Global China 2049 Initiative: Challenges and Opportunities for the US

Leksyutina Yana

Global China 2049 Initiative − a discourse in some Western expert circles 1 and not an official Chinese term − refers to the Chinese economic strategies and policies across various sectors as it moves toward achieving its aspirational “national rejuvenation dream.” By 2049, which marks the 100th anniversary of its founding, the People’s Republic of China is set to become “a great modern socialist country that is prosperous, strong, democratic, culturally advanced, harmonious, and beautiful.” 2 Chinese senior-officials’ policy statements and publicized industrial plans (like the Strategic Emerging Industries initiative, the National Strategy of Innovation-Driven Development, the Made in China 2025, the Internet Plus plans, the New Generation of Artificial Intelligence Development Plan, and the 14th Five-Year Plan for 2021 to 2025, etc.) provide some insights into China’s development objectives and industrial priorities for the years ahead through 2049. The primary imperative for Chinese authorities to move toward its 2049 “grand goal” is to ensure sustainable and balanced economic growth against the background of multiple domestic issues. The challenges have been identified as aging population, widening income inequality, economic imbalances, production overcapacity, rising local government and corporate debt, an inefficient financial system, and environmental degradation. The country also has to deal with structural problems, including the middle-income trap and international challenges resulting from rising strategic competition with the US and the Covid-19 pandemic. Given that the growth model that served China well in recent decades are no longer sustainable and efficient, the authorities are currently restructuring its economic model, adapting it to new challenges and tasks. Since the 2008 global financial crisis, and especially after Xi Jinping came to power in 2013, China has been gradually

1 Overseas Development Institute // https://odi.org/en/about/our-work/global-china-2049-initiative/ 2 Xi Jinping’s Speech Delivered at the 19th National Congress of the Communist Party of China. October 18, 2017. P. 17 // http://www.xinhuanet.com/english/download/Xi_Jinping's_report_at_19th_CPC_National_Congress.pdf changing its economic growth pattern based on fixed investment and exports, emphasizing domestic consumption and innovation as the new drivers of its economy. To this end, the most recent initiative has been the “dual circulation” strategy. It was unveiled in May 2020 and incorporated in the 14th Five-Year Plan for 2021 to 2025. The “dual circulation” strategy, which is key to guiding Chinese economic policies in the foreseeable future, accentuates the role of domestic production and consumption (or internal circulation). At the same time, in parallel, they continue to rely on the global market (external circulation). According to Chinese official estimates, the strategy aims to boost domestic supply, taking advantage of the Chinese extra-large market scale (China is the largest market in the world for most products with a middle-income group of 400 million people, according to Chinese official estimates. This unleashes the potential of domestic demand as a driver of economic growth and reduces the Chinese economy’s reliance on overseas markets and technology against an increasingly challenging and complex global environment. Beijing seeks to reorient its manufacturing sector from producing for export to meeting domestic demand. An emphasis on internal circulation is closely connected with another key Chinese national priority − promoting innovation and self-sufficiency in key strategic industries. Domestic innovation capabilities have been a top priority for the Chinese government for at least 15 years since China adopted the 2006-2020 National Medium and Long-Term Program for Science and Technology Development. 3 This plan called for enhancing “indigenous” innovation capability, accelerating science and technology development, and narrowing down the technological gaps with the developed nations. It set objectives for China to become an “innovation-oriented” country and a world science and technology power by the middle of the 21st century. At the 18th Chinese Communist Party National Congress, held in 2012, “innovation-driven development” was mentioned as a new key strategy that lies “at the heart of country’s development.” Since then, Beijing has viewed innovative development as an imperative and the way to achieve “the rejuvenation of the Chinese nation.” The push for domestic innovation was further reinforced in 2015 by introducing the Made in China 2025 Industrial Plan, which seeks to reduce China’s dependence on foreign technology, catch up to technologically advanced countries and

3 National Medium- and Long-Term Program for Science and Technology Development (2006-2020) // https://www.itu.int/en/ITU-D/Cybersecurity/Documents/National_Strategies_Repository/China_2006.pdf create competitive advantages for China. These advantages are manifest in the following 10 key sectors: 1. New-generation information technology 2. High-end computerized machines and robots 3. Aerospace technology 4. Maritime equipment and high-tech ships 5. Advanced railway transportation equipment 6. New energy and energy-saving vehicles 7. Energy equipment 8. Agricultural machines 9. New materials 10. Biopharma and high-performance medical devices.

It aims to advance China into higher positions in the global manufacturing value chain (from the lower-to-medium end of the value chain to the medium-to-higher end) and expand its global market competitiveness and global market share. It is correlated with China’s focus on creating national champions with independent innovation capabilities which could compete with leading multinational companies. By 2049, China aims to lead global manufacturing and innovation with a competitive position in advanced technology and industrial systems. It plans to become “an innovative country in all respects.” To achieve these stated objectives, China has been pursuing various industrial policies, ranging from government subsidies, forced technology transfer, state-financed acquisitions of foreign firms in strategic sectors to, allegedly, IP theft. It has also raised concerns with Washington and called for relevant counter-measures. Seeing such policies as unfairly advantaging Chinese companies and distorting global trade and investment patterns, both the Trump and Biden administrations initiated the tightening of technology transfer to China and some restrictions on technology ties with Beijing. In turn, initiated by the Trump administration, the technological war against China has induced Beijing to accelerate core technology development and establish a national innovation system. The newly adopted 14th Five-Year Plan 4 has created a

4 The 14th Five-Year Plan for National Economic and Social Development and Long-Range Objectives for 2030 // https://cset.georgetown.edu/wp-content/uploads/t0237_5th_Plenum_Proposal_EN-1.pdf nationwide system supporting science and technology development. China’s ultimate goal is to become a self-sufficient and global leader in several strategic technologies and sectors with a focus on those that will define the future, such as artificial intelligence, quantum computing, semiconductors, genetics, biotech, aerospace technology, deep earth and deep sea, and advanced manufacturing. However, despite years of state-led industrial policies promoting innovation, China currently lacks core competencies and technologies. In advancing its technology independence and leadership goals in strategic industries, it still relies on obtaining technology and expertise from foreign (including US) companies through inroads that are not yet restricted. These include partnerships in open-source technology and basic research, establishing research and development centers abroad, and talent programs for foreign specialists to work in China. Rigorous Chinese efforts to sustain research and development (R&D) and manufacturing in strategic sectors, specifically in telecommunication, semiconductor, or microelectronics sectors, limit the opportunities for US companies in China. They also have potentially adverse implications for American companies’ global market competitiveness in these emerging sectors. Chinese industrial policies are believed to have fueled a transfer of global productive capacity and technology to China and contributed to the weakening of the US industrial base. 5 Of great concern to US policymakers 6 are China’s semiconductor policies and the Chinese government’s ambition to lead across the entire semiconductor value chain, which, if successful, could lead to the loss of US technological leadership. Such a change would significantly shift global semiconductor production and related design and research capabilities to China. Semiconductors are used in nearly all electronic devices and have become the computing revolution’s foundation. Chinese semiconductor competencies could promote other technology advancements, including in the military sphere. Important implications on the US might have Chinese long-term strategy to develop a fully digital economy and to lead the world toward a digital future. For

5 Prepared Statement of Commissioner Michael Wessel. Hearing on An Assessment of the CCP’s Economic Ambitions, Plans, and Metrics of Success. 15.04.2021. P. 6 // https://www.uscc.gov/sites/default/files/2021-04/April_15_2021_Hearing_Transcript.pdf 6 China’s New Semiconductor Policies: Issues for Congress. 20.04.2021 // https://www.everycrsreport.com/files/2021-04-20_R46767_2cd34407ee3ff126834038a7035fe41896fbe13b.p df example, China was one of the first countries to promote digital currency development. The government is advancing a central bank digital currency to influence global finance and e-commerce and diversify from the US dollar-dominated global trade settlement and transactional monitoring systems. According to estimates, Chinese digital currency is likely to have a marginal impact on the global economy. It is unlikely to displace the dollar as the top international reserve currency or undermine the power of US sanctions in the next few years. However, China’s strategic approach to financial technology lays a foundation that could give China a tremendous economic advantage over the US in the coming decades. 7 Moreover, China’s digital currency system might have national security implications for the US as this system will give the Chinese government extensive data to collect, analyze, and exploit China’s economic and political benefits. China also does not limit itself to developing strategic technologies and digital infrastructure for domestic use only. It also aims to advance its digital infrastructure − including 5G, smart cities, Internet of Things − and technical standards globally. Beijing’s recent industrial plans emphasize standards development, standards-setting, and standards exporting. In setting technical standards, Beijing searches to cultivate and secure foreign markets for Chinese companies and to shape the norms and rules for how emerging technologies are applied. China’s push in standards-setting in emerging technologies is likely to impact international standards-setting for these technologies in the absence of existing rules. It bears the risk of setting immature standards for sensitive technologies, like facial recognition. From the US perspective, it threatens to distort the international technical standards ecosystem, disadvantage US companies or leave no choice to US companies but to adapt to Chinese standards to access other markets. 8 Against rising geopolitical competition with the US and the COVID-19 pandemic accompanied by the temporary disruption of global supply chains, Chinese authorities also began to prioritize protecting and securing supply chains. The primary focus for China is to build “self-controlled, safe, and reliable domestic production, and supply

7 Fanusie Y. Hearing on An Assessment of the CCP’s Economic Ambitions, Plans, and Metrics of Success. Panel IV: China’s Pursuit of Leadership in Digital Currency. 15.04.2021. P. 1 // https://www.uscc.gov/sites/default/files/2021-04/Yaya_Fanusie_Testimony.pdf 8 2020 Report to Congress of the US-China Economic and Security Review Commission. 2020. P. 114 // https://www.uscc.gov/sites/default/files/2020-12/2020_Annual_Report_to_Congress.pdf chain” and to ensure “at least one alternative source for important products and supply channels to form a necessary industrial backup system.” 9 China seeks to guarantee that importing from one country can be easily substituted with the same import from another − raw materials or hi-tech products. In particular, China has been diversifying its agriculture and energy supply and is making efforts to reduce its dependence on semiconductor imports. Secondly, Beijing aims to advance Chinese-controlled supply chains and make China a critical world center for supply and demand. China seeks to dominate the supply chains to get economic benefits and leverage to achieve political goals. If realized, these Chinese ambitions may create further US supply chain dependencies and vulnerabilities. The outbreak of Covid-19 has already revealed risks in supply chains that rely on Chinese production and exposed the US economy’s dependence on China-based supply chains, specifically on critical medical supplies (personal protective equipment and pharmaceuticals). China has already managed to occupy an important role in global supply chains and some key technology sectors. It came almost as an unpleasant surprise to Washington that its new climate policies indirectly rely on China because a shift away from fossil fuels depends on lithium-ion batteries, and Beijing dominates all four stages of supply chains for these batteries (mining, processing, assembly, and recycling). 10 Moreover, currently, the US’s quest for global leadership in manufacturing electric vehicles depends on China. The global green agenda and efforts to reduce greenhouse gas emissions, previously seen in Beijing as constraining Chinese economic development since 2020, have occupied a prominent place in Chinese policies. In September 2020, China voluntarily announced its plans to peak CO2 emissions by 2030 and achieve carbon neutrality before 2060. China’s technology and environmental goals turned out to be mutually reinforcing. An example is the Chinese plans to have half of the vehicles electric or fuel-cell powered by 2035 and the other half hybrid adhere to technology and environmental goals.

9 Self-Controlled, Safe Domestic Supply System Needed to Safeguard National Security: Xi. 31.10. 2020 // https://www.globaltimes.cn/content/1205226.shtml 10 Schadlow N. How Our New Climate Policies Could Lead to Increased Reliance on China. 19.03.2021 // https://thehill.com/opinion/international/544070-how-our-new-climate-policies-could-lead-to-increased-relian ce-on-china In sum, all these Chinese economic strategies and policies taken together, if successfully implemented, will further promote sustainable and balanced growth in China. If realized, they will make China a global leader in several sectors and industries, an innovation powerhouse, a leading world manufacturer by the 100th anniversary of the founding of the People’s Republic of China in 2049. In concert with China’s Belt and Road Initiative, international-standards setting activities, and other Chinese undertakings in the world arena, they will promote China-centric economic system. They will decrease China’s reliance on the world while making the world increasingly reliant on China, which will provide Beijing with leverage to advance its economic and political goals around the globe. President Biden has referred to China as “our most serious competitor” and called on allies and partners to “prepare together for long-term strategic competition with China.” Given Washington’s seemingly long-term containment policy toward China, the Global China 2049 Initiative − a set of China state-led strategies and policies aimed at building China into a global economic, manufacturing, innovation, financial, etc., powerhouse − presents significant challenges rather than opportunities to the US. It will have implications for the US economic competitiveness, national security, and leadership position in the world arena.

Dr. Sc. Leksyutina Yana is a Professor at Saint-Petersburg State University, Russia.