Category

China

China’s CBDC-as-a-standard?

Written by Alexander van Wijnen
September 20, 2021

An August 2021 report by the Carnegie Endowment for International Peace (CEIP) shows that China is far ahead of other countries in the development of a “central bank digital currency” (CBDC). Whereas most countries are still researching the possibility of a CBDC, China has been running different types of pilots since 2019. In effect, a CBDC, by eliminating the role of intermediary entities in the financial system, allows for more efficient financial transactions. Based on such efficiency, it is expected that China’s CBDC will boost the share of the yuan in the global financial system. Yet, turning the yuan into the global reserve currency is not China’s primary goal here.

Instead, China primarily seeks to protect its companies against American sanctions by building a financial infrastructure that parallels the US dollar system. The report highlights several reasons as to why China’s CBDC is likely to become a standard. China’s pilots are far ahead of other countries and its government is willing to boost adoption aggressively (e.g. discounts for consumers, incentives for trade). Also, China has already set standards for a new global financial infrastructure through “m-CBDC” (a cross-border payment project between China, Hong Kong, Thailand and the UAE), the Blockchain Service Network, and the inter-bank payment system of CIPS. Finally, China already has large international payment platforms which are accessible through government intervention (UnionPay, Alipay, WeChat Pay).

Burning questions:

  • What are the consequences of a Chinese parallel (to the U.S. dollar) financial system for trade and capital flows?
  • To what extent will the CBDC be able to boost the dominance of Chinese firms in other regions (e.g. Southeast Asia)?

On the Chinese variety of capitalism

Written by Alexander van Wijnen
August 9, 2021

From a Western perspective, the Chinese crackdown on tech companies is a sign of an authoritarian state imposing its will on the market economy. To a certain extent, such an assessment is correct, but it prevents us from gaining an understanding of how Chinese capitalism continues to be a successful system. In his book Capitalism, Alone the economist Branko Milanovic explains that although capitalism has emerged victorious from the post-Cold War period, it has split into two models: “liberal meritocratic capitalism” (e.g. the U.S.) and “political capitalism” (e.g. China). In political capitalism, the state is autonomous, which means the absence of the rule of law is a necessary condition for capitalism to be successful.

It follows that the interest of the state will prevail over the interest of the market. Simply put, the law may not protect private companies against the state. This does not suggest an absence of capitalism, but rather a different ‘variety’ of capitalism. It is likely that the current crackdown will intensify before it abates, but beyond that, it is important to see that China has a different model for successful capitalism: the state will redirect the private sector to produce innovation that is more relevant to the good life, create sustainable growth and foster social stability.

Burning questions:

  • To what extent will Chinese companies align with the state?
  • How will the Chinese state’s policies and regulations affect the global perception of China’s financial markets?
  • Will non-Chinese societies be inspired by the way in which China regulates its tech companies and forces them to build a better life?

Building national character based on trauma

Written by Alexander van Wijnen
April 22, 2021

Since the beginning of the coronacrisis, there has been a lively debate on the successful handling of the pandemic in East Asia. In March 2020, we argued that we have to look beyond the idea of “strong governments” to explain why East Asia has coped well. Commentators, however, still point to the political leadership, social trust and state capacity of these countries to explain their success. Yet Western countries that share those characteristics have performed much worse. The key factor that seems to determine success in handling the pandemic is the historical lesson learned by East Asia in 2002/3 with SARS, another coronavirus. Interestingly, one of the most important lessons China learned with SARS is to overcome “impediments to the flow of information through the governmental hierarchy”.

Two years later, China launched its mass surveillance system to boost the flow of information for governments. Fifteen years later, China has been much better prepared for COVID-19 as rapid tracking and testing prevented the virus from spreading like in the Western world. Overall, we can explain the success of East Asia in terms of national character. However, instead of traditions of leadership, trust and capacity, national character also seems to be shaped by far more recent historical experiences.

Burning questions:

  • How will COVID-19 change the national characters of Western countries?
  • To what extent is the outperformance of East Asian governments part of a bigger competitive edge of these countries – and what does that mean for the future?

The unique strength of Chinese business alliances

Written by Alexander van Wijnen
March 9, 2021

Geely, one of China’s biggest automakers, has announced strategic partnerships with Tencent, Baidu and Faraday Future. Li Shufu, founder of Geely, argues that these partnerships are inspired by the School of Vertical and Horizontal Alliances, a school of thought from ancient China’s Warring States period that urges weaker organizations to cooperate in order to compete with incumbent powers. It may be difficult to determine whether Li’s vision is markedly different from regular strategic cooperation between companies. However, there seems to be a unique quality to the cooperation of Chinese tech firms. Geely, Tencent, Baidu and Alibaba create collective business models to an extent that U.S. tech firms such as Amazon, Google, Facebook and Apple do not. Besides the School of Vertical and Horizontal Alliances, the idea of guanxi capitalism, which assigns high importance to interpersonal relationships, further adds to the importance of such cooperation within the Chinese economy. Furthermore, the developmental state tradition of China places the Chinese state at the center of facilitating such cooperation. In the coming years, Chinese business alliances will likely gain importance and could increasingly come to create a global competitive advantage for Chinese tech firms.

Burning questions:

  • To what extent do Chinese business alliances create a competitive advantage over the U.S. and Europe?
  • Does Li’s reference to the School of Vertical and Horizontal Alliances reflect the growing tensions between the Chinese state and Chinese tech firms?

Transatlantic troubles

Written by Alexander van Wijnen
December 18, 2020

Since the U.S. election victory of Joe Biden, there has been a widespread expectation of renewed transatlantic cooperation between the U.S. and Europe. However, while it is likely that the Biden administration will reinvigorate some alliances, as opposed to Trump and his strategic pressure on both adversaries and allies, it is unlikely that the U.S. and Europe will grow as close together as is widely expected.

The main issue is hegemonic shift. The rise of China is primarily a threat to the U.S., but while Europe is cautious and also feels threatened by China in several domains, it is much more open to the strategic opportunity of a rising China. An implication is that the U.S., aware of Europe’s position, will not allow Europe to freeload off U.S. security while refusing to follow American policy towards China. Overall, although we should expect policy proposals such as transatlantic strategies and agendas to emerge, they will be much more difficult to implement than is widely expected.

Our image of Chinese power

Written by Alexander van Wijnen
December 4, 2020

In the past years, a dominant narrative has emerged about the power of China: China poses a threat to the “global rules-based order”, the BRI is a “geopolitical strategy” and Chinese investments are part of China’s “debt-trap diplomacy”. But this image is misleading. In order to better understand the power of China, we present two figures of thought: the multiplicity of the world order and the relational nature of power.

Our observations

  • In the West, China is often seen as a country that poses a threat to the current “world order”. The Chinese Belt and Road Initiative (BRI) is seen as a “geopolitical strategy” with which China aims to build a new world order. Furthermore, Chinese funding of development is often seen as “debt-trap diplomacy”, a way for China to obtain strategic assets such as ports or railways.
  • In his article China In a World of Orders, Alastair Ian Johnston shows that in various world orders, China is more supportive of international norms than the U.S. The concept of the “rules-based order” (which China threatens to overthrow, according to many) is an idea by American policy-makers that once referred to the future of Asia and has only in the past few years come to apply to a “global rules-based order” in the twentieth century.
  • In their article Debunking the Myth of ‘Debt-trap Diplomacy, Lee Jones and Shahar Hameiri show that the BRI is not a geostrategic plan of the central Chinese government to gain strategic assets, but in fact a national-economic program in which the profit motive of Chinese state-owned companies and Chinese banks is dominant. The backlash against Chinese funding of infrastructure, of which we wrote in 2018 that it’s not structural, has yet to occur. Most developing countries actually want Chinese aid in building infrastructure. Jones and Hameiri show that the problems around the BRI are actually the result of weak state capacity (e.g. corruption, lack of transparence, structural economic problems), of developing countries (e.g. Sri Lanka, Malaysia), which causes many projects to fail. The idea of “debt-trap diplomacy” originates from an Indian thinktank, in the context of Hambantota, one of the 4,300 Chinese investment projects, in which Xi Jinping actually declined to take over the port.

Connecting the dots

The Western image of China lacks perspectivism. That’s why we fixate on the Chinese threat to the “rules-based order”, the “geopolitical plan” of the BRI and the Chinese “debt-trap diplomacy”. We’re inclined to reduce reality to an image in which the world order is under pressure because China is gaining power. But what actually is “the world order”? And how does “Chinese power” manifest itself? To better understand China, we introduce two figures of thought: 1) the multiplicity of the world order and 2) the relational nature of power.

1) The Chinese position in the world order is different than we often think, because the international system comprises several policy areas. Johnston explains that there can never be only one world order. There are different domains in which international rules, norms and institutions play a role. The question should be in which domains China is attempting to challenge the international norms. The answer is that China actually supports many international norms (e.g. sovereignty, arms control, free trade, freedom of navigation, currency internationalization, liberalization of trade and investments, multilateral development funding, fighting climate change). So in many respects, China greatly supports the world order. Then why is the dominant image that of China opposing the world order? In areas where liberal ideas are dominant, such as the development of political institutions and internet governance, China is attempting to change the norms. For example, China defends its own political system (in which socioeconomic rights trump political rights) and presents alternative internet structures to the United Nations. However, this does not constitute a negation of international norms but an attempt to reform them.

2) China’s power will manifest itself in different ways. Korean philosopher Byung-Chul Han explains that power always constitutes a continuation of “the self” into its surroundings. “The power of China”, without the context of a relationship with a specific power domain, is thus meaningless. Byung-Chul Han shows that power manifests itself in several different ways. Because China is building relationships with the rest of the world in an increasing number of areas, Chinese forms of power will continue to grow. The problem is that many news reports about and analyses of China are mainly concerned with the traditional forms of power, such as the size of the economy, the role of the yuan and innovation capacity. But there are new, less highlighted or important forms of power. Examples of these are technical standards, infrastructure, digital governance models, mutual economic dependence or cosmotechnics. What if China increasingly sets technical standards with regard to AI? What if the traditional Chinese way of thinking about technology becomes dominant? These could become important forms of Chinese power.
Why does this matter? If our image of China is formed by misleading concepts such as the “global rules-based order” and “debt-trap diplomacy”, we will create an unlikely projection of China’s future. Moreover, all sorts of opportunities and risks will be incorrectly assessed. The country is much less hostile towards international norms than we think, and China’s power is actually growing in places we don’t give enough regard to.

Implications

  • Europe and the Netherlands could become close partners with China in many domains.

  • Because of the Chinese cosmotechnics, it’s entirely possible that China’s adoption of technology in many areas will become the fastest in the world.

  • It’s probable that China will remain the most important financier of developing countries in the post-corona era. Chinese investments through the Chinese Development Bank already surmount those of the World Bank.

The geopolitics of rare earth metals

Short Insight written by Pim Korsten
October 22, 2020

Last year, China scared markets when it threatened to halt the export of rare earth metals to the U.S. For decades, China has invested heavily in rare earth industries (Deng Xiaoping compared them to oil) and it is now home to 90% of global production. Rare earth metals are used in everything from chips to batteries to military and green technologies. As such, these raw materials are the material backbone of our digital technology, powering data centers, electric cars and solar panels.

Given the fact that nascent exponential technologies such as AI, 5G, and quantum computing will determine who achieves digital hegemony, these materials will become important vectors of geopolitical interest. Last month, China again stockpiled huge quantities of the strategic resources, citing the coronavirus crisis as the cause of the dwindling exports, since an outright export ban would mean an act of economic war. In response, both the U.S. and Europe are trying to secure their supply, through investments as well as new exploration. In the foreseeable future, these materials will be in the crosshairs of a great power competition.

Who do we trust in the stack war?

Short Insight written by Arief Hühn
October 7, 2020

After threats from Trump to ban TikTok on security grounds, Oracle, Walmart and TikTok’s mother company Bytedance have proposed a deal in which the U.S. will have a 20% stake in TikTok Global. Furthermore, Oracle will host the service for the U.S. as a ‘trusted technology provider’, in order to guarantee the safety of U.S. citizens’ data. However, the deal will not involve the transfer of the service’s algorithms.

The fight over services and underlying algorithms and user data seems to be a progression of the tech war that mostly has been focusing on lower layers of the stack, whether it be rare-earth metals, hard infrastructure (Huawei) or soft infrastructure (new IP). Even though the deal still has to be approved by the U.S. and China, we can already expect that the dependency on trusted providers and tech could become a future template for popular services that aim to operate across adversarial national stacks. In fact, Apple and Amazon are already subjected to a similar treatment for their services in China.

The new power of technical standards

Written by Alexander van Wijnen, september 25 2020

Behind the global “interoperability” between technical systems, the shadow of Western dominance still lurks. This will change, however, now that China is playing an increasingly important role in the development of standards for 5G, blockchain, facial recognition, AI and network protocols. Technical standards are thus becoming the new battlefield of the economic and cosmotechnical power struggle between countries.

Our observations

  • A number of international organizations set global technical standards, such as the International Organization for Standards (ISO), the International Electrotechnical Commission (IEC), the International Telecommunication Union (ITU) and the 3rd Generation Partnership Project (3GPP).
  • A recent paper shows that China’s influence in the most important organizations for technical standards has increased rapidly. A clear sign of this is the number of Chinese in leadership positions. Zhao Houlin is secretary-general of the ITU. Shu Yinbiao is president of the IEC. From 2015 to 2018, Zhang Xiaogang was president of the ISO.
  • Last year, China submitted 830 technical proposals to the ITU – more than the following three countries, South-Korea, the U.S. and Japan, combined. Since 2014, 16 out of the 65 proposals in the ISO and the IEC have come from China.
  • Huawei is working on new internet protocols for the ITU. The Chinese company is proposing a “New IP” model in which the state has more influence on digital infrastructure compared to the TCP/IP network protocols developed in the U.S.
  • Chinese companies such as ZTE, Dahua and China Telecom have introduced standards for facial recognition and other forms of surveillance to the ITU.
  • This month, he ITU approved blockchain standards developed by Huawei, the People’s Bank of China and the China Academy of Information and Communications Technology.
  • Since 2017, SC 42 (subcommission 42), a collaboration between the ISO and the IEC, has been the most important subcommission for AI standards. At its first meeting, which took place in Beijing, the China Electronic Standards Institute presented a white paper.
  • In the book The New Global Rulers: The Privatization of Regulation in the World Economy (2011), the authors note that the decision-making process of the large organizations (e.g. ISO, IEC, ITU) is more political than we think. Oftentimes, there is no optimal technical solution. According to the authors, the key to successfully setting technical standards is to speak with one national voice (companies and governments that are on the same page in their thinking), which might work to China’s advantage.

Connecting the dots

Where does geopolitical power come from? The term “geopolitics” especially connotes armies, capital or energy. These are important, but every age will also create new forms of power. Our age included. The technical standard is such a new form of power, which does not receive much attention. The forcefield around technical standards is changing rapidly and China is already playing an important role. Besides being of economic value, the Chinese technical standard will give China more influence by spreading the Chinese perspective on technology around the world.

In the current system, technical standards are determined by international organizations such as the ISO, IEC and ITU. Many countries participate in these organizations through associations between governments and businesses, and standards are developed in committees with engineer workgroups. One theme has long been central to this system: the worldwide interoperability of technical standards (to improve efficiency, scalability and innovation). At the same time, however, this system has been used by Western countries to exert power. The ISO was established in 1947 and the ITU joined the UN in 1949. In the post-war period, the U.S. and Europe dominated the world and the development of technical standards was part of this. That has begun to change. China has taken great strides in the fields of 5G, facial recognition, blockchain and AI. Moreover, China has created a strong position for itself within the most important organizations.

The question is what the impact this greater role of China will have. Two types of impact are already noticeable. First, China will economically profit from setting technical standards. This became clear, for example, when the U.S. government recently gave American companies permission to continue to collaborate with Huawei in the standard organizations, for fear of being excluded from the international process. In the coming years, Chinese companies will increasingly profit from their current role in setting fundamental standards. Because, for instance, their existing products and competencies meet these standards, which gives them a lead on international competitors. Second, the Chinese cosmotechnics (the Chinese way of thinking about technology) will become more influential – and incur more resistance because of it. Technology is always connected to culture, and this holds even more true in our time of digital technology, in which, for instance, SC 42 is attempting to determine how we should regard transparence and the explainability of AI systems. Modern technology (more so than railroads or electricity networks in the past) is programmed in advance, according to certain rules that derive from cultural values. This has become apparent in the development of facial recognition, which more and more American companies are pulling out of, and Chinese companies have seized the opportunity to set the global standard.

Technical standards are geo-economic (countries become dependent on each other, which can create political pressure) and cosmotechnical (shaped by “foreign” cultural values). There is thus much at stake, especially to a hegemon (the U.S.) witnessing the decline of its influence. This means that the battle over technical standards might harden in the coming years, putting companies in a vulnerable position.

Implications

  • Through the Belt and Road Initiative, Chinese companies will increasingly use technical standards to create lock-in effects in rising countries in Asia and Africa. This applies not only to digital technology but also to industries such as the railway industry and the energy industry.

  • In the battle over technical standards, momentum for open-source platforms could increase. Recently, the open-source chip design platform RISC-V chose to move from the U.S. to Switzerland to protect its appeal in a geopolitical world becoming increasingly strict where technology is concerned.