Executive Summary
China through the lens of risk
The rise of the People’s Republic of China presents the most significant foreign policy challenge of the twenty-first century. Across all spheres, from the economy, to technology, security and the environment, engaging with an increasingly dominant China is both necessary and unavoidable.
For much of the last decade, liberal democracies turned a blind eye to the growing risks posed by the Chinese government’s tightening authoritarianism at home and growing assertiveness abroad. The slow awakening to this reality has been accompanied by an increasingly heated policy debate in democratic capitals. Today, this debate is at risk of polarisation. On one side are those to whom any engagement with China is seen as dangerous and morally compromised. On the other side there are those who see concerns as driven by a belligerent anti-China agenda, providing unhelpful ‘background noise’ to what could be a stable and fruitful relationship.
By analysing the debate in terms of risk, this report hopes to contribute towards a broader and more nuanced discussion. Risk as a concept is not black and white – there is high risk, low risk and everything in between. A risk framework provides a common language understood by governments, businesses and citizens alike, and can be applied across economics, politics, security, ethics and more. While risk can be mitigated and reduced, it can rarely be fully eliminated, and so a risk framework does not lend itself to extreme solutions. And of course, as any entrepreneur can tell you, risk must always be balanced against opportunity. The presence of risk does not rule out prospects for cooperation or engagement.
Analysing risk does not necessitate passing value judgements, but that does not mean this endeavour is a value-less approach. The China Strategic Risks Institute sees the advance of human rights, democracy and the rule of law to be of universal benefit. Upholding these ideals is at the core of our common interest, and so we understand strategic risks to be the collection of economic, political and security factors that make it difficult for democratic countries to uphold these goals.
This report analyses strategic risks in relation to China in sectors across geopolitics, economics, security, technology and the environment. In doing so a number of overlapping themes emerge.
Supply chains dependency
The first theme throughout this report is the urgent need for democratic countries to better manage their supply chain risks. Chun-Yi Lee’s article examines the resilience of global semiconductor supply chains. Taiwan plays an indispensable role in semiconductor production globally, producing over 70% of the world’s semiconductors and over 90% of the most advanced chips. Beijing’s military threats against Taiwan pose a major risk to the semiconductor supply chain, with ramifications for nearly every manufacturing sector. There are no quick fixes to this vulnerability. The complexity of the semiconductor production means that onshoring an end-to-end domestic supply chain would be slow and hugely expensive. Instead, risks must be mitigated by effective ‘friend-shoring’ initiatives, which ensure that all stages of production are covered between like-minded partnering countries, whilst still ensuring countries safeguard Taiwan’s security as a pre-eminent strategic priority.
The solar supply chain presents similar challenges, with the added complexity of China’s dominance across all stages of solar production – set to reach 95% of global solar manufacturing capacity by 2025. Just as Europe has learned the dangers of reliance on Russian gas following the invasion of Ukraine, so democratic countries find themselves dependent on China for a technology pivotal to the green transition. The importance of the Xinjiang Region to this supply chain – producing 45% of the world’s solar grade polysilicon – adds an additional layer of ethical risk.
State sponsored forced labour is endemic to Xinjiang and nearly all major solar firms based in the region are implicated. Reducing this reliance requires both demand and supply side solutions. Governments must strengthen modern slavery legislation to penalise firms complicit in forced labour abuses while supporting manufacturers to develop alternative supply chains elsewhere, particularly by addressing the high energy costs which drive solar producers to Xinjiang’s cheap and dirty coal based energy.
Growing business risks
The second theme running through this report is the growing risks to businesses operating in China and Hong Kong posed by an increasingly politicised economy. Dennis Kwok and Kevin Yam write on what Xi Jinping’s new national security regime means for Hong Kong’s status as an international financial centre. Hong Kong’s national security legislation is vaguely defined and broadly interpreted, creating a restricted and uncertain business environment. Not only do businesses in the city face an increased risk of entanglement within shifting legal jurisdictions, but also trials and rulings from a judiciary that prioritises Beijing’s political aims.
As shown in the treatment of media mogul Jimmy Lai, Hong Kong – once prized by businesses for its adherence to the rule of law – is now subject to the same rule by law system seen in mainland China. As businesses, capital and workers exit Hong Kong, the city is likely to adapt to a diminished regional role as the financial hub for China’s growing ‘Greater Bay Area’.
Xi’s regime also poses significant risks to those investing in China. As covered by Sam Goodman’s article, last year’s crackdown on tech firms demonstrates the significant governance risks present for foreign investors. Through legal changes, state subsidies and embedding of Chinese Communist Party branches in company structures, the line between the party-state and private enterprise is increasingly blurred. This presents challenges for prospective investors attempting to undertake due diligence on Chinese firms and leaves investors more exposed to the whims of the Chinese state. Governments must both advise investors on the full nature of this risk and protect taxpayers from any ensuing fallout. Reviewing and cutting investment guarantees for China – schemes which shift the financial risk of private investments onto taxpayers – is a necessary first step in this direction.
Aside from legal and political changes, structural challenges within China’s economy also present a new set of risks for foreign businesses operating in the country. Despite optimism as restrictive COVID measures are lifted, high debt, an inflated real estate sector and a declining working age population could all dampen China’s growth in the long term. While China’s economy is unlikely to face a sudden crisis, foreign businesses could still be impacted by a weakened Chinese consumer market and exposed assets. As highlighted in Margaret McCuaig-Johnston’s article on Canada’s Indo-Pacific Strategy, governments and businesses can mitigate economic risks of dependency on Chinese markets by seeking out new opportunities for trade and investment in the region. By setting out dedicated funding for its flagship “Trade Gateway in South East Asia” initiative, the Canadian government is helping its firms access new markets in this region. Diversifying supply chains, consumer bases and investment portfolios is key to helping businesses manage their China risks.
Technological dominance
The third and final theme across this report is the risk posed by China’s growing technological dominance. As analysed by Charles Mok, China’s Digital Silk Road initiative has enabled its technology giants to become world leaders in areas from 5G to artificial intelligence. From this position it is seeking to normalise state surveillance within the global internet architecture, as seen through proposals such as Huawei’s new IPv6+ internet standards. Crucially, this comes at a time when democratic countries already cannot agree on harmonising tech and data regulations between themselves. Together, the EU, US and other democratic countries have significant regulatory power that can be used to set global standards on protecting user privacy and limit the role of the state. So far, much of this influence remains underutilised.
China’s growing technological dominance also carries a security risk. Dean Cheng’s article tracks the rapid transformation of China’s People’s Liberation Army (PLA) into a modern fighting force with a global reach. By 2027, the PLA will be both quantitatively and qualitatively on par with any likely adversary. The most pressing risk is that this changes the Chinese government’s calculus on Taiwan. As emphasised by Sheryn Lee’s article, war in the Taiwan Strait would have a catastrophic impact on the global economy and, if it successfully annexes Taiwan, gives China a strategically important route out of the first island chain.
Deterring China from taking military action against Taiwan is thus of paramount importance to global security and stability, and must be at the centre of any government’s foreign policy for the region. Such deterrence should not be limited to military support alone. This report recommends that the international community builds a broader concept of deterrence to safeguard Taiwan’s security. Governments should signal to China that military action against Taiwan would lead to the same range and severity of economic sanctions as used against Russia following the invasion of Ukraine. At the same time, by increasing economic and cultural exchange with Taiwan, democratic countries can push back against Beijing’s attempts to weaken Taiwan through international isolation. Trade and investment, academic partnerships and political exchanges with Taiwan can all help shift Beijing’s cost-benefit analysis when contemplating actions against the island.
Strategic engagement
Understanding the strategic risks posed by the rise of China does not preclude strategic engagement with Beijing. Regima Lam writes on the success of Canada’s cooperation with China in leading global initiatives on biodiversity. In areas of shared interest, governments can still carve out space for working with China. This is not just desirable, but necessary for the myriad of global risks presented by climate change, pandemics, food insecurity and other challenges. Governments acting to mitigate against strategic risks need not be seen as acting provocatively towards Beijing.
Indeed, the Chinese government understands the language of strategic risk only too well, and it too is acting to secure its core interests. The majority of the recommendations made in this report are neither policies towards nor against China, but policies for a world in light of China and its growing global role. Only by building a full assessment of the strategic risks can policy makers navigate this new reality.