy industry according to the “green” standards confirmed at the Environmental Summit in 2021.
There is a question about the meaning of the goals announced by President Xi to bring China to full decarbonisation by 2070. To understand it, three points should be noted. Firstly, Beijing stated that the “peak of coal” in China will come around 2030. That is, over the coming decade, China will continue to increase the volume of “coal” generation.
Secondly, China considers not only “wind” and “sun” to be “green energy”, but also nuclear energy, the pace of development of which is already accelerating today.
Thirdly, in terms of construction costs, solar and wind farms are still much cheaper than hydroelectric and nuclear power plants, and require significantly less time to deploy them. At the same time, the total share of “intermittent generation” will continue to remain insignificant in the total volume of its other types for a long time, which will allow us not to face its negative side in terms of the stability of the energy flow in the next decade.
In other words, “total carbon-free” is certainly considered a mandatory goal, but it is very far away. And while it is not even clear exactly how it is supposed to be achieved practically. The possibility of creating a powerful segment of “hydrogen energy” in China is absolutely not excluded.
Including the so-beloved “green hydrogen” in the West, produced by electrolysis technology at the expense of renewable energy generation. Moreover, China is a leader in the production of renewable energy equipment, while in the oil and gas sector it remains extremely dependent on its exports.
But in the near future, China will be able to afford to ignore the cross-border “carbon tax” by further reducing foreign trade with European and American markets. And the nearest increase in electricity consumption should be ensured by the construction of new coal-fired power plants.
First of all, as the easiest and cheapest to create and operate. Second of all, because China has significant domestic reserves of thermal coal. Third of all, because the “decarbonisation” of the Western economy will inevitably lead to a decline in demand for coal in developed countries, and therefore contribute to a drop in world prices for it. Although now it is still not obvious.
Fourthly, because coal-fired thermal power plants can be upgraded relatively quickly in the future with conversion to natural gas. This will reduce emissions, and therefore allow us to show the presence of a tangible movement of China towards general “decarbonisation”.
Thus, China’s continued economic growth over the coming decade will be limited by its ability to expand the coal-fired segment and its ability to implement plans to build an additional 81 GW of installed nuclear power capacity by 2030 and reach 238 GW by 2049. To reach such figures, China already needs to start building at least 40 reactors, while, according to open sources, it is building only 13 power units and 12 more are in the process of project approval.
Most likely, Beijing will not be able to achieve its stated goals in the field of nuclear energy in the next 30, and even more so in the next 10 years. Although it will most likely be able to surpass the level of the United States, with its 99 GW of installed capacity of nuclear power units. A high rate of increase in the scale of renewable energy, of course, will continue, but the necessary increase in the volume of generation will not provide. This ultimately leads China to a difficult future.
Based on the average ratio that two tons of coal is approximately equal to 1,000 cubic meters of natural gas in terms of energy value, just a simple replacement of coal generation with gas will require China to consume approximately 2.5 trillion cubic meters of “blue fuel” per year, which is a third less than the total global gas production in 2020.
This leads to two conclusions: first – that the “peak coal” in China is likely to last significantly longer than the declared 2030; second – that China will maintain, and even increase, its dependence on gas imports for a very long time, at least until the middle of this century.
And since the Chinese leadership clearly interprets this situation as a serious threat to national security, Beijing will continue to step up efforts to establish full control over the South China Sea, under the bottom of which, according to geological exploration, there is the second largest gas field in the world, and not yet “unsealed”.
Therefore, even if it is necessary to achieve this by force of arms, China is psychologically ready to fight for it with the United States. Although it is trying to find a way to solve this problem, if possible, without the direct use of military force.
These same reasons also determine Beijing’s high interest in “hydrogen” as a new additional energy source. But not “instead of fossil generation”, as in Europe, but strictly in addition to it.
Socio-political model of “new communism”
In addition to the geo-economic aspect, the Chinese plan to build a “society of great unity” in the country by 2035 also has an important geopolitical aspect. An analysis of the statements of the CCP’s top leadership suggests that in the next decade and a half, China intends to put into practice a completely new social model, radically different from the principles of the “open market” and the approaches of the “liberal democracy” prevailing in the West. This automatically determines the deepening of the ideological conflict between China and the “collective West, under the leadership of the United States”.
Although important details of the practical steps taken by the Chinese leadership will finally become clear in the next one or two years, nevertheless, the fundamental aspects of the “China plan” are already taking on tangible features.
According to the 14th five-year plan for 2021-2025 adopted in China, it has outlined the state’s commitment to bring social security coverage to at least 90% of the country’s population. That is, we are talking about building a “social state” there with a level of support for citizens higher than in any other country in the world.
In combination with providing conditions for high incomes, it is possible to form a strong public belief in the indisputable superiority of the “Chinese way of life” over any other. At least for Chinese citizens. With the subsequent prospect of spreading such beliefs to the entire “Chinese economic cluster” currently formed on the basis of the ASEAN (RCEP Agreement).
At the same time, a stick is also attached to the “carrot”. In two forms: for society and for business.
The formation of a new “social” model of world perception and behaviour in society is supposed to be carried out with the help of the new Civil Code adopted on January 1, 2021, which is actually the first in the history of China. Among other things, it reinforces the universal application of the “social credit system” in the country.
Within the framework of its concept, each citizen is given a starting amount of social points, the current value of which will directly depend on the level of availability of social benefits and even certain civil liberties.
Further, based on the analysis of 160,000 parameters obtained from 142 institutions, the unified information centre will analyse the behaviour of a citizen and raise or lower their rating.
Chinese people will receive points: for participating in charity work, caring for elderly family members, good relations with neighbours and helping the poor, donating blood, supporting the government on social networks, having a good financial credit history, performing any heroic act, etc.
Points can be deducted for violating traffic rules, anti-social behaviour, hooliganism, violating the norms of good neighbourliness and dorms, participating in a protest against the authorities, posting anti-government messages on social networks, unsatisfactory assistance to ageing parents, spreading rumours and fakes on the Internet, insincere apologies for crimes committed, participating in sectarian activities and cheating in online games.
At the initial value of 1000 points (level A+), all services and opportunities are available to the citizen, including public service and doing business, and individual bonuses, including regional ones, can also be provided. For example, in the form of discounts on the cost of travel in transport, hotel services and the service sector, or preferential rates and credit conditions.
A level below 599 points belongs to category D, which automatically introduces restrictions on travel in transport, activities, and even the level of positions held. And some activities are generally banned. A low rating will lead to public censure and ridicule, the publication of the names of the perpetrators, up to personal information of friends, colleagues and relatives.
From a Western liberal point of view, all of this looks like a “digital concentration camp” and is sure to cause rejection, up to calls for “overthrowing” it for the sake of the triumph of “freedom and democracy”. At least in the information space, which will increase the degree of information isolation of the “Chinese world” on the Internet, on the one hand, and will require the Chinese leadership to expand its own offensive foreign information policy.
Thus, we should expect the “ideological value” split between China and the “Western world” to deepen.
In addition to the “re-education of society”, the Chinese authorities have launched a program to increase corporate social responsibility of business. Although it is mistaken for an analogue of the “collapse of the NEP” and the “repression of 1937” in the USSR, in reality it is about something else. About introducing into the social consciousness of high-income segments of the population, especially large business owners, the unconditional postulate of the need to “share fairly”.
But not in the form of expropriating “too much money”, but in the form of consolidating the understanding of the need to use a significant, at least a quarter, of the net profit and large personal income received for “ennobling the place where you live”.
For this purpose, non-governmental funds are being created in a number of Chinese provinces. Donations to them are supposed to finance the development of transport and social infrastructure, the construction and improvement of kindergartens, schools, public leisure centres, the formation of a comfortable environment for mass recreation, the maintenance and development of physical education and sports, and the development of the local road network and local public transport, including a cheap car-sharing system. A separate line indicates the development of technologies for recycling garbage and improving the environmental situation.
It is postulated that an increase in welfare should not result in an increase in the level of “pay for everything” for society. As Western culture shows, this situation everywhere leads to an increase in the atomisation of society, undermining its social foundations and social stratification of society with a deepening ideological separation of social groups from each other. Which ultimately destroys the mental connection between people that shapes the nation as a whole.
On the contrary, an increase in well-being should be perceived as unconditional consent to increase a person’s social obligations to society. Including for improving the world around them, in which the whole society lives together.
It is still difficult to say to what extent these measures are really capable of achieving the declared goal of building a “society of great unity”. However, it is already clear that this goal is primarily focused only on China itself. That is, the expansion of the “Chinese way of life” beyond its borders should not be expected.
This leads to the conclusion that the final outcome of Chinese economic and social modernisation is the formation of a rather closed “Chinese” cluster with China in the form of a “middle state” in the “space of universal prosperity” in Asia. Most likely – only within the borders of Southeast Asia, with Central Asian countries like Pakistan and possibly Iran as its outer periphery. It is not intended to include the rest of the world. At least until the end of this century.
Conclusions and recommendations
Based on the above, a number of conclusions should be drawn.
1. Although the scale of China’s economic dominance will continue to increase in the coming decade, in the systemic sense, this process will be mostly inertial, as the relative share of foreign trade in China’s GDP will continue to decline.
2. The expansion of the “Belt and Road” project in the future should not be expected. Therefore, all Russian projects that are planned in one way or another based on expectations of growth in the future Chinese transit cargo flow need to be reviewed and adjusted.
In fact, this means the beginning of competition between existing logistics flows for pulling volumes only at the expense of offering a more developed infrastructure, reducing delivery times and significantly reducing logistics costs. Russia certainly has the opportunity to achieve tangible competitive advantages in this process, but it will be necessary to achieve results with an emphasis, first of all, on its own financial resources.
3. In any scenario, the further locking of China within the boundaries of “its” cluster, on the basis of the RCEP agreement, is systematically irreversible and stably long-term. Moreover, the process will be accompanied by the ever-growing demand of the Chinese economy for raw materials and energy carriers. In the future, at least until 2030, and probably until 2035, it will even include coal.
Later, China will begin converting coal-fired generation to more environmentally friendly fossil fuels, i.e. natural gas. This makes China a stable and long-term buyer of Russian gas in all its forms, from pipeline to liquefied. Consequently, rather long-term conditions are formed that guarantee the payback of the expansion of the relevant infrastructure facilities and the return on investment in them. Thus, the pace and scale of Russia’s “pivot to the East” should be maximised.
4. China will continue to increase the pace of introduction of wind and solar generation capacities in the foreseeable future, but with any “revolutionary” scale of their expansion, in the next 15 years this process will not be able to interfere with the demand for fossil fuels in any significant way.
5. It is important to note that technological equipment is a critical factor in maintaining China’s interest in cooperation with the Russian Federation. In the field of wind and solar power plants, China already is a leader, which will not allow to count on success in promoting the Chinese market (including the market of other countries of the “Chinese cluster”) with our own Russian developments. Even if progress is made in creating them.
But in the field of equipment for oil and gas production, pipeline transportation, as well as in the field of liquefaction and re-gasification, China will maintain a high level of dependence on imports in the foreseeable future. This opens up an opportunity to encourage R&D in this area in Russia and the deployment of domestic production of the necessary equipment. The strengthening of China’s confrontation with the West creates sufficient prerequisites for this.
However, it should be remembered that the transfer of technology to China will result in a fairly rapid appearance of its own analogues there, with a corresponding loss of interest in continuing cooperation. So one should sell only finished products, but not their production technologies.
6. Given the growing demand of China for all types of raw materials, Russia’s strategic goal is to expand its expansion into Africa in order to secure raw material deposits and organise the production of raw materials at the highest possible levels of technological processing. China should sell not only raw materials, but also the results of labour.
Moreover, to strive to increase the share of added value in the delivered goods. It should also be understood that Russia has no more than 15 years to practically penetrate the Black Continent and gain a foothold there, while Beijing will be severely limited in its capabilities due to the geopolitical and geo-economic confrontation with the United States. After this point, its ability to expand control over external sources of raw materials will radically increase.
7. For the same reason, it is advisable to consider restoring mass cotton production in Central Asia under Russian control and with Russian participation. In the next 10-15 years, the demand for it from China will increase by at least 15-20% relative to the current level. And China now consumes over a third of the world’s cotton production.
8. As a source of finding internal sources of financing for relevant infrastructure projects outside the budget, it is advisable to consider the Chinese experience of increasing the “social responsibility of business”.