171 PCNP 16 E Bis - China in a Changing World

PC 171 PCNP 16 E bis Original: English

NATO Parliamentary Assembly

POLITICAL COMMITTEE

CHINA IN A CHANGING WORLD

REPORT

Paolo ALLI (Italy) Rapporteur of the Sub-Committee on NATO Partnerships

www.nato-pa.int 19 November 2016 171 PCNP 16 E bis

TABLE OF CONTENTS

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INTRODUCTION: CHINA’S INCREASING ROLE IN INTERNATIONAL AFFAIRS

1. While the priorities for the Chinese leadership will continue to be domestic economic development and social and political stability, the People’s Republic of China (PRC) has steadily increased its global role since the late 1970s, in parallel with its dramatic economic progress. Today, China is a truly global actor, particularly in the economic and financial realms, but also increasingly in the area of international security. According to its own narrative, under the leadership of the Chinese Communist Party (CCP), the country’s foreign policy remains primarily geared towards maintaining a stable regional environment that allows its economy to grow and towards managing its “peaceful rise” in a way that does not cause confrontation. However, recent actions by China, including its territorial claims and actions in the East and South China Seas, have raised concerns among its neighbours that the PRC may pursue a more assertive approach towards them.

2. Although NATO has neither a formal Asia policy nor a clear role in the region, China’s increasing leverage in global affairs is having a strong impact on the Allies’ individual and collective security and their political and economic interests. Regional instability arising from deepening tensions between China and countries in the Asia-Pacific would have a tangible impact on NATO member states, not least because of the close political, economic and financial ties between several of these countries and the West. The purpose of this short report is to inform the Members of the NATO Parliamentary Assembly of China’s rise and the possible implications for Allied security. In this context, your rapporteur will provide a short analysis of China’s foreign policy priorities and the domestic drivers behind them. This paper is following up on earlier reports of the Political Committee on the interconnectedness of security in the Asia-Pacific and the Euro-Atlantic regions, and the 2011 General Report of the Political Committee on The rise of China and possible implications for NATO [183 PC 11 E rev.1].

CHINESE FOREIGN AND SECURITY PRIORITIES AGAINST THE BACKDROP OF DOMESTIC AND INTERNATIONAL DETERMINANTS

3. The foremost objective of the Chinese leadership is domestic political stability to ensure regime survival, which depends to a large extent on continued economic growth. Since the late 1970s the Chinese political leadership has consistently pursued gradual reforms that have resulted in China becoming a country with an increasing market orientation. This has been remarkably successful, making China the second largest economy in the world and an influential global economic and financial actor. As the Communist ideology has become less relevant after the end of the Cold War the Chinese political leadership has also at times used nationalism as an instrument to garner support among the population. Therefore, any discussion of the primary concerns of Chinese foreign policy must be framed in the context of domestic priorities and constraints. Xi Jinping, the General Secretary of the CCP, President of the People's Republic of China, and Chairman of the Central Military Commission, has made his vision of the “China Dream” – the country’s ascendance to military, economic, and cultural power, “strong, democratic, culturally advanced, and harmonious” by mid-century – the trademark of his administration. Understanding the national leadership’s vision of transforming China into a fully developed economy and truly global power within just several decades from now is crucial to grasping and analysing the direction of China’s national economic policy and foreign and security policy.

4. The Council of State’s XIIIth five-year Development Plan for the years 2016 to 2020, approved by the CCP’s Central Committee in October 2015, and formally adopted by the National People’s Assembly in March 2016, sheds light on the changing focus of China’s future economic development. The Plan emphasises the goals of achieving “sustainable, inclusive, green and balanced” development, building an “environmentally friendly society” and a “moderately prosperous” China. The latter is generally understood as the goal of the Chinese government to double the GDP and per capita income by 2020 compared to 2010 levels. More generally, the new

3 4 five-year plan emphasises citizens’ welfare by, among other things, striving to increase salary levels, modernise agriculture, reduce income differences, and provide more efficient healthcare services.

5. Under the new leader, China is undergoing a political transformation that has led to a centralisation of power in the hands of Xi Jingping. In the pursuit of this domestic vision, Xi Jinping has accrued more personal authority in the Chinese political system than any leader since Chairman Mao. The political power he holds has been reinforced since he took office, in particular through a publicised and large-scale campaign to root out corruption in the CCP, which has implicated many senior officials since it was launched almost three years ago. It should be noted that some analysts consider Xi’s anti-corruption campaign as a way to get rid of political opponents and that the centralisation of power in his hands has also generated a backlash from party officials who understand that the last time there was so much centralised power under Mao it ended in disaster. The CCP has carefully tweaked a system to try to balance power interests and Xi has upset this. This centralisation of power reflects the fragility of the system.

6. Indeed, the CCP has for several decades maintained an “unwritten social contract” with its citizens whereby political participation remains curtailed in exchange for the government continuing to deliver on steady high growth and rapidly rising living standards. However, the viability of this implicit trade-off between rising prosperity and political rights, as well as the country’s leaders’ reputation for economic competence, has suffered of late. A stock market crash and a string of policy missteps compounded a slowdown of China’s economic growth that has lasted for several years now. Moreover, despite joining the World Trade Organization (WTO) and multiple promises of reform, Beijing’s attempts to become more like a market economy have slowed. Approximately 60% of China’s GDP is generated by state-owned enterprises (SOEs), which account for around half of bank credit but produce only about a fifth of industrial output. While the number of SOEs has been reduced since the 1990s the government’s stimulus programme following the global economic and financial crisis in 2007/2008 generated factory construction and equipment without the demand to meet this supply. Hence, despite numerous reform pledges, the share of SOEs has not been decreasing lately. This poses a considerable problem not only for China, but also for the global economy.

7. Official GDP growth in 2015 fell to 6.9%, the weakest in 25 years, undermining predictions made by Chinese officials that growth of 8% and above would be the norm for at least the next two decades. For 2016, predictions by market observers range from an official target of 6.5% to 5% and even lower. Following a major monetary stimulus programme in 2009, private companies and SOEs went on a borrowing binge, which increased the debt-to-GDP ratio from around 170% in 2007 to 280% by mid-2015. The country’s non-financial state-owned enterprises account for around half of bank credit but, as already mentioned, produce only about a fifth of industrial output. An August 2016 report by the International Monetary Fund (IMF) warned of “heightened downside risks” and the need for “decisive action” to reduce the economy’s reliance on credit, including reforming and even shutting down overly indebted companies. Significant volatility in the stock market which began in summer 2015 has had serious repercussions on international financial markets and has prompted emergency interventions from the Central Bank. In the longer term, the Chinese economy will also be subject to demographic and social pressures. Economic progress has been uneven in the last 30 years, favouring China’s coastal areas and leading to increasing urbanisation. This has generated considerable levels of inequality between the rural areas and the cities.

8. Another social issue the PRC is facing are the approximately 280 million migrant workers with little access to education and welfare. In addition, the one-child policy has led to a rapid ageing of the society. The resulting reversal of the generational pyramid and the switch from the traditional family-based welfare model to state welfare is likely to have a significant negative impact on the state budget. The move from the one-child policy to a two-child policy announced in late 2015 was an acknowledgement of the need to replace an aging work force and to increase consumption. However, the two-child policy has come too late, few people will take advantage of it

4 171 PNCP 16 E bis and it is likely that China will get old before it gets rich. Moreover, the huge numbers of Chinese men deprived of spouses by selective female abortion has generated such worries of unrest that the government has initiated a publicity campaign promoting the raising of daughters.

9. Some difficulties were clearly to be expected as the country attempts a major re-balancing of its economic model – from one primarily dependent on government investment and industrial exports to a more service-oriented one underpinned by consumption - in a time of low global demand. Taken together however, some analysts predict that China’s current economic woes point to a deeper and longer-lasting stagnation, with unpredictable consequences for the Party’s political legitimacy. Others emphasise the fact that China remains the world’s second largest economy and that its drive for economic transformation seems to be remarkably on track, given turbulence in global financial markets and reduced trade. The role of private domestic consumption in the economy is rising year after year, leading to a surge in Chinese services industries across the country.

FOREIGN POLICY

10. China’s declared overarching foreign policy priorities are to maintain a stable regional environment and to manage its “peaceful development” as a global power. Given the CCP’s focus on developing the country’s economy and society and the fact that China is both a leading economic and financial power and at the same time a developing country, the foreign policy of China is by necessity partly resource-driven. As such it emphasises facilitating and promoting cooperation that supports its economic needs. Against the backdrop of the current domestic developments and constraints discussed above, many of the priorities of Chinese foreign and security policy become clearer.

11. Reflecting its strong sense of history and its role as an important global economic, financial, and increasingly political actor, China is becoming more ambitious in its international engagements. This is particularly evident from its increased involvement with international organisations such as the IMF and the United Nations. The decision by the IMF in November 2015 to include China’s currency, the renminbi (RMB), in its basket of reserve currencies (Special Drawing Rights - SDR), joining the dollar, the euro, the pound and the yen, highlights the country’s rising financial and economic heft and is likely to increase the use of the renminbi in global trade and finance. Joining the IMF currency basket is an acknowledgement that China is now a “world player” and has been used by the Chinese leadership as a stamp of approval by the international community of the CCP’s ability to manage the country’s economy. However, inclusion in the SDR basket has also had the negative side-effect of generating currency outflows and has created difficulties in adjusting between onshore and offshore RMB accounts.

12. At the same time, Beijing is questioning whether existing international organisations are adequate in today’s world. In this context, China is also creating new venues of international cooperation it believes better suited for promoting its interests in an increasingly multipolar world, such as the Asian Infrastructure Investment Bank (AIIB), the New Development Bank and the “Belt and Road” infrastructure project1. Some analysts see these new initiatives as challenges and even rivals to the Bretton Woods institutions developed by the US and its European Allies after the end of World War II. However, others view their emergence as a logical consequence of both shifts in the global balance of economic and political power and of frustration with the slow pace of governance reforms within the Bretton Woods institutions intended to reflect these changes. Whether these initiatives will lead to regional trade blocs harmful to overall global trade or to strengthened institutions and deeper integration through the Asia-Pacific remains to be seen.

13. Conceived as a modern-day restoration of the Silk Road, the “Belt and Road” initiative has both a land component (Silk Road Economic Belt) and a maritime one (Maritime Silk Road). It

1 The initiative was previously known as the “One Belt, One Road” (OBOR) initiative.

5 6 envisages the development of an unblocked road and rail network between China and Europe through Central Asia and the Middle East, as well as a maritime road connecting China’s port facilities with the African coast, then up the Suez Canal into the Mediterranean. By channelling capital and China’s domestic overcapacity, especially in the steel and manufacturing sectors, into regional infrastructure development, Beijing intends to improve trade and relations with Asian, Central Asian and European countries.

14. “Belt and Road” is an ambitious initiative with huge economic, and indeed political, potential that can promote China’s international role and would certainly affect its relations with its neighbours, which are sometimes tense. If implemented, it would cover dozens of countries with a total population of over three billion people. During the visit of the Sub-Committee to China in July 2016, Chinese interlocutors compared “Belt and Road” to the Marshall plan in Europe after the end of World War II, emphasising that the initiative provides opportunities for all the sides involved, including India, even though New Delhi remains, for now, reluctant to get involved. Some analyses of the project have highlighted its potential to allow China to build up a sphere of influence and even proxies across the 60 countries that may in the end be involved, despite Chinese assurances to the contrary. The Maritime Silk Road in particular has raised suspicions of ulterior military motives, with China’s ultimate objective being to secure access for its navy to a series of ports stretching from the South China Sea to Africa’s East Coast. This is the “string of pearls” model, with potential ports including Colombo in Sri Lanka, Gwadar in Pakistan, Chittagong in Bangladesh, the Maday Island in Myanmar, and Port Victoria in the Seychelles.

15. The “Belt and Road” initiative would inevitably have a tangible effect on Central Asia, where Russia and China compete for influence. Beijing’s approach to the Central Asian republics is primarily focused on trade and financial assistance. Beijing’s relative restraint in interfering with domestic politics in the region has enabled it to gain considerable ground against Russia in the region. However, while Russia and China vie for influence in Central Asia, they are united in their concerns about religious extremism, which is primarily driven by poor governance and weak economies, and a desire to limit the influence of the United States and of NATO Allies in the region.

16. Russia initially kept aloof from the “Belt and Road” initiative, primarily because Moscow was concerned by its possible negative impact on its own plans for a Eurasian Economic Union (EEU), which includes Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia. Moscow continues to consider Central Asia as its sphere of influence, which China’s economic expansion in the region could undermine. More specifically, Moscow regards itself as the power which should bear exclusive responsibility for regional security. China is not contesting Russia’s claim and has thus far refrained from getting involved in the internal affairs of Central Asia. Moscow has meanwhile publicly declared that it recognises the opportunities and possible benefits from engaging with the “Belt and Road” initiative. Russian President Vladimir Putin and Chinese President Xi Jinping signed a statement linking the EEU and “Belt and Road” projects in May 2015. However, for the time being, the projects have yet to produce tangible economic and political results.

RELATIONS WITH RUSSIA

17. Although one can argue that the importance of Russia for China has decreased since the demise of the Soviet Union, it remains a relevant factor for Beijing’s foreign policy. Sino-Russia relations, which had been tense for most of the Cold War as both vied for control of the worldwide Communist movement, improved significantly during the 1990s. In recent years Beijing and Moscow have deepened their bilateral relationship in a number of areas, ranging from Russian sales of advanced weapon systems and military technology transfers to major energy cooperation projects. Sino-Russia cooperation also takes place in the context of the Shanghai Cooperation Organisation (SCO), a regional security organisation that also includes four Central Asian countries and originally focused on combating terrorism and religious extremism. The remit of the SCO has in the meantime been expanded and now also includes regional stability, and economic cooperation, as well as energy development.

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18. Moscow’s deteriorating relationship with NATO Allies, and the West more generally, following Russia’s annexation of Crimea has led it to pursue its own “pivot” to Asia, thereby also increasing the importance of Russia’s bilateral ties with China. This was to compensate for some of the losses generated by Western sanctions that closed access to key financial markets and reduced Western investments in Russia significantly. While China has not recognised Russia’s annexation of Crimea or the independence of South Ossetia and Abkhazia, it has refrained from condemning Moscow’s actions. China’s position on these issues is highly relevant, not only for NATO Allies but also for some partner countries. During a visit to Japan of the Sub-Committee on NATO Partnerships in 2015, host country interlocutors suggested that China’s actions in the South and East China Seas were comparable to Russia’s aggressive actions against Ukraine and Georgia.

19. In addition to increasing opportunities for greater economic trade and energy cooperation both China and Russia also have a shared interest in reconfiguring global (economic) governance and limiting, or reducing, the influence of the West and the United States in particular. However, while both Moscow and Beijing have declared their intention to elevate their bilateral relationship to a higher level and their economic, diplomatic, and military ties have indeed developed, both sides appear at present uninterested in forming a military and political alliance or entering into other formal arrangements. The relationship between China and Russia remains a marriage of convenience and continues to be characterised by ambiguity and competition over regional influence, particularly in Central Asia. Moreover, Beijing is also aware that its economic interdependence with the West is much more important for its peaceful rise than any deeper cooperation with Russia.

THE SOUTH AND EAST CHINA SEAS

20. It is clear that the tensions in the South and East China Seas affect the interests of NATO Allies. Given the volume of trade that passes through, ensuring freedom of navigation and securing sea lines of communication throughout the East and South China Seas is of national interest not just for the United States, but for other NATO Allies as well. It is estimated that USD5.3 trillion worth of trade passes through the South China Sea every year. If Sino-Japanese tensions over the contested Senkaku/Diaoyu islands in the East China Sea have decreased in recent months thanks to high-level political discussions, the Paracel and Spratly island chains in the South China Sea have become the focus more recently of regional territorial disputes.

21. China has laid claim to sovereignty over much of the sea, which is estimated to contain 11 billion barrels of oil and 190 trillion cubic feet of natural gas, provoking Malaysia, Vietnam, Brunei, Taiwan, Indonesia, and the Philippines, which have their own claims. The region is also an important sea-lane choke-point and holds valuable fish stocks for a region largely reliant on protein from the sea. The dispute dates back to the early 1970s when the countries began to claim islands and various zones like the Spratly Islands as their own. Vietnam has claims to both the Paracel and the Spratly island chains and the Philippines is still smarting from what President Benigno Aquino III described as China’s “annexation” of the Scarborough Shoal in the Spratlys four years ago.

22. In late July 2016, the Permanent Court of Arbitration in The Hague unanimously ruled against China and in favour of the Philippines, arguing that under the United Nations Convention on the Law of the Sea (UNCLOS), China had no legal basis to claim historic rights over most of the South China Sea. China had boycotted the proceedings, arguing that the tribunal had no jurisdiction and that it would ignore any decision. At the same time, after the ruling of The Hague, Chinese officials have repeatedly declared, including to the Sub-Committee on NATO Partnerships, which visited directly after the verdict, that the dispute should be resolved by consultation and negotiations and that the PRC will continue to pursue dialogue to reach an agreement. The PRC has rejected the decision of the International Tribunal in The Hague. China's

7 8 handling of its legal defeat and, more importantly, its approach towards its neighbours over the South China Sea will clearly demonstrate how far Beijing is prepared to abide by international law.

23. Paradoxically, Beijing’s attempts to assert itself in the region while pushing back US influence have only strengthened the United States’ long-term prospects for regional influence. China’s littoral neighbours and the United States contest Beijing’s claims and continue so-called “freedom of navigation” operations. Defending its current interpretation of international law and of the freedom of the seas in particular, the United States has deployed ships on “freedom of navigation” missions in the South China Sea and beefed up its military presence in the region. In addition, reacting to requests from littoral states, the United States has strengthened its existing defence ties in the region. For example, Vietnam has begun to buy weapons from the United States, the Philippines has invited US forces back onto its soil after expelling them 25 years ago and Singapore has begun to let US Navy surveillance aircraft use several of its bases. At the same time, to preserve relations with China and continue cooperation on various issues, the United States has an interest in de-escalating tensions. To that end, the United States has expressed its support for an agreement between regional countries on a binding code of conduct and other confidencebuilding measures.

24. In contrast, China interprets UNCLOS as barring foreign militaries from conducting intelligence-gathering activities such as reconnaissance flights in its exclusive economic zone (EEZ), while the United States asserts that countries should have freedom of navigation through EEZs in the sea and are not required to notify claimants of military activities. China has warned its Southeast Asian neighbours against drilling for oil and gas in the contested region, disrupting other countries’ oil exploration and seismic survey activities.

25. In addition, China began dredging operations to build artificial islands on top of coral reefs in the Spratlys as early as 2014 and has sped up the pace over the last year, building deep water harbours and runways able to accommodate warships and fighter jets. In February 2016, satellite imagery revealed the existence of surface-to-air missile batteries on the Paracel islands, as well as radar installations which could extend the range of so-called “carrier-killer” missiles based on the Chinese mainland.

26. Apart from territorial and economic interests of the littoral states in the South and East China Seas, regional allies of the United States, like Japan and the Republic of Korea, are also concerned about the security implications of the deployment of military hardware by China on the disputed island chains. The United States and regional military experts worry that China’s Anti- Access/Area Denial (A2/AD) capabilities such as its anti-ship ballistic and cruise missiles and submarines would delay or hinder the United States from coming to the defence of its regional allies if a conflict erupted. However, despite this rapid pace of military build-up, analysts say that China is not close to achieving the capability to deny access to US forces in the region.

27. However, despite widespread international concern about China’s territorial claims in the South and East China Seas and the measures it has taken to advance them, many experts agree that China’s primary foreign policy objective remains to foster “stable, benign and, if possible, positive” relationships with its numerous neighbours and above all, to avoid the risk of armed conflict as China continues its rise and attempts to complete its domestic economic transformation. The consequences of any conflict would be devastating for Chinese business and for its economy. Moreover, for the time being Chinese military capabilities are far inferior to those of the United States, which has a strong military presence in the region, as well as mutual defence pacts with several of China’s neighbours with whom it has a relatively contentious relationship. Nonetheless, China’s continuing and intensifying efforts to assert its disputed territorial claims in the East and South China Seas raise questions about Beijing’s intentions in the region.

28. Adding to these tensions are the disputes between China and Taiwan over the island’s sovereignty, which the PRC claims to be its sovereign territory. The relationship improved between 2008 and 2016 when President Ma Ying-jeou and the Kuomintang party were in power and political

8 171 PNCP 16 E bis dialogue and economic co-operation increased. However, tensions heightened after Tsai Ing-wen and the Democratic Progressive Party, which has traditionally put a stronger emphasis on Taiwan’s independence, took over the government in January 2016. Taiwanese President Tsai has reiterated that she will maintain the status quo in Taiwan’s relations with the PRC, yet has promised to reduce Taiwan’s economic dependency on China. President Tsai did not endorse the “1992 Consensus” – in which Taipei and Beijing agreed that they are part of “one China” but with different interpretations – during her inauguration speech on 20 May. Beijing has repeatedly emphasised that accepting the “1992 Consensus” is necessary for political and economic relations to continue as they have in recent years. On 25 June, China suspended diplomatic ties with Taiwan over Tsai’s failure to explicitly recognise the “1992 Consensus”, though on 20 August Tsai said that unofficial communication channels remained.

29. In recent years, China has significantly expanded its military capabilities. The shifting from a focus on Asian land war to prioritising sea and airpower was reflected in the most recent defence white paper of the People’s Liberation Army (PLA) of May 2015: “The traditional mentality that land outweighs sea must be abandoned, and great importance has to be attached to managing the seas and oceans and protecting maritime rights and interests”. To that end, the People’s Liberation Army Navy (PLAN) is undergoing a transformation from a coastal defence force to one able to operate on the high seas, with procurements including advanced frigates, destroyers and nuclear- powered submarines. The Chinese Defence Ministry announced, in late 2015, the first Chinese aircraft carrier to be built with domestic technology, and the second one for the PLAN since the Liaoning entered service in 2012 is currently under construction.

30. Upgrades in naval capabilities are part of a larger modernisation of the Chinese armed forces, transforming it into a professional force able to project power into the Western Pacific, over the internet and even into space. This modernisation includes: the restructuring of its military command regions; giving the navy, air force, and strategic missile services their own command structures and removing them from the control of the ground forces; and strengthening its missile, space and cyber capabilities. In the context of the modernisation of its armed forces, China also plans to cut 300,000 non-combat personnel from its 2.3 million-strong military over the next five years.

31. Amid this efficiency drive, Chinese officials recently announced a slowing in defence spending for 2016 – a rise of between 7 and 8% in contrast to the double-digit increases seen over the past two decades. Although the slowdown in economic growth may be partly to blame, analysts caution that China’s military budget is opaque, with off-budget procurement accounting for 50% of the total published outlay. Furthermore, China may now be seeing the fruit of a decades-long R&D effort on newer-generation weaponry, including a stealth fighter, the Y20 transport aircraft and the 052Dtype destroyer, which would also account for part of the spending slowdown.

THE DEMOCRATIC PEOPLE’S REPUBLIC OF KOREA

32. The Democratic People’s Republic of Korea (DPRK, or North Korea), and particularly its nuclear weapons programme, is a major concern for global security as well as for NATO Allies. Over the years, the DPRK has successfully performed several nuclear weapons tests and launched several ballistic missiles, including sea-launched ballistic missiles (SLBM). According to a report by the Institute for Science and International Security, by 2011 the DPRK had produced between 34 and 36 kg of plutonium, sufficient to build 12 nuclear devices. The US Defense Intelligence Agency has assessed “with moderate confidence” that the DPRK also has nuclear weapons capable of delivery by ballistic missiles. Stability on the Korean peninsula is a regional priority of China, which is North Korea’s closest partner and trading partner and an important source of food, arms and energy to the regime in Pyongyang. China has traditionally resisted pressure from the United States to take a harder line towards North Korea, believing sanctions to be counterproductive. Beijing has generally followed a policy of pushing back against punitive international sanctions and propping up the government in order to stave off regime collapse in the

North and the likely flood of refugees into China that would ensue. The collapse of the regime would also be likely to remove the strategic buffer China enjoys between its territory and the 30,000 US troops stationed in South Korea.

33. However, the DPRK’s continued provocative and aggressive actions, including nuclear tests since the current Supreme Leader, Mr Kim Jong-un, succeeded his father in 2011, have tested this policy. China began to support punitive United Nations Security Council (UNSC) resolutions beginning in 2006 when North Korea tested a nuclear weapon, while also working within the UNSC to water them down before adoption. Most recently, China joined the United States in drafting UNSC Resolution 2270 (2016) imposing the harshest sanctions to date targeting North Korea’s mining, trade and financial sectors, following North Korea’s nuclear test on 6 January 2016 and rocket launch on 7 February. The new resolution requires that all cargo going to and from North Korea be inspected. It bans the transfer to North Korea of any item that could directly contribute to the operational capabilities of its armed forces and blacklists individuals, entities and ships which have contributed to the development and financing of the country’s nuclear weapons programme.

34. China hopes that this most recent round of sanctions will bring about a return to dialogue, notably in the framework of the stalled Six Party Talks. At the same time, recent Chinese efforts at rapprochement with South Korea, spurred in part by the US “pivot to Asia” and its strong protests against the possible deployment of a US THAAD (Terminal High Altitude Area Defense) missile defence system in South Korea, show the complex dynamics China faces on the Korean peninsula. China’s participation in international cooperation to address the North Korean issue is tempered by concerns that such an approach will result in bolstering the US military presence in the region and strengthening US regional alliances. As host country interlocutors informed the Sub- Committee on NATO Partnerships during the visit to China in July 2016, Beijing also believes that the United States and South Korea share responsibility for growing tensions in the region.

35. The North Korean regime’s bellicose behaviour and the callous depredation it inflicts upon its citizens has been detrimental to efforts to foster peace and stability in East Asia. The DPRK’s latest nuclear test on 9 September 2016 and a series of ballistic missile launches with growing ranges during the summer of 2016 have heightened tensions on the Korean Peninsula and in the region. Most observers considered North Korea’s threats and earlier weapons tests under Kim Ilsung and Kim Jong-il primarily as posturing and blackmailing to get more aid, attention, or sanctions relief. In contrast, it appears that Kim Jong-un wants to build a nuclear deterrence. This is a very dangerous development which is highly destabilising for the region. Despite its manifest inability to reign in North Korea’s most provocative behaviour, China remains the actor with the most influence by far over Pyongyang. The evolution of its policies towards the Korean peninsula is certainly of great interest and relevance to NATO Allies and international security at large.

AFRICA

36. China’s engagement in Africa is another example of its increasing role and leverage in international affairs. China has continued to expand and deepen its economic ties with African countries, it has established a modest military presence on the continent, and has intensified its participation in peace and security initiatives within the UN framework.

37. Indeed, among the UNSC’s permanent member states, China contributes the most troops to UN peacekeeping missions, with a full Chinese battalion currently deployed in challenging conditions in Africa. In September 2015, President Xi Jinping announced that China will join the new UN peacekeeping capability readiness system, taking the lead in setting up a permanent peacekeeping police squad and providing an 8,000-strong rapid reaction force to the UN for global deployments at any time.

38. China has recently established its first overseas military outpost in Africa. At the same time as it announced its participation in the Maritime Silk Road, Djibouti announced it would host a

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Chinese navy base for a period of ten years which would serve as a hub for the People’s Liberation Army Navy ships engaged in anti-piracy operations off the coast of Yemen. This base is a concrete example of China taking on more responsibility in international security, and will also give Beijing future force projection capabilities in the region.

39. China’s nascent military engagement in Africa, and particularly its economic investments there, have led some to label the continent as a “policy incubator for China’s future global role”. Bilateral trade between China and Africa reached USD 300 billion last year, and China has significant investments across the continent in key raw materials, providing over 2 million Chinese jobs. The opening of the base in Djibouti, as well as the previously mentioned deployment of combat troops under UN auspices to South Sudan, may foreshadow an even larger Chinese military footprint in Africa. Such a development could presage a paradigm shift in China’s thinking, making it more willing to protect its interests in Africa, and the lives of the more than one million Chinese nationals based there, and build its reputation as a good global citizen.

40. With the economic slowdown in China and increasing questions around the viability of past Chinese investments in African natural resources, the financial and trade relationship may be undergoing a shift away from raw materials. Indeed, China’s economic partnerships with African countries have raised concerns in the past around equity and sustainability. These countries are eager to escape historical dependency on raw materials, so purely commodity-based trading relations with China and the spectre of unsustainable debt loads arising from loans-for-resource agreements have caused anxiety.

41. At the 6th Forum on China-Africa Cooperation held in Johannesburg in December 2015, President Xi Jinping announced investment pledges of around USD60 billion, thus effectively tripling the commitment announced at the previous Forum in 2012. Natural resources did not figure prominently in China’s policy statements this time around, instead they were replaced by mentions of “industrial capacity cooperation” and “strategic complementarity”. Given China’s ongoing economic transformation and Africa’s needs for industrialisation, modernisation and urbanisation, China has begun to move some of its labour-intensive industries to Africa while exporting its excess capacity to finance African infrastructure projects. While the majority of African exports to China during the first three quarters of 2015 were in natural resources – with crude oil, iron ore, diamonds and agricultural products accounting for 56% of exports – the China-Africa relationship seems to be on a path of increasing complexity and interdependence. That said, the short-term consequences of China’s slowdown on China-Africa trade have been quite important, with sharp downturns in both foreign direct investment and imports from China last year hurting the economies of numerous African nations. If this slowdown persists it could have a fundamental impact on the relationship. Land acquisitions by Chinese companies are another aspect of China’s engagement on the African continent. These have increased significantly since international food prices rose after 2007-2008, and in some cases, have resulted in large-scale resettlement of populations, sometimes leading to local protests.

THE ARCTIC

42. Another area that has seen China’s increasing international engagement is the Arctic. The effects of climate change as well as the potential for new shipping lanes and for resource exploitation have put the Arctic on the agenda of “Arctic stakeholders”, and China in particular. Even if the Arctic region may not seem to be a priority for China’s foreign policy, Beijing has taken steps over the past years to protect its interests in the High North. Like many other countries, China is interested in the potential commercial, resource and geopolitical implications of the Arctic sea lanes slowly opening up (as a result of global warming). Moreover, China is also interested in strengthening its ability as a non-Arctic state to access Arctic mineral resources and fishing waters. To that end China has expressed its commitment to a “respectful, cooperative and win-win relationship” with other actors in the region. Reflecting a recognition that the melting of the polar ice is likely to have a significant impact on navigable sea lanes and on global economic trade, China has intensified diplomatic relations with Nordic countries such as Iceland, Denmark, Norway, and Sweden and was also granted Permanent Observer Status at the Arctic Council in May 2013.

43. Given China’s traditional insistence on respect for sovereignty and the principle of noninterference and its own assertions of sovereignty in the South and East China Seas, it is improbable that it will in the near future adopt a more assertive tone, particularly in contesting claims by Arctic littoral states. Instead, it is likely to continue to pursue an incremental track of diplomacy and scientific cooperation that will favour its inclusion in decisions pertaining to Arctic governance and resource exploitation, despite its legal status as a non-Arctic state. That said, there is a contradiction in Chinese policy as the PRC champions UNCLOS for the Arctic but disparages it for their immediate neighbourhood.

CHINA AND NATO

44. China’s increasing international clout has numerous implications for NATO Allies. China’s policies can have an impact, both directly and indirectly, on Allies’ individual and collective security and their political and economic interests. For example, regional instability arising from deepening tensions between China and countries in the Asia-Pacific would have a tangible impact on NATO Allies, not least because of the close political, economic and financial ties between several of these countries and the West. Although there is no formal relationship between NATO and the People’s Republic of China and the interaction between the two has been limited in the past, both sides recognise the need for dialogue and developing political ties, which has led them to gradually develop contact at the political level. This includes an annual meeting at staff level between Chinese and NATO officials. Moreover, Chinese representatives have participated in a limited number of NATO seminars and conferences, particularly in NATO’s annual conferences on WMD Arms Control, Disarmament and Non-Proliferation. At the military level, there has been increasing contact between the PLAN and NATO forces conducting counter-piracy missions in the Gulf of Aden and off the Horn of Africa. Practical cooperation has included shared access to the Mercury maritime information tool, and deconfliction and coordination of counter-piracy efforts through the Shared Awareness and Deconfliction (SHADE) meetings between counter-piracy mission contributors. Increased dialogue and, ideally, coordination is relevant for several reasons. First, the PRC and NATO Allies share a number of common challenges, such as terrorism, the proliferation of weapons of mass destruction, maritime piracy, and regional security, particularly in Afghanistan and in Central Asia. Moreover, as China has become a global actor, both sides also need to address issues of regional and global instability. For example, in Africa, Chinese investment could help African countries address their economic problems, which could stabilise the region. This in turn could increase regional stability and also have an impact on the number of economic migrants leaving for Europe. What is more, a more frequent dialogue between the Alliance and China would provide much-needed transparency for both, as well as for NATO’s global partners, some of which, like Japan, the Republic of Korea and Afghanistan, are direct neighbours of China. CONCLUSIONS

12 171 PNCP 16 E bis

45. China is increasingly active and relevant in NATO’s neighbourhood, including in Central Asia, in Afghanistan, in the MENA (Middle East and North Africa) region and in the Arctic. Yet, while NATO Allies and the PRC share a growing number of security concerns, it is the only permanent UN Security Council member with which the Alliance has no formal mechanism for engagement and consultation. Increased political dialogue between China and the Alliance would provide an opportunity for both sides to constructively engage with each other in order to reduce tensions and increase regional stability. As internationally active terrorist organisations such as Daesh2 and alQaeda pose a continuing threat, NATO and China share a common interest in counter-terrorism. The PRC feels threatened by terrorism, especially in its Xinjiang Uyghur Autonomous Region, and it is estimated that around 100 individuals have joined Daesh. While cooperation in counter- terrorism could be beneficial, practical implementation is difficult. However, NATO Allies and China could evaluate the possibility of sharing intelligence on these groups, as Chen Dongxiao, Director of the Shanghai Institute of International Affairs, suggested to members of the Sub-Committee during the visit to China in July 2016.

46. What is more, tackling the threat posed by these organisations requires a truly coordinated international effort. Thus far, the international community has addressed only the symptoms of international terrorist groups. With its large investments and more than one million of its nationals living and working in Africa, China has a vested interest in the stability of the continent. Hence, NATO and China, as well as NATO partners, could develop an extended dialogue on how to address poor governance in the MENA region and help the countries of this region and in Africa to improve their economic and social conditions.

47. Similarly, China’s “Belt and Road” initiative has huge geopolitical potential, as it could develop the Central Asian republics economically and help them address their significant social challenges. Here too, China and NATO Allies – but also Russia – have congruent interests because continuing or increasing instability in Central Asia would have ripple effects on security beyond the region. It would be important if China’s initiative could also improve governance in Central Asia. NATO and NATO Allies should explore opportunities to include Chinese participation, at least in Central Asia, in its “Building Integrity” initiative.

48. Moreover, both China and NATO Allies should have a shared interest in upholding international law. In our increasingly globalised world, instability in one region can easily affect security on a global scale. This is certainly the case in the South and East China Seas and in the Arctic, which are of geostrategic importance. NATO Allies, and NATO as an organisation, should thus monitor developments in these regions and follow established international law, and UNCLOS in particular. More specifically, NATO Allies should call upon the PRC to abide by the ruling of the Permanent Court of Arbitration in The Hague on the South China Sea.

49. More consultation, and possibly also coordination, between NATO Allies and the PRC is also necessary over North Korea. The DPRK is a major proliferator of nuclear weapons and missile technology; it is also actively expanding its ballistic missile arsenal and developing intercontinental ballistic missiles with which it is threatening the United States as well as NATO global partners Japan and South Korea. The PRC is the largest provider of food, fuel and industrial machinery to the DPRK. If any country wields at least a modicum of leverage over the DPRK it is China. Thus, the PRC is crucially important for the effectiveness of international sanctions against the DPRK and more so for the revival of negotiations aimed at curbing the DPRK‘s nuclear programme.

50. Finally, increased dialogue, and possibly cooperation, between NATO and the PRC should not exclude NATO’s partners in the region, most notably Japan and South Korea, but also Australia and New Zealand. On the contrary, increased dialogue between NATO and the PRC could help mitigate existing tensions in this crucially important region.

2 Arabic acronym of the terrorist organisation “Islamic State in Iraq and Syria”

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