Chinese Economic Security in the Coming Decade

Liu Youfa

Since the 2008 financial crisis, the status of Asian countries in the world economy has changed, and the difference between the national strengths of Asian countries is widening. As a result,many countries have found that conflicts of national interest are getting more complicated, closer economic and trade cooperation is facing bottleneck restraints, and numerous challenges are arising regarding the security of China’s peripheral economy.China needs to join hands with countries in the region in order to establish new concepts, implement new policies, and expand new areas of cooperation with countries in the region. In doing this, China must broaden areas of cooperation, maintain and promote common security interests, and strive for common spaces for economic development.

I.The Current State of Economic and Trade Cooperation between China and Its Neighboring Countries

In the 21st century China has been actively promoting bilateral and regional trade and economic cooperation, and working for a favorable peripheral economic and security environment.

1. The making of an all-round mechanism for regional economic cooperation and integration

In recent years, regional economic and trade cooperation has become a bright spot in China’s foreign relations strategy.China has reached out to construct free trade areas with its neighboring countries, which has in turn provided institutional support for the relevant countries to realize their sustainable economic and social development goals. On January 1, 2010,the China-ASEAN Free Trade Agreement took effect, creating a huge market space for mutually beneficial development in the region.

With China’s active engagement and promotion, the Asia-Pacific Economic Cooperation (APEC) has continued to play its positive function by encouraging regional economic integration and coordination. At the same time, sub-regional economic cooperation institutions have become increasingly attractive vehicles for relevant countries to promote economic and trade cooperation.

China has actively engaged itself in sub-regional economic cooperation both in the eastern ASEAN economic zone, and the Indonesia-Malaysia-Thailand Growth Triangle, steadily promoting the construction of the Mekong River Basin Economic Zone and that of the Pan-Beibuwan Economic Zone,and pushing forward the economic and industrial cooperation within the framework of the Shanghai Cooperation Organization(SCO). All of these projects are aiming to maintain and promote common security and development interests. In addition to security cooperation, the SCO also added a new function to promote mutually beneficial economic and trade cooperation.

2. Rapid increases in two-way trade

Since the international financial crisis, China and its neighboring countries have stood together as a team. They have joined hands in an effort to effectively manage the shock waves from the external economy, expedited the readjustment of industrial structure, and taken the lead in keeping the momentum of economic growth. Meanwhile, all of China’s neighboring countries have enjoyed good political relations with each other, taken fair advantage of comparative advantages in their respective industries, and expedited economic, trade and industrial cooperation. For example, ASEAN countries enjoy comparative advantages in food, agriculture, iron ore, energy and electronic products, while China enjoys such advantages in home appliances, the textile industry, communication equipments, and other fields. Realizing these comparative industrial advantages has led to mutually beneficial cooperation.According to statistics from China’s Customs Bureau, trade between China and ASEAN in 2011 amounted to $362.9 billion,a 24% increase from 2010. China and Pakistan established a free trade zone, providing steam for their bilateral trade. In the same year, trade between China and India broke the $60 billion mark. The Shanghai Cooperation Organization became the new platform to promote regional economic and trade cooperation,and in 2011, the volume of trade among the member countries reached nearly $120 billion.

3. The blossoming of two-way investment

Investment cooperation has been a strong engine for economic and trade cooperation between China and its neighboring countries. For a long time, FDI from the neighboring countries and economies remained an important external factor for China’s economic development. In the past decade, however, Chinese capital has been venturing into the international market, and neighboring countries have become the springboards for Chinese enterprises“to go global.”This process has served as the new driving force for economic and trade cooperation in the region,and it has provided steam for relevant countries to realize rapid economic growth. For example, on August 15, 2009, China and ASEAN signed an investment protection agreement which facilitates legal protection for investors from both sides. The agreement is characteristic of a free, convenient, transparent and fair trade environment. By the end of 2011, cumulative investment totaled more than $90 billion, covering agriculture,manufacturing, processing, services and contract engineering,etc. Mutual investment between China and SCO member countries also began to flourish, and two-way investment exceeded $40 billion.

By the end of 2011, the China Development Bank had provided loans to SCO countries of up to $40 billion, supporting a number of major projects and cooperation within the area. Each SCO member, in accordance with the Program for Multilateral Trade and Economic Cooperation among the Shanghai Cooperation Organization, has set up 19 major projects in the energy sector. All of these projects involve investment in resource development, infrastructure construction, manufacturing, and agriculture, to name just a few sectors.

4. The regionalization of industrial cooperation

International experience demonstrates that industrial cooperation is an inevitable trend to promote sustainable trade and investment cooperation. Through upstream and downstream industrial cooperation, countries can expect to facilitate conditions for their economic development and provide industrial support for sustainable trade and investment. In recent years, China and its neighboring countries have been fully utilizing their respective production advantages, and they have gradually been building up industrial chains which serve to improve trade and investment conditions. Relevant countries,in line with their comparative advantages, have strengthened industrial cooperation, rationalized division of labor, and promoted steady industrial cooperation in manufacturing,transportation, energy, resources, information, communication,human resource development, etc. For example, the China and ASEAN free trade area has provided legal support for regional industrial cooperation.

Energy cooperation between China and Central Asian countries has seen significant breakthroughs. The Chinese-Central Asian gas pipeline has been put into operation and realized twin-line ventilation. So far, China has received over 20 billion cubic meters of gas supply from the pipeline. A Phase-I crude oil pipeline between China and Kazakhstan is in stable operation, and it has pumped more than 40 million tons of crude oil to China. The Phase-II China-Kazakhstan crude oil and natural gas pipeline project is under construction. China and Turkmenistan signed an agreement that will allow Turkmenistan to provide China with an additional 25 billion cubic meters of gas each year. Meanwhile, China, Kazakhstan, Uzbekistan and other countries in the region have already begun to mutually benefit from cooperation in natural uranium mining as well as in clean energy.

China needs to join hands with countries in the region in order to establish new concepts, implement new policies, and expand new areas of cooperation.

5. Regional interconnectivity has made solid progress

Infrastructure interconnectivity is an important foundation and precondition for further promoting relations between China and its neighboring countries. Currently, has established a mechanism for a transport ministers’conference with the SCO and ASEAN. China has also strengthened cooperation in water and land transportation with the DPRK and South Korea. In Southeast Asia, China and ASEAN countries have effectively launched a historical process of mutual connectivity,within which the Pan-Asian railway network will likely be the showcase. Its eastward line spans from China’s Kunming through Hanoi all the way to Singapore, with a total mileage of 5,450 kilometers, while the line within China starts from Yuxi,travels through Mengzi and ends up in Vietnam. The mid-branch line stretches from China’s Kunming through Vientiane all the way to Singapore, covering a total length of 3,900 kilometers.The western line connects Kunming, Rangoon and Singapore,covering a total of 4,760 kilometers. The above railway system,when in full service, will provide powerful transportation support for closer trade and economic cooperation between China and ASEAN countries.

In addition, China, Pakistan, Burma and other countries have started the renovation and expansion of transportation facilities, in order to further promote economic and trade cooperation, and build up southwest import and export gateways. In the northwest, China and SCO member states have already connected railways that have the capacity to carry out international transportation, basically realizing subregional interconnectivity. Currently, China and Kazakhstan are successfully connecting their railways at Huoerguosi. Major transportation projects such as the China-Kazakhstan highway,the China-Kyrgyzstan-Uzbekistan railway, the Tajikistan-Uzbekistan highway, and the China-Tajikistan highway have seen steady progress, further promoting mutually beneficial cooperation between China and countries in Central Asia.

6. Security, economic and trade cooperation move forward hand in hand

Regional economic development and safety call for regional security management. In recent years, China and its neighboring countries have been carrying out regular security dialogues and cooperation. Similar dialogues and cooperation between China and the ASEAN countries not only cover areas of economic development, but also relate to security cooperation. For many years, China has been taking an active part in the ARF cooperation, joining hands with countries in the region in order to address common challenges and promote regional stability.China, Japan and South Korea have been exploring possibilities to establish an East Asian Community which would help boost economic development and cooperation in terms of sub-regional governance. China and the SCO have extended cooperative relations from the field of security to that of economy and trade. The 2011 Astana Summit comprehensively reviewed the development experience of the SCO during its first ten years,and it drew a strategic plan for the next decade. At the same time, China and other powers have been carrying out dialogues and cooperation over the building of security cooperation in the Asia-pacific. The Strategic and Economic Dialogue between China and the United States (SED) has yielded effective results.In line with the consensus of practical cooperation, peace and stability in the Asia-Pacific, the two countries have carried out a series of dialogues in order to broaden their shared interests,deepen comprehensive cooperation, promote common interests,address their respective concerns and effectively resolve interest disputes and conflicts. In 2011, the SED for the first time included a strategic security dialogue and consultation on Asia Pacific affairs, in order to further promote shared interests,facilitate mutual trust, effectively manage differences, and avoid strategic misunderstandings.

In addition, the two countries have also carried out practical cooperation in terms of food security, urban search and rescue,and disaster relief ability construction. They have reached a consensus to maintain communication and coordination on hotspot issues relating to the Korean Peninsula, Iran,Afghanistan, and other serious security concerns. A bilateral strategic partnership between China and Russia is continually growing. The two countries each other as the most important strategic partner and the priority direction of their foreign policy,and they support each other in maintaining sovereignty and protecting security and development interest. The“strategic and mutually beneficial relations”between China and Japan have seen steady developments and mutual understanding improved in relative terms. China and India are both BRICS members and partners within the G20 framework, which also helped to strengthen their bilateral cooperation.

II.China’s Economic Security Challenges in the Coming Decade

Over the next ten years, China will face challenges in dealing with the post-financial crisis world economy, and it will have to overcome difficulties in the international division of labor, global economic governance, financial liberalization, foreign trade, and cooperation in non-traditional security areas.

1. Asian countries remain subjected to a Westerndominated international division of labor

China and its neighboring countries are new comers to industrialization, and they are faced with the following economic security challenges. On the whole, Asian economies are still subjected to those of Europe and the United States.The economic development of Asian countries has traditionally dwelled mainly on European and American markets, and many Asian economies have been implementing export-led economic development. Many Asian countries have been forced to adapt to the economic system of developed countries, and to abide by the economic rules of the dominant European countries, landing themselves in a passive“follow-up”economic development role,seriously impeding their paths for development.

In the past, capital and technology have been the two most effective tools through which developed countries allocate international factors of production, organize specialized productions, and manage marketing chains. Transnational corporations from the developed countries, taking advantage of technology, capital, managerial expertise and marketing skills,have managed to place Asian countries in subordinate positions in the global production chain. In recent years, Asian countries have launched various subregional integration processes and closer cooperation mechanisms,but these mechanisms lack core industrial technologies, making it difficult for them to reap the benefits of cooperation. From the perspective of human capital,

Asia-Pacific countries, excepting Japan and Singapore, are all faced with pressures from a growing population. At present,each country needs at least 3% of annual GDP growth in order to offset pressures on education, medication, employment and housing that are brought about by net population increases. As a result, many countries have found it difficult to realize their late-comer advantages in the post financial crisis era.

Many countries have found it difficult to realize their late-comer advantages in the post financial crisis era.

2. Financial risks on the rise

The 2008 international financial crisis not only enhanced China’s international economic status and enlarged its international economic role; it also created more serious threats and challenges. As the country with the largest international trade surplus, China has become a major target in rebalancing the world economy, the prime victim of monetary and fiscal policies of developed nations. China’s foreign currency reserve has grown to more than $3 trillion, and much of it has been used to purchase United States Treasury bills or the U.S. corporate bonds. Since the financial crisis, financial authorities in the United States and other international reserve currency providing countries have implemented quantitative monetary easing and low-interest rate policies, causing a potential contraction in the value of China’s financial assets.

Under the impact of international economic imbalances, the Chinese RMB will continue to face pressures to appreciate. More and more countries will deliberately point their fingers at the RMB exchange rate to account for their internal and external economic troubles. It is worth noting that regional countries -namely, the Republic of Korea, Japan and India - have joined the international“band wagon”vis-à-vis the appreciation of the RMB. Furthermore, existing international financial institutions such as the IMF are finding themselves incapable of adapting to the rapidly changing international financial situation,warranting long overdue reforms to their structure. As the second largest economy in the world, the way in which China projects its power to protect its economic security and interests will test the wisdom and capability of its economic and security governance.

3. Trade protectionism still looms large

From the perspective of the previous economic or financial crises, trade protectionism is always an important factor that impedes the healthy development of international economic relations during the post economic or financial crisis period.The ongoing financial crisis is no exception. At present, China is facing the following challenges in the field of foreign trade.The economic contraction of developed countries produced spill-over effects in the economies of Asian countries through goods chains and the setting up of“road blocks”for the smooth implementation of their national development strategies. Due to dwindling market demand, the EU and the United States have been losing steam as the engines of Asian growth. Japan has undergone 20 years of sluggish growth, and the 2011 tsunami and nuclear power disaster shocked the confidence of the Japanese government and the people. Amidst the financial crisis and the sovereign debt crises, Japan’s economy is likely to be heading for a third“l(fā)ost decade.”Meanwhile, the Republic of Korea, which was seriously hurt by the financial crisis, is still licking its wounds. Consequently, relevant countries have been erecting invisible trade barriers and implementing policies of“economic patriotism.”Faced with intense domestic popular pressures, they have been purposefully interfering with the normal development of trade among concerned countries. In the past, more than 70% of institutions in the field of foreign trade have been FDI related companies and importers and exporters from foreign countries. As a result, the Chinese government and enterprises have little say in either trade negotiations on the commodities produced within their country, and this has prevented China from realizing its expected trade benefits.Furthermore, a large number of FDI related enterprises have flooded into the Chinese market, driving many national brand products out of market competition and converting China into a manufacturing country of foreign products with foreign patents. As China’s economy is still largely dependent on foreign markets, and as its foreign trade is still set to grow in the future,the economic and trade disputes between China and other trade partners will continue to grow, thus amplifying China’s external economic security pressures.

4. Non-traditional security factors directly influence China’s economic security

At present, non-traditional security threats that China is faced with have profound political, economic and cultural roots. Such non-traditional security issues are complicated, mainly relating to the following areas: exclusive economic zone jurisdiction,resources and energy, terrorism, drug trafficking, AIDS, piracy,illegal immigration, environmental safety, financial security,and information security. Any of the above problems might affect China’s economic security seriously if they are not handled properly. To a large extent, there is still a lack of strategic trust between China and some of its neighboring countries. Relevant countries formulate and implement their security policies largely in accordance with their national development strategies and domestic politics, resulting in policy differences and frictions on security issues. For example, some ASEAN countries have formed a policy of relying on China for economic development,while leaning on the United States for security protection.Non-traditional security issues are mostly multinational, transregional and high-tech in nature,and they have been producing serious impacts for social stability in the region. Over recent years, international terrorist activities have increased significantly. In turn, these threats have constituted real menaces towards international and regional peace, and they have become new uncertain factors that will impact the regional security situation. Despite this,countries concerned are still bogged down with the“soft security cooperation,”and satisfied with dialogues and manifestos.Relevant national leaders at summits mostly make collective political decisions lacking effective executive support and legal protection.

China is also faced with more external economic safety risks, as its economy integrates into the wider world economy.

5. An unhealthy dependency on foreign economies still exists

After 33 years of Reform and Opening, China’s national economy has made renowned achievements and today it is the largest manufacturing and trading country in the world.Meanwhile, as its economy integrates into the wider world economy, China is also faced with more external economic safety risks. These risks are mainly reflected in the following areas:

Firstly, China remains overly dependent on international market. In recent decades China has been implementing an export-led economic growth model, within which import and export values in proportion to the national GDP have been growing year by year. Therefore, any drastic economic fluctuation with major trade partners can produce shock waves in China’s economy through goods and capital chains. China is already the world’s second largest economy, as well as the main consumer of industrial products, energies and resources,but it still has not gained the right to price commodities within the framework of the existing international division of labor.This has it difficult for China to achieve its expected economic and social benefits. China has long implemented an exportled economic growth modality, leading to a scenario in which it lacks initiative in terms of national economic development.Since Reform and Opening, China has achieved rapid economic growth, its economy continues to expand in scale, and it has completed the accumulation of national capital. However, China is yet to build up its own system of internationally competitive technological development and it is yet to gain some sway in the field of international finance. As a result, China is still weak in international economic and financial fields, still vulnerable to external negative impacts, and still suffering from invisible costs related to its economic development.

III.Policy Thoughts on Building a Harmonious Surrounding Economic Security Environment

In the coming decade, China will face both opportunities and challenges in terms of economic security. It should draw on advantages, turn challenges into opportunities and effectively tap into all of its favorable conditions. If it does this, it will be able to create the best possible regional and international security environment for its grand aspiration of national rejuvenation.

1. Actively create surrounding economic security environment.

Firstly, China should formulate and readjust national security strategy, especially peripheral security strategy, in accordance with the changing international and surrounding environment.It must actively coordinate policy, exchange information via regional and sub-regional economic and trade cooperation and governance. In addition, China should seek to fortify existing regional cooperation mechanisms in order to reach consensus on common economic safety, build up its capacity to collectively prevent and manage regional security threats, and safeguard common interests.

Secondly, China must work to establish bilateral economic security cooperation mechanisms. In doing so, it must effectively grasp the future trend of a low carbon economy, construct and readjust the mechanism on joint technological development and commercial promotion with the green economy as the main carrier, concentrating efforts on coping with the challenges of low-carbon economy and seeking rights of common development.

Thirdly, China must join hands with countries in an effort to establish a complementary mechanism of industrial cooperation and promote mutual benefits and win-win outcome, in line with its readjustment of industrial structures and the transformation of its growth modality.

2. Establish and fortify security cooperation mechanisms

To establish and readjust industry security policies, China must actively exert influence on the regional and bilateral economic cooperation mechanisms. In addition, it must establish and readjust national economic security early warning mechanisms, which help with the timely monitoring and management of economic development in neighboring countries,searching for new opportunities for cooperation, proposing new ways and means for cooperation, spotting potential risks, and putting forth proposals for closer cooperation. In line with global economic laws, China must establish and readjust its regional economic outsourcing mechanisms with Chinese enterprise at their core in order to give full play to its comparative advantage in the downstream industrial division, fully tap into outside factors for its own economic development, and effectively prevent and manage economic risks.

3. Establish and readjust the system of technological progress

To accomplish this goal, China must make full use of its system advantages and step up efforts in technological breakthroughs in key economic sectors. China must encourage domestic enterprises to strictly observe benchmarks for business operations and abide by laws and regulations of host countries when developing their foreign markets, closely follow economic cycles, observe local industrial structures, market scales,research and develop industrial technologies that can be easily applied to the local conditions, research and develop products and services that can easily be marketed locally, broaden space for technological cooperation, and promote results of cooperation. Meanwhile, China should continue to make full use of its comparative advantage in capital - importing relevant advanced industrial technologies - in order to expedite the process of industrial technological renovation and elevation,consolidate the right to participate in international competition during the post financial crisis, and facilitate conditions for China to gain early development advantages in terms of the low carbon economy. It must also seek to fully utilize its advantage in both economic scale and market landmass, promoting cooperation in industrial R&D in an effort to realize regional economic rejuvenation.

4. Actively expand mutually beneficial trade

In line with the Twelfth Five-Year Plan, China must fully tap into two-way investment, broaden energy and resource import channels, and effectively address resource and energy bottlenecks in terms of economic development; expedite the process of national R&D and commercialization of patents and brand products, spare no efforts in promoting the popularity of Chinese products and services, and encourage competent Chinese enterprises to establish marketing chains in regional countries in order to broaden access for Chinese products to enter foreign markets. In addition, China must join hands with countries in an effort to tighten oversight on customs and quarantine authorities, step up legal inspection, jointly address“grey trade”activities, eradicate the channels of circulation for sub-quality goods, and eventually promote the quality and popularity of Chinese goods. Take full advantages of existing economic and trade cooperation mechanisms between China and relevant countries, expand policy dialogues, promote interconnectivity in the fields of highway, railway, waterway,and post and telecommunication, which will facilitate conditions for convenient and standard transportation services, create favorable conditions for the enterprises of both sides to carry out two-way trade smoothly, promote trade benefits, expand two-way investment through trade, and eventually elevate the overall capability of Chinese industries. China must further improve its trade structure, broaden international market space for both imports and exports, potentially increase the ratio of Chinese-made products, drastically increase the ratio of the Chinese brand products and technological products,help build the capacity of Chinese enterprises in managing international marketing, and expedite the process by which China will transform from a major trading country to a strong and competitive trading country.

5. Steadily promote industrial cooperation

China must effectively implement agreements signed with relevant countries and regional organizations. In line with the guidelines on the readjustment of industrial structure, China should encourage domestic enterprises to outsource their surplus production capacities to neighboring countries in an orderly fashion so as to expand production space, extend the life expectancy of relevant technologies and production lines, further promote macroeconomic benefits of economic development, and up-lift China’s position and role in the regional economic division. China must establish and improve its national funds that are related to cooperation between China and relevant countries in order to provide financial support for Chinese enterprises to venture into the neighboring countries and eventually across the world. At the same time, it must create conditions to construct and improve systems of communication,transportation, and post and telecommunication in an effort to upgrade the level of connectivity between China and the neighboring countries and provide infrastructure support for the two-way investment. It must also tap into its comparative advantages in the industrial and resource endowments of its neighboring countries and broaden and improve industrial cooperation chains in agriculture, energy, transportation,communication and information.

6. Cultivate a collective security concept

China must work to build upon mechanisms of economic and trade cooperation as well as those of regional economic integration, further promote economic security cooperation between China and neighboring countries, increase political,economic, diplomatic and strategic dialogues in order to effectively resolve differences and disputes, and jointly construct economic security cooperation mechanisms. China should readjust the mindset of economic security and cooperation between itself and its neighboring countries, accelerate research on economic security theories in order to formulate national economic and security strategies and policies, carry forward a new security theory that underscores“mutual trust, mutual benefit, equality and coordination,”and broaden regional cooperation on both traditional and non-traditional security.Meanwhile, it must further promote bilateral and multilateral economic security cooperation and take full advantage of mechanisms of strategic partnership, and fortify its non-ally security cooperation mechanisms that are not targeted at third countries. It must further strengthen bilateral and multilateral policy coordination and strive for collective economic security interests; and establish and improve regular military and security exercises in order to create security environment for the regional economic and trade cooperation.

7. Further promote regional economic governance

China must give full play to the role of sub-regional economic summits and regional cooperation mechanisms in fostering economic security; further emancipate its mindset, adjust policies on regional economic cooperation, step up regional economic and trade cooperation processes in order to build up the collective capacity to cope with economic security risks and form the collective voice of Asian countries in global economic governance. China must exchange views on economic security issues via regular high level forums and the regional summits;establish relevant economic and trade commissions in order to effectively prevent or manage possible economic risks;enhance economic legal cooperation mechanisms with relevant countries in order to properly address economic and trade disputes; and speed up negotiations with relevant countries on Free Trade Agreements in an effort to establish dynamic economic and trade arrangements, promote regional economic and trade cooperation, provide security environment for the two-way trade between China and the relevant countries, and promote common economic security. At the same time, China should seek to establish early warning systems on economic security, exchange relevant information on a regular basis,share success experiences, formulate and readjust future cooperation plans, and further improve the results of economic security cooperation.

8. Actively carry out non-traditional security cooperation

In conclusion, China must actively promote regional non-traditional security cooperation and strengthen the regional economic security environment. It should build on non-traditional security cooperation mechanisms through negotiation and consultation in order to effectively address trans-boundary economic criminal activities, and maximize the benefits of security cooperation. China must take full advantage of its existing bilateral and multilateral cooperation mechanisms, implement programs that target poverty and the improvement of people’s livelihood, gradually improve its development assistance, and help relevant countries eradicate economic and social factors that produce non-traditional security risks. Meanwhile, China should carry out more regular security dialogues and strengthen law enforcement cooperation on regional non-traditional security. Based on the principle of respecting sovereignty, China will continue to abide by the principle of non-interference in internal affairs,and in accordance with the balance of rights and obligations,it will enhance policy coordination, exchange experiences on law enforcement, and provide human resource training and relevant technical equipment in order to provide legal and institutional guarantees for cooperation in the field of regional economic security.