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China’s endgame

October 31, 2020
Turning Points
Bloomberg

Faced with an increasingly hostile world, China is looking inward. At the heart of its latest Five-Year Plan, a blueprint for economic development unveiled on Oct. 29, is a Mao-era slogan that arguably represents the posture of a government feeling threatened by what it calls "hostile foreign forces" while also defiant—zili gengsheng, or "self-reliance."

For example, instead of depending on imported technology, China will go all-out to produce its own while looking to domestic consumption to drive growth. "Tech­nol­ogy self-re­liance is the strate­gic sup­port for na­tional de­vel­op­ment," said a com­mu­niqué at the end of a four-day conclave of top Communist Party leaders led by President Xi Jinping.

Some will interpret this approach as a lurch toward autarky—a China that seals itself off from the world and goes it alone. But this gets the idea of "self-reliance" all wrong. The term was born of necessity: Mao coined it in the context of a civil war with Chiang Kai-shek's Nationalist armies that threatened to annihilate his peasant movement. Once Mao took power, though, he was more than happy to accept Soviet help to build China's industrial base—that is until the two communist giants split over ideology.  

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Mao was not against trading with the capitalist West. And neither is Xi.

"Self-reliance" isn't the same as self-sufficiency. It might even imply more openness, not less. To be self-reliant, China will have to build up its technological capacity. That means greater collaboration with Western tech companies who control many of the core technologies China needs to stand on its own two feet, including advanced semiconductors.

This is why China has allowed Tesla to build a gigafactory in Shanghai. It also helps explain why Beijing hasn't retaliated against U.S. companies even as the Trump administration seeks to cripple Huawei (the avatar of China's tech ambitions), block TikTok (the Chinese music app that's become a global sensation), and disrupt the listing of Ant Group (a fintech giant soon to be worth more than most U.S. banks).

Ironically, the drive for Chinese "self-reliance" may end up encouraging the very reforms the West has been demanding for years.

If China is serious about boosting domestic consumption, it will have to redistribute national wealth toward households and away from heavily favored state-owned enterprises that have skewed its economy in a mercantilist direction, challenging the global system of free trade. The Chinese leadership will also have to build a more innovative financial system to improve returns on savings, which will require U.S. know-how. 

Sure enough, China is now throwing open its doors to U.S. asset managers. And the more China improves the fundamentals of its economy, the more foreign investment will come rolling in. Indeed, in a Covid-ravaged global economy, China is looking increasingly attractive. Witness the announcement this week by Volkswagen that it returned to profit in the third quarter on the strength of surging Chinese demand for luxury cars.

A Volkswagen showroom in Beijing in May

Photographer: Noel Celis/AFP

The meaning of "self-reliance" in 2020 has little to do with China retreating into Maoist isolation. Rather, it shows the Chinese leadership is digging in for a long struggle with those "hostile foreign forces."

Though the trade war with Washington has reached a truce, tariffs remain in place on hundreds of billions of dollars of Chinese exports, and an ever-tightening technology blockade imposed by the White House threatens Beijing's industrial champions. Nor do the tough-minded realists who steer China's economy expect any relief from a potential Joe Biden presidency. On the contrary, they anticipate the former U.S. vice president would be far more effective in building an anti-China coalition among U.S. allies.

In addition, the Chinese leadership is sending a message to its public. In Communist Party propaganda, "self-reliance" is often paired with "self-sacrifice." The Party may be priming the populace for hardship should Xi's prediction of a "great rejuvenation of the Chinese nation" not come to fruition. That goal, to the extent it means reshaping the global order to accommodate Chinese military power and political values, is meeting with widespread resistance.

Deng Xiaoping and family members during a visit to Shenzhen in 1992.

Xi is not the first modern Chinese leader to invoke the Maoist spirit of "self-reliance." Indeed, the Party faithful have never stopped reciting the slogan. The West, however, has long been seduced by other phrases, like "Reform and Opening Up," believing China's modernization was all about integration into a globalized economy.

That was never the deal. The economic opening that Deng Xiaoping launched in 1978 was first and foremost about making China strong and independent. Self-reliance is much more than a defensive tactic for China: it's the end-game. 

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