China : Transition a Market Economy

In 2021, China's Gross Domestic Product (GDP) reached ￥114 trillion ($18 trillion in USD), according to the National Bureau of Statistics. The country's economy outperformed government targets of 6% growth, with the overall economy growing by 8.1%.

Top Five Challenges Facing the Chinese Economy

• Falling Growth Rate: Chinese economic growth rate has been unprecedented. ...
• Export Driven Economy to Consumption Driven Economy: ...
• Manufacturing and Banking Viability: ...
• Tax Revenues and Expenses: ...
• Regional Imbalances: Coastal to Internal.

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China's Incomplete Transition to a Market Economy

Despite China's three-decade history of widespread economic reforms, Chinese officials contend that China is a "socialist-market economy." This appears to indicate that the government accepts and allows the use of free market forces in a number of areas to help grow the economy, but the government still plays a major role in the country's economic development. China has become much more important in the global supply chain. This has multiple implications for theEU-China trade relationship and the global economy more broadly. When it comes to the global economy,the coronavirus outbreak is an important reminder of just how central China has become to global value chains. The shutdown of parts of China, especially Hubei province, has resulted in significant disturbances to global supply chains. The changing nature of China’s supply chains and China’s ascent of global value chains also affects EU member states’ integration with each other in terms of trade in intermediate goods.In fact, while the size of the intra-EU value chain has shrunk (countries are more loosely bound to each other in their exports of intermediate goods), EU member states have become increasingly linked to China for intermediate goods.When China joined the WTO in December 2001, it benefitted from a reduction in the tariffs faced by itsexporters, as other WTO members were required to adopt the most-favoured nation principle for China.Moreover, uncertainty about trade policy declined significantly. The WTO provides members with tools to protect themselves from unfair competition. In 2018, roughly half of the trade-defence instruments used by the EU were applied to China. In particular, anti-dumping measures were widely used and have been shown to effectively dampen trade. Their use increased significantly from the beginning of China’s WTO membership until 2006; since then the number of new cases has declined. In 2019, the EU initiated only two anti-dumping cases against China, out of a total of five anti-dumping cases initiated by the EU. China has initiated far fewer cases against the EU, with fewer than two new cases per year since WTO accession. The ratio between EU and Chinese cases also reflects the trade balance between the two economies.Finally, other countries have more frequently used anti-dumping instruments against China than the EU. EU28 ChinaPolicy Department, Directorate-General for External PoliciesIn particular, India, the US and Brazil have been among the most frequent users of anti-dumping measures against China. Globally, more than 600 anti-dumping measures are in force against China, with only a fraction coming from the EU. Finally, the EU’s anti-dumping measures are particularly important in base metals and the chemicals and pharmaceutical sectors (Felbermayr and Sandkamp, 2020). In December 2017, the EU adjusted its trade-defence rules, particularly its methodology for calculating dumping margins. This is of particular relevance for the EU’s trade policy stance towards China, because the EU has removed the specific provisions governing the calculation of anti-dumping duties for China and other non-market economies. Under the old rules, China was the largest target of EU anti-dumping duties and was also subject to higher duties than Europe’s other trading partners. The change in rule de facto shifted the burden of proof from Chinese firms to the European Commission. It is now the Commission that must prove export prices are distorted for non-market economy reasons. In cases since 2017, the Commission seems to have consistently argued that prices are distorted. The new methodology has also allowed higher duties to be applied. European anti-dumping legislation reform might not significantly change how China is treated in EU anti-dumping investigations. However, it certainly requires the EU to be more transparent and to carefully explain on a case-by-case basis why Chinese exporters are treated differently from those of other countries. On 14 February 2020, the US-China Economic and Trade Agreement (ETA) entered into force. It may mark a turning point in the Sino-American trade war, which saw US tariffs against China increase from an average of 3.8 % at the beginning of 2018 to 21 % in the summer of 2019 (Bown, 2020). The ETA does not address tariffs at all (ETA, 2020). However, the agreement commits China to increasing its imports from the US. These targets will be difficult to meet, not least because of the growth slow-down resulting from the coronavirus crisis. Chowdhry and Felbermayr (2020) estimated how the envisaged increase in Chinese imports from the US might affect EU exports to China.In 2021, China would import goods worth USD 193.3 billion from the US under the ETA scenario, compared to USD 130.7 billion under the no-ETA scenario. This would be an increase of 48 %, attributable to the ETA. Mechanically, imports from the EU would decline by USD 10.8 billion (from USD 202 billion to USD 191.2 billion), equal to 5 % of the undistorted benchmark. The EU’s manufacturing sector, particularly aircraft and vehicles, would be hit hardest. In addition, the China-US ETA could make it difficult for China to honour its commitments to the EU regarding the protection of Geographical Indications. The EU could, however, benefit from the ETA’s provisions reducing restrictions on foreign equity in China and its aim to strengthen intellectual property protection. Foreign direct investment (FDI) flows between the EU and China are substantial but their stock is underdeveloped compared to the sizes of the two economies (Dadush et al, 2019). While FDI has increased as trade between the EU and China has surged, bilateral FDI flows remain small in relation to the size of both economies, and have been relatively volatile. Nevertheless, from 2008 to 2017, the stock of EU FDI in China grew from EUR 54 billion to EUR 178 billion — an increase of 225 %. Meanwhile, the stock of Chinese FDI in the EU rose nearly tenfold, reaching

EUR 59 billion in 2017. The rise of Chinese FDI should be no surprise, given China’s emergence as an important economic power with a declining domestic rate of return on capital. Consequently, Chinese FDI has increased in attractiveness and volume.EU-China trade and investment relations in challenging times European FDI in China has declined in recent years. European players have complained of the many obstacles faced in the Chinese environment, notably poor investor protection, highly uneven and sometimes arbitrary market access (European Union Chamber of Commerce in China 2019). A key concern has been joint venture requirements in many sectors. These have often involved transfers of intellectual property to Chinese counterparts, reducing the attractiveness of investing in Chinese operations. China’s presence in the group of major global investors has also created distinct concerns linked to its state- driven economic model. This model can create an unequal level playing field. Against this backdrop,concluding an EU-China bilateral investment treaty would be an important step to regulate cross-border investment between the two economies. The main obstacles on the EU side are the necessary reciprocity for EU companies operating in China, and ensuring that Chinese companies operating in the EU complywith existing rules and regulations and are not favoured by the Chinese government. This is especially the case for state-owned enterprises (SOEs) but could also apply to private companies (García Herrero and Xu, 2017).Chinese companies have become major competitors of European companies as they top the Fortune 500

list, together with American companies. Furthermore, many Chinese large companies are state-owned,which poses different challenges than competing with American companies, in terms of differinggovernance levels and financial support. The fact that Chinese companies now operate in high value addedmarkets — increasingly doing so in European companies’ areas of strength — combined with the strong role of the Chinese state, has served to heighten European concerns about Chinese investment in EU markets.Competition between European and Chinese companies does not only affect the Chinese and EU markets.It is also relevant in third markets.

‘’** Domestic and global challenges of China’s economic transformation

China’s well-known story of spectacular growth, at around 10 per cent annually for 40 years, is coming to an end because of both domestic and global factors. In analysing China’s prospects for the next several decades, three particular challenges are striking: the shift from a labour-surplus to a labour-scarce society; the shift from investment to innovation as the primary source of growth; and the shift in China’s global position from a rising power to an established power.

Rapid ageing is probably China’s biggest domestic challenge. The population over 65 will increase from 200 million today to 400 million by 2049, while the overall population will decline slightly. Within this group, the most rapid rise will be in the population 85 and older: from fewer than 50 million today to over 150 million in 2049. The challenge of taking care of the elderly is compounded by China’s rural–urban divides. Most of the elderly live in the countryside, though often their working-age children have moved to cities as migrant workers. Since rural health systems are weaker than urban ones, taking care of the elderly will require more permanent migration to cities plus strengthened rural service delivery. China needs to scrap the hukou household registration system that limits permanent migration and to unify rural and urban pensions, health insurance and educational systems. This will be good both for social objectives and the efficient use of labour. Dealing with ageing is first and foremost a quality-of-life issue, but it also has economic implications. China’s labour force will shrink, but by how much and with what impact remains to be seen. As China’s workforce shrinks, the 55–64 year-old cohort will increase dramatically. Keeping this group and the ‘young olds’ (65–85) healthy and active is China’s best hope for staving off a dramatic labour force decline. Improving rural education is also critical because about half the workers of the future are attending school in the countryside. Deficiencies in their education will affect China’s growth for years to come.

China is counting on robots and automation to fill the gaps in the labour force, but it is impossible to make the pace of automation match declines in particular types of jobs. The social safety net and retraining programs will be increasingly important to help people shift as the job picture shifts. A second domestic weakness that China needs to address is its overreliance on investment and underperformance on innovation. The financial system adequately channelled resources to investment during China’s rapid growth phase, but the state-dominated system is inefficient. Now that China has reached middle-income it will need to depend less on investment and more on innovation and productivity growth. But the bank-dominated financial system favours lending to state enterprises, which are less productive and innovative than the private sector. One piece of evidence that the old investment-heavy growth model is running out of steam is that the debt-to-GDP ratio has been rising inexorably since the global financial crisis. If lending is financing productive investment and growth, then this ratio should be stable or slowly rising. As diminishing returns to investment set in, successful countries naturally rely more on innovation as a source of growth. China has impressive inputs into innovation, with a large share of GDP devoted to research and development (R&D) and the world’s largest technical labour force. But the outputs, in terms of successful companies, high-value patents and productivity growth, are less impressive. The Made in China 2025 industrial policy is trying to direct innovation in 10 key industries. This approach is unlikely to succeed and has caused great consternation among trading partners. China should focus on the foundations of innovation: intellectual property rights (IPR) protection, venture capital, universities, free trade and general subsidies to R&D rather than ones targeted at particular technologies. A strong innovation foundation combined with ambitious targets to reduce carbon and improve the environment should make China a leader in new technologies to address climate change.

China’s ability to meet its social and economic goals will also depend on the international environment and economic architecture. China has benefited enormously from globalisation, but aspects of the global order are outdated and need reform.

The World Trade Organization is not equipped to deal with modern trade issues like IPR protection, investment restrictions, cross-border data flows and subsidies. The major economies of the world cannot agree on expanding the resources of the International Monetary Fund because the United States does not want to increase the weight of China and other emerging markets in decision-making, though this is what their growing role in the world economy dictates. China and Western donors have separate and competing programs to finance infrastructure in the developing world.

A strengthening of these economic institutions that provide critical global public goods is required for the world economy to function smoothly. This will require practical compromises between China and the United States, and more generally between developing and advanced countries. China will need to take on more responsibilities commensurate with its great power status.

Right now, it seems like a joke to talk about practical compromises between China and the United States. Even with a new Biden administration that will act more cooperatively, US–China relations are likely to remain difficult. But we should not take it for granted that China and the United States will become enemies. Both countries have an interest in international cooperation on public goods. For China, domestic reforms that address its main challenges will also be the right foundation for improved relations with the United States and other advanced economies.

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Industrial Policies and SOEs

According to the World Bank, "China has become one of the world's most active users of industrial policies and administrations."?China's State Council has said that there are currently 150,000 SOEs at the central and local government level.?China's SOEs may account for up of 50% of non-agriculture GDP.?In addition, although the number of SOEs has declined sharply, they continue to dominate a number of sectors (such as petroleum and mining, telecommunications, utilities, transportation, and various industrial sectors); are shielded from competition; are the main sectors encouraged to invest overseas; and dominate the listings on China's stock indexes.One study found that SOEs constituted 50% of the 500 largest manufacturing companies in China and 61% of the top 500 service sector enterprises.Not only are SOEs dominant players in China's economy, many are quite large by global standards. Fortune's 2016 list of the world's 500 largest companies includes 103 Chinese firms (compared to 29 listed firms in 2007).Of the 103 Chinese firms listed, Fortune identified 75 companies (73% of total) where the government owned 50% or more of the company. Together, these 75 firms in 2016 generated $7.2 trillion in revenues, had assets valued at $20.7 trillion, and employed 16.2 million workers. Of the 28 other Chinese firms on the Fortune 500 list, several appear to have financial links to the Chinese government.

Corruption and the Relative Lack of the Rule of Law

The relative lack of the rule of law in China has led to widespread government corruption, financial speculation, and misallocation of investment funds. In many cases, government "connections," not market forces, are the main determinant of successful firms in China. Many U.S. firms find it difficult to do business in China because rules and regulations are generally not consistent or transparent, contracts are not easily enforced, and intellectual property rights are not protected (due to the lack of an independent judicial system). The relative lack of the rule of law and widespread government corruption in China limit competition and undermine the efficient allocation of goods and services in the economy. A?New York Times?article reported that (former) Chinese Premier Wen Jiabao's family controlled assets worth at least $2.7 billion.?One study estimates that between 2001 and 2010, China was the world's largest source of illicit capital outflows at $3.8 trillion.?A 2012 survey by the Pew Research Center's Global Attitudes Project reported that 50% of respondents said that corrupt officials are a very big problem (up from 39% in 2008).?Chinese officials often identify government corruption as the greatest threat to the Chinese Communist Party and the state. The Chinese government's anticorruption watchdog reported that 106,000 officials were found guilty of corruption in 2009.?Since assuming power in 2012, Chinese Xi Jinping has carried out an extensive anticorruption drive. China has reportedly sought cooperation with the United States to obtain extradition of 150 alleged corrupt officials who have fled to the United States.?However, many analysts contend that government anticorruption campaigns are mainly used to settle political scores with out-of-favor officials. Some analysts contend that President's Xi anticorruption drive is more about consolidating his own political than instituting reforms.In addition, there are some indicators that the current anticorruption campaign may be having a negative impact on the Chinese economy, due to hesitancy by some local officials to pursue projects they feel will lead to scrutiny from the central government.?Many observers argue that meaningful progress against government corruption cannot occur without greater government transparency, a system of checks and balances, a free press, Internet freedom, and an independent judiciary.?In October 2014, China held its fourth Plenum of the 18th?Party Conference. The meeting focused on the need to enhance the rule of law in China, but emphasized the leading role of the Communist Party in the legal system.

China maintains a weak and relatively decentralized government structure to regulate economic activity in China. Laws and regulations often go unenforced or are ignored by local government officials. As a result, many firms cut corners in order to maximize profits. This has led to a proliferation of unsafe food and consumer products being sold in China or exported abroad. Lack of government enforcement of food safety laws led to a massive recall of melamine-tainted infant milk formula that reportedly killed at least four children and sickened 53,000 others in 2008. Transparency International's Corruption Perception Index for 2016 ranked China 79th?out of 176 countries and territories, up from 72nd?in 2007.

Demographic Challenges

Many economists contend that China's demographic policies, particularly its one-child policy (first implemented in 1979), are beginning to have a significant impact on the Chinese economy. For example, according to a McKinsey Global Institute study, China's fertility rate fell from about 5.8 births per woman in 1964 to 1.6 in 2012.This is now affecting the size of the Chinese workforce.

The existence of a large and underemployed labor force was a significant factor in China's rapid economic growth when economic reforms were first introduced. Such a large labor force meant that firms in China had access to a nearly endless supply of low-cost labor, which helped enable many firms to become more profitable, which in turn led them to boost investment and production. Some economists contend that China is beginning to lose this labor advantage. According to the Chinese government, the size of its working age population (ages 16 to 59) peaked at 925 million in 2011, but then fell for seven consecutive years to 897 million in 2018. The Chinese government projects that its working age population will drop to 830 million by 2030 and to 700 million by 2050. If these projections prove accurate, the Chines working age population could drop by 225 million individuals (2011-2050).

The one-child policy has also resulted in a rapidly aging society in China.According to the Brookings Institute, China already has 180 million people aged over 60, and this could reach 240 million by 2020 and 360 million by 2030. The population share of people aged over 60 could reach 20% by 2020, and 27% by 2030.?With a declining working population and a rising elderly population, the Chinese government will face challenges trying to boost worker productivity (such as enhancing innovation and high-end technology development) and expanding spending on health care and elderly services. China's Hukou (household registration) system also poses challenges to the government.

China's Hukou System

First introduced in 1951, the Chinese Hukou (household registration) system is a categorization of its citizens based on both their place of residence and eligibility for certain socioeconomic benefits. Hukou is issued through a registration process administered by local authorities and solidified into inheritable social identities.The classification of the system is composed by two related parts: socioeconomic eligibility (agriculture/nonagriculture); and residential location (living in urban/rural areas). The Chinese government imposed the system with the purpose of regulating population distribution, especially in regard to cities. Since economic reforms were begun in 1979, hundreds of millions of people have been allowed to leave their home towns to work in urban areas, such as Shanghai. The number of rural laborers working in China's cities was 274 million in 2014, over one-third (36%) of the total workforce.?Although such workers are allowed to reside in the cities where they work, they are generally denied access to social entitlements, such as pensions, medical insurance, and basic education for children. This forces such workers to save a very high level of their income to pay for these services. Due to China's desire to increase the urbanization of its population, combat demographic disparities, and boost domestic consumption, the Chinese government is currently considering implementing new reforms to the Hukou system.''The hukou system codifies various social inequalities in China by dividing the population into two classes, rural and urban, to determine where citizens can receive public services''

Economic Goals of the 19th?Party Congress of the Communist Party

President Xi's report to the 19th?Party Congress in November 2017 stated that socialism with Chinese characteristics had entered a new era. He stated that China would work to become a "moderately prosperous society in all respects" by 2050. Major goals include boosting living standards for poor and rural people, addressing income disparities (e.g., rich-poor and urban-rural), making private consumption the driver of the economy, boosting services, reducing pollution, promoting innovation and economic modernization, and improving overall living standards.?For example, the report states the following:

We will work faster to build China into a manufacturer of quality and develop advanced manufacturing, promote further integration of the internet, big data, and artificial intelligence with the real economy, and foster new growth areas and drivers of growth in medium-high end consumption, innovation-driven development, the green and low-carbon economy, the sharing economy, modern supply chains, and human capital services. We will support traditional industries in upgrading themselves and accelerate development of modern service industries to elevate them to international standards. We will move Chinese industries up to the medium-high end of the global value chain, and foster a number of world-class advanced manufacturing clusters.

The report indicated that China would continue to pursue trade and investment reforms, noting the following:

We will adopt policies to promote high-standard liberalization and facilitation of trade and investment; we will implement the system of pre-establishment national treatment plus a negative list across the board, significantly ease market access, further open the service sector, and protect the legitimate rights and interests of foreign investors. All businesses registered in China will be treated equally.

However, the report emphasized the continued importance of the state sector and the government's continued role in various economic sectors:

We will improve the systems for managing different types of state assets, and reform the system of authorized operation of state capital. In the state-owned sector, we will step up improved distribution, structural adjustment, and strategic reorganization. We will work to see that state assets maintain and increase their value; we will support state capital in becoming stronger, doing better, and growing bigger, and take effective measures to prevent the loss of state assets. We will further reform of state-owned enterprises, develop mixed-ownership economic entities, and turn Chinese enterprises into world-class, globally competitive firms.

?{With President Xi Jinping at the helm, the Chinese government doubled down on repression inside and outside the country in 2021. Its “zero-tolerance” policy towards Covid-19 strengthened the authorities’ hand, as they imposed harsh policies in the name of public health. Beijing’s information manipulation has become pervasive: the government censors, punishes dissent, propagates disinformation, and tightens the reins on tech giants. The once-cacophonous internet is now dominated by pro-government voices that report to the authorities on people whose views they deem insufficiently nationalistic.The Chinese government pushed for more conservative values in 2021, shrinking space for lesbian, gay, bisexual, and transgender (LGBT) and women’s rights—issues previously considered less sensitive. Beijing grew less tolerant of criticism from private entrepreneurs. In July, courts imposed a sentence of 18 years on Sun Dawu, an agricultural tycoon supportive of rights activists, for vague crimes, after handing down a similarly harsh sentence to Ren Zhiqiang, an outspoken real estate mogul.

Xi’s latest promise to tackle inequality and deliver “common prosperity” rings hollow as his government suffocates grassroots voices. After the self-immolation of a delivery truck driver in January, the government tightened regulatory controls to protect gig workers, yet also cracked down on their activism. China’s rapidly expanding inequality led some young people to advocate a form of passive resistance known as “tang ping”—opting out of consumption and demeaning work—a concept that the government condemned and censored.

Authorities devastated human rights protections and civil liberties in Hong Kong, recasting much of the peaceful behavior that had undergirded Hong Kong life, such as publishing news, as acts of subversion. An April 2021 report by Human Rights Watch found authorities were committing crimes against humanity as part of a widespread and systematic attack on Uyghurs and other Turkic Muslims in Xinjiang, including mass detention, torture, and cultural persecution. Tibetans continued to be subjected to grave abuses, including harsh and lengthy imprisonment for exercising their basic rights.

The Chinese government’s rights record and its “wolf warrior” diplomacy resulted in increasingly negative public perceptions of the government in some countries abroad. New research from AidData revealed US$385 billion in “hidden debt ” owed by developing countries to Chinese authorities. Some foreign governments took more concrete measures to press the Chinese government to improve its rights record, at home and abroad, but those remained inadequate to effectively challenge the scope and scale of Beijing’s abuses.

Hong Kong

Beijing and Hong Kong authorities moved aggressively to roll back rights in Hong Kong.

Pro-democracy activists were arbitrarily arrested and detained. In January, authorities arrested 53 politicians for “subversion” for their involvement in a July 2020 public opinion poll.?In September, three members of the group Student Politicism were arrested for “conspiracy to incite subversion” for delivering snacks to imprisoned protesters. Ordinary people were arrested for public defiance, such as for displaying flags bearing the banned 2019 protest slogan, “Reclaim Hong Kong, Revolution of Our Times.”

At time of writing, over 150 people had been arrested for violating the draconian National Security Law (NSL) since it was imposed on June 30, 2020. Some NSL suspects held in custody were mistreated; pro-democracy activist Tam Tak-chi has been held in solitary confinement since he was detained in September 2020.

Authorities turned Hong Kong’s quasi-democratic institutions into rubber-stamp bodies. In March, Beijing imposed “electoral reforms,” requiring that only those loyal to the Chinese Communist Party could win a seat in Hong Kong’s legislature. In April, following citizens’ calls to cast blank ballots to protest the changes, the government revised the electoral laws to prohibit “incitement of others to cast blank ballots,” with sentences of up to three years in prison. In September, when the government required elected members to the District Council—a consultative body that advises the government on local issues—to take a loyalty oath, about half resigned as they anticipated being disqualified by the government for their pro-democracy views.

Authorities banned the annual Victoria Park vigil commemorating victims of the 1989 Tiananmen Square massacre in Beijing. On the day of the vigil, police arrested the vice-chair of the organizing group, Hong Kong Alliance, cordoned off the park, and stationed officers throughout the city to prevent remembrances. In September, police froze the Alliance’s HK$2.2 million (US$283,000) in assets, closed its June 4th Museum about the massacre, revoked its registration, deleted its social media accounts, and arrested its four leaders for “inciting subversion.”

Dozens of civil society organizations disbanded in 2021, including protest organizer Civil Human Rights Front in August and the legal aid group 612 Humanitarian Relief Fund in November. Major labor groups, including the Hong Kong Professional Teachers’ Union and Hong Kong Confederation of Trade Unions (HKCTU), disbanded in August and September respectively.

Throughout 2021, Beijing’s newspapers smeared the Hong Kong Bar Association and its chairperson, Paul Harris, and called for his resignation. In August, citing threats to himself and his family, a pro-democracy candidate withdrew from a council election of the Law Society, a solicitors’ association. Candidates with Beijing ties later won .

Authorities attacked press freedom. They forced the city’s second most popular newspaper, Apple Daily? to close in June, after arresting its owner, Jimmy Lai, top executives, and editors, freezing Lai’s HK$500 million (US$64 million) worth of assets, and raiding the paper’s headquarters. Lai was also sentenced to a total of 14 months in prison in April for attending protests; he faced an additional six charges in four other cases.

The government also transformed the previously independent Radio Television Hong Kong (RTHK). In May, it replaced the head of RTHK with Li Pak Chuen, who had no prior media experience. Li then censored current affairs programs, prohibited staff from attending press award events that honored their coverage of the 2019 protests, and fired journalists and talk show hosts for their views critical of the government.

Police censored the internet through website blocking for the first time. In January 2021, the police ordered internet service providers to block access to HKChronicles.com, a website that documents police abuse but had also revealed personal information about police officers. In June, an Israeli hosting company took down the website of a Hong Kong exile initiative, 2021 Hong Kong Charter, at the request of the Hong Kong police, though it reinstated the site following an international outcry. In September, Hong Kong police blocked the website of the June 4th Museum.

Academic freedom deteriorated. University administrations were hostile towards student unions throughout 2021, while a number of academics were fired, or their contracts were not renewed, because of their pro-democracy views.

Authorities censored art, forcing theaters to pull a documentary about the 2019 protests in March, and forcing a new museum, M+, to pull a work by Chinese dissident-artist Ai Weiwei from its opening in November.

Xinjiang

The Chinese authorities are committing crimes against humanity against Uyghurs and other Turkic Muslims in Xinjiang. Abuses committed included mass arbitrary detention, torture, enforced disappearances, mass surveillance, cultural and religious persecution, separation of families, forced returns to China, forced labor, and sexual violence and violations of reproductive rights. Little news trickled out of Xinjiang in 2021, however, as the authorities maintained tight control over information, and as access to the region, already limited, was further constrained due to Covid-19 movement restrictions.

Some Uyghurs who disappeared into Xinjiang’s abusive “Strike Hard Campaign against Violent Terrorism” were confirmed imprisoned, including prominent academic Rahile Dawut, though her alleged crime, length of sentence, and location of imprisonment remained unclear. There were also reports of Uyghurs dying in detention, including biotech researcher Mihriay Erkin, 31, businessman Yaqub Haji , 45, and poet and publisher Haji Mirzahid Kerimi , 82.

A report by the Uyghur Human Rights Project showed the Xinjiang government dispossessed Uyghurs by confiscating $84.8 million worth of assets from 21 jailed Uyghurs and auctioning the assets online.

Neighboring governments continued to facilitate Beijing’s abuses. In September, Kazakh authorities banned a Russian-American researcher, Yevgeniy Bunin, from the country in apparent efforts to stymie his work documenting Xinjiang’s abuses. Also in September, Turkey denied entry to Dolkun Isa, president of the Uyghur exile organization World Uyghur Congress. Uyghurs abroad from Afghanistan to Morocco feared deportations to China as the Chinese government continued to seek their return for alleged terrorism, a term vaguely defined under Chinese law that encompasses peaceful expression and advocacy.

Businesses continued to be subjected to heightened scrutiny over their Xinjiang involvement. In March, Chinese consumers boycotted international clothing brands for vowing to stop purchasing cotton from Xinjiang due to reports of forced labor. In April, Shenzhen police shut down the Chinese affiliate of a US labor auditing nonprofit, Verite. In July, US photography company Kodak deleted from Instagram a photographer’s post calling Xinjiang “dystopian.” The US Customs and Border Protection agency issued numerous import bans related to Xinjiang, including cotton and tomatoes from Xinjiang, and all downstream products that use Xinjiang cotton and tomatoes manufactured outside the region. There are growing calls for other countries to impose similar bans on Xinjiang imports.

Tibet

Authorities in Tibetan areas continue to severely restrict freedoms of religion, expression, movement, and assembly. They also fail to address popular concerns about mining and land grabs by local officials, which often involve intimidation and unlawful use of force by security forces.

Following a November 2020 announcement tightening controls on online communications that “undermine national unity,” there was a surge of reported detentions of Tibetans in 2021 for alleged online offenses. In particular, Tibetans who communicated with people outside China were harassed and punished, regardless of the content of their communications.

The government stepped up coercive assimilationist policies. Chinese language classes were already compulsory for schoolteachers, local officials, and vocational trainees. In July, authorities announced that kindergartens in ethnic minority areas must use Chinese as a medium of instruction. In August, President Xi emphasized the subordination of minority identities to a single national identity at the national “Ethnic Work” conference.

Authorities’ heightened surveillance and intimidation at all levels, from online to neighborhoods to schools, and have rendered protests—such as those over the downgrading of minority language in Inner Mongolia in 2020—virtually impossible in Tibetan areas.

At least eight Tibetan prisoners or suspects were released due to ill health, some due to torture, four of whom died soon after, though the true number is unknown due to extreme information controls in Tibet.

Covid-19

Authorities continued to detain or prosecute people for criticizing the government’s handling of the Covid-19 pandemic. Between January 2020 and June 2021, the Twitter account SpeechFreedomCN recorded at least 663 arrests for Covid-19-related speech. In March, retired professor Chen Zhaozhi was put on trial on charges of “picking quarrels and provoking trouble” for posting on social media, “The Wuhan pneumonia is not a Chinese virus, but Chinese Communist Party virus.”

In August, a Beijing court sentenced activists Chen Mei and Cai Wei to 15 months in prison after convicting them of “picking quarrels and provoking trouble.” They were detained in April 2020, for archiving censored online articles and social media posts about the pandemic. In the same month, imprisoned citizen journalist Zhang Zhan became seriously ill following a hunger strike. In December 2020, Zhang was sentenced to four years in prison after travelling to Wuhan to document the pandemic in February. Citizen journalist Fang Bin, who was detained in April 2020 in Wuhan, remained missing.

In 2021, authorities launched a nationwide vaccination campaign. Though the central government insists that the scheme is voluntary, many complained online about local authorities’ abusive tactics to drive up vaccination rates. In some cases, the police physically restrained people to forcibly inoculate them; in others, authorities announced that they would suspend government benefits for anyone who refused vaccination or conditioned school enrollment on the vaccination of the student’s entire family. Vaccine safety activist He Fangmei, taken into custody by Henan authorities in October 2020, remained forcibly disappeared.

Human Rights Defenders

Authorities continued to crack down on human right defenders . Police in Hunan province detained activist Ou Biaofeng in December 2020, and later charged him with “inciting subversion.” Ou has been an outspoken critic of the Chinese government and a supporter of Dong Yaoqiong, who was held in a psychiatric hospital for over a year after she splashed ink on a poster of President Xi in 2018. In February, Dong was reportedly taken into a psychiatric hospital again after she posted on Twitter about being subjected to police surveillance.

In January 2021, a court in Guizhou province sentenced former journalist Zhang Jialong to one-and-a-half years in prison for “picking quarrels and provoking trouble” for criticizing the government’s censorship and urging the US to help “tear down” the Great Firewall in a 2014 meeting with then-US Secretary of State John Kerry.

In April, Beijing police detained food delivery worker and labor activist Chen Guojiang , accusing him of “picking quarrels and provoking trouble” after he tried to unionize delivery workers, undermining the government's vow to protect gig workers from dangerous working conditions.

In May, Guangzhou police detained human rights activist and writer Wang Aizhong on suspicion of “picking quarrels and provoking trouble.”

In July, a court in Hebei province sentenced outspoken agricultural mogul Sun Dawu to 18 years in prison on charges including “picking quarrels and provoking trouble” and “assembling a crowd to attack state agencies.” Sun was also a longtime supporter of human rights activists and lawyers.

In August, a court in Anhui province sentenced activist Zhou Weilin to three-and-a-half years in prison for his tweets critical of the government and articles he wrote for the overseas-based Rights Defense Network website.

Also in August, Cheng Yuan, Liu Yongze, and Wu Gejianxiong, the founder and two staff members of the anti-discrimination group Changsha Funeng, were sentenced to between two and five years in prison in a secret trial. Authorities detained the three in July 2019, on charges of “subversion.”

In September, prominent rights lawyers Ding Jiaxi and Xu Zhiyong were indicted for “subversion.” Authorities detained the activists in late 2019 and early 2020, for participating a gathering where attendees discussed human rights and China’s political future. In February, Beijing police detained Li Qiaochu, a women’s and labor rights activist, and partner of Xu, charging her with “subversion.” While in detention, Li was taken to a hospital several times for treatment of mental and physical illnesses.

Also in September, the authorities forcibly disappeared Huang Xueqin, a journalist and leading voice in China’s #MeToo movement, and Wang Jianbing, a labor activist. In the same month, detained human rights lawyer Chang Weiping was allowed by authorities to meet with his lawyer for the first time since he was forcibly disappeared in 2020.

Freedom of Expression

Authorities harassed, detained, or prosecuted numerous people for their online posts and private chat messages critical of the government, bringing trumped-up charges of “spreading rumors,” “picking quarrels and provoking trouble,” and “insulting the country’s leaders.” A 2021 Wall Street Journal report found that 58 Chinese users were punished with prison sentences between six months and four years since 2017 for their posts on Twitter, Facebook, and YouTube—all platforms banned in China.

An increasing number of people were punished for speeches deemed “unpatriotic.” In February, at least seven people were detained for comments in relation to the border clash with Indian troops. In March, the government passed a provision stipulating that slandering “heroes and martyrs” could be punished with up to three years in prison. Former journalist Qiu Ziming was sentenced to an eight-month prison term for suggesting the real death toll of Chinese soldiers in the clash was higher than the official figure.

Authorities continued to suppress online content not in line with “core socialist values .” They targeted “misbehaving” celebrities and their online fan groups, and banned some reality shows. In April, censors deleted from WeChat and other websites an article penned by former premier Wen Jiaobao in which he wrote, “China, in my vision, should be a country of justice and fairness.”

In December 2020, the Beijing police detained Haze Fan, a journalist for Bloomberg News, on suspicion of endangering national security. In July, the Communist Youth League encouraged the harassment and doxing of foreign journalists who were covering the flood disaster in Zhengzhou.

Freedom of Religion

Chinese law allows people to practice only five officially recognized religions in officially approved premises, and authorities retain control over personnel appointments, publications, finances, and seminary applications. Since 2016, when President Xi called for “Sinicization” of religions—which aims to ensure that the Chinese Communist Party is the arbiter of people’s spiritual life—state control over religion has strengthened.

In 2021, police arrested those who worshipped outside of state-sanctioned parameters. In May, a Shenzhen court sentenced four employees from a company that sold audio devices broadcasting the Bible to between 15 months and six years for “operating an illegal business.” In July, five members of an unauthorized “house church” in Shanxi province were detained on suspicion of “illegally crossing the border” after they went to a January 2020 religious conference in Malaysia. In August, police took nine people involved with the Golden Lamp Church, an unauthorized “house church” in Linfen, Shanxi province, into custody.

Authorities continued efforts to alter the architectural style of mosques and landmarks to make them look more “Chinese” across the country, while Hui Muslim activists said police had harassed them for criticizing the policy.

Mass Surveillance

Authorities devoted resources to expanding mass surveillance systems nationwide, in the absence of meaningful legal protections against unlawful or abusive government surveillance. Chinese companies with reported links to the government continue to draw global scrutiny for their data collection practices.

The Standing Committee of the National People’s Congress passed the Personal Information Protection Law (PIPL) in August, making significant progress to regulate companies’ collection of consumer data. While it could potentially empower citizens to hold companies accountable by filing a complaint with the government or getting a government-approved organization to file a lawsuit, it will unlikely check the state’s use of mass surveillance.

Women’s and Girls’ Rights

March marked the fifth anniversary of the landmark Anti-Domestic Violence Law, yet victims continued to face an uphill battle in seeking authorities’ protection and accountability for their abusers. In February, an article by former journalist Ma Jinyu on the violent abuses she suffered by her husband ignited a heated discussion on social media about the government’s persistent failure to prosecute domestic violence.

Women’s rights issues continued to face online censorship. In April, dozens of social media accounts run by women’s rights activists, including those of prominent feminists Xiao Meili and Liang Xiaomen, were abruptly shut down after they were attacked and reported by nationalistic trolls online.

In June, the Chinese government announced that it would further relax the country’s birth quotas from two to three children after the previous strict “one-child” policy led to a demographic crisis—and human trafficking . Many women expressed concerns that without measures to increase access to equitable parental leave and caregiving, the policy change could further exacerbate gender inequality. Human Rights Watch research shows that the two-child policy, in effect from 2016 to 2021, had worsened workplace gender discrimination.

In September, the State Council, China’s cabinet, in its “Chinese Women’s Development Guidelines” for 2021-2030, identified “reducing non-medically necessary abortions” as a step toward women’s development. Many expressed concerns that the Chinese government could further restrict reproductive rights.

The #MeToo movement gained new traction in 2021, after more women came forward to accuse well-known men of sexual harassment. In August, the Beijing police arrested Chinese-Canadian singer Kris Wu for rape. Authorities in Hangzhou investigated a manager at the online commerce giant Alibaba after rape allegations surfaced online. In September, a Beijing court dismissed a landmark sexual harassment case brought against a prominent TV host at the state broadcaster CCTV, after the judge refused the plaintiff’s requests to retrieve corroborating evidence, including security camera footage.

Sexual Orientation and Gender Identity

While China decriminalized same-sex conduct in 1997, it still lacks laws protecting people from discrimination on the basis of sexual orientation or gender identity, and same-sex partnerships are not legal. The Chinese government showed greater rigidity towards sexual orientation and gender norms in 2021.

In February, a court in Jiangsu province ruled in favor of a publisher that described homosexuality as a “psychological disorder” in a university textbook. In July, social media platform WeChat removed dozens of LGBT accounts run by university students, claiming some had broken rules on online information. In September, the Chinese government banned “sissy” effeminate men and “abnormal esthetics” in the entertainment sector. It called for media to establish “correct beauty standards” and spread “positive values.”

Belt and Road Initiative

The Belt and Road Initiative (BRI), announced in 2013, is the government’s trillion-dollar infrastructure and investment program stretching across some 70 countries. Some BRI projects have been criticized for lack of transparency, disregard of community concerns, and negative environmental impacts.

Human Rights Watch published a report, in August, that documented economic, social, and cultural rights violations in Cambodia resulting from the Lower Sesan 2 dam’s displacement of nearly 5,000 people between 2013 and 2018 and impacts on the livelihoods of tens of thousands of others upstream and downstream. The dam was a BRI project funded mainly by a Chinese-state owned bank and built by a Chinese-state owned electricity generation company.

China Labor Watch, an NGO, reported , in April, that overseas Chinese workers working on BRI infrastructure projects in Algeria, Indonesia, Pakistan, and other countries were victims of human trafficking and forced labor, including being deceived into working illegally, held against their will, and forced to work while infected with Covid-19 in early and mid-2020.

Climate Change Policies and Actions

China is by far the largest emitter of greenhouse gases globally, making a major contribution to the climate crisis that is taking a mounting toll on human rights around the globe. China accounts for nearly 70 percent of global emissions in 2018, although its per capita emissions put it only in the top 40 countries. Much of the considerable energy that has fueled China’s economic growth comes from coal, driving these emissions . It produces half of the world’s coal and is also the largest importer of oil, gas, and coal.

China is the world’s largest funder and builder of overseas coal projects , some of which are through the BRI. President Xi announced at the UN General Assembly in October, that China would no longer “build new coal-fired power projects abroad.” China continues to develop coal projects domestically.

In September 2020, Xi announced China would reach carbon neutrality by 2060, and reach peak carbon emissions before 2030. Despite these improved targets, the?Climate Action Tracker?rates ?China’s domestic target as “highly insufficient”?to meet the Paris Agreement goal to limit global warming to 1.5°C?above pre-industrial levels.

China also leads the world in renewable energy use and is the largest funder of overseas renewable projects , some of which, however, have been linked to human rights abuses . China has much of the global production capacity for the materials needed for a global transition to renewable energy including wind turbines, solar panels, and minerals. Some of these materials are reportedly processed in Xinjiang , raising concerns about the use of forced labor .

China’s imports of agricultural commodities?drive?more deforestation globally than those of any other market—including the imports of all 27 member states of the European Union combined. This deforestation is largely?illegal . In November, in a joint China-US statement issued in the context of the global climate summit in Glasgow, the two countries said they would contribute to eliminating global illegal deforestation by enforcing their respective laws that ban illegal imports of timber. China has yet to enforce a restriction on illegal timber imports it adopted in 2019.

Key International Actors

Canada, the European Union, the United Kingdom, and the United States imposed coordinated and bilateral targeted sanctions on Chinese government officials and companies responsible for serious human rights violations, including international crimes, in Xinjiang. The US also imposed sanctions on several senior Hong Kong officials for imposing the National Security Law. In August, the US gave Hong Kong people in the US a temporary 18-month “safe haven.”

In September, UN High Commissioner for Human Rights Michelle Bachelet expressed “regret” that the authorities had not given her meaningful access to Xinjiang, and said that her office would issue an assessment of human rights in that region. Her announcement followed a joint statement of concern by 44 governments at the 47th session of the UN Human Rights Council. A similar statement was delivered by 43 governments at the UN General Assembly in October 2021.

Parliamentarians in Belgium, Canada, the Czech Republic, Lithuania, the Netherlands, and the UK passed resolutions accusing the Chinese government of committing genocide against Uyghurs; some also called on their governments to limit participation in the 2022 Beijing Winter Olympics. The UK Parliament passed a non-binding motion supporting a diplomatic boycott of the Games. Members of the European Parliament halted the EU’s proposed Comprehensive Agreement on Investment with China, citing human rights concerns, and freezing consideration of the deal for as long as they are subject to Beijing’s counter sanctions. In September, they also adopted a recommendation for a new, more assertive, and better coordinated EU strategy on China, placing human rights at its core.

EU member states continued to issue strong statements of condemnation of China’s human rights abuses at the UN. In July, the European Commission issued a guidance note to help businesses address the risk of forced labor, and, in September, Commission President Ursula von der Leyen pledged that the EU would introduce legislation banning goods produced through forced labor to enter the EU market.

Multinational companies came under greater pressure to withdraw operations from Xinjiang over concerns about forced labor. Those who publicly expressed concerns about that issue, including H&M and Nike, were then targeted for a boycott by consumers in China.

International technology companies continued to facilitate censorship in their operations in China. According to a May New York Times report, Apple created a mechanism to proactively reject or remove apps the company believes could run afoul of government censors. In June, Apple announced that it would not roll out its new privacy measure, Private Relay, in China. (Apple declined to respond on the record to a Human Rights Watch letter regarding the issues.) Also in June, the New York Times reported that the search engine Bing, owned by Microsoft, blocked image and video results for the phrase “tank man” in countries including the US, Germany, and Switzerland. Microsoft attributed the incident to “accidental human error.” LinkedIn, also owned by Microsoft, citing the need to comply with local laws, blocked the profiles of some Chinese government critics and people associated with organizations deemed critical of the government, including a Human Rights Watch employee. In October, LinkedIn announced it was shutting down its professional networking service in China, citing “challenging operating environment.”

Few universities in democracies took steps to protect their students’ and scholars’ free speech involving criticism of the Chinese government. In Australia, Human Rights Watch research showed only weak efforts to push back against such problems. At the same time, none of the universities with ties to academia in Hong Kong publicly challenged Hong Kong authorities’ clear assault on academic freedom—including harassing student unions and firing pro-democracy faculty—in the territory.

Foreign Policy

The Chinese government confirmed its use of “hostage diplomacy” when it released two Canadians, Michael Kovrig and Michael Spavor, within hours of Canada allowing Huawei executive Meng Wanzhou—detained for alleged violations of US sanctions law—to return to China.

At the United Nations, Chinese authorities continued to push back against criticism of its human rights violations. The government advanced a resolution on “combating legacies of colonialism,” and continued to present other resolutions—prioritizing economic development, “mutually beneficial cooperation,” and “realizing a better life for everyone” (the last of which was withdrawn due to lack of support)—that would weaken international norms by shifting focus away from accountability for rights violations. It also blocked access to UN forums for civil society groups that referred to Taiwan as an independent country.

In August and September, the Chinese government moved quickly to offer support to Afghanistan’s new, abusive Taliban-controlled government, making clear its concerns that instability in that country should not allow for security threats to Xinjiang or the BRI.

New research shows that Chinese government-linked disinformation campaigns have spread in scope, languages used, and platforms globally, including in 2021 on the origin of Covid-19.

In response to sanctions imposed on Chinese government officials, companies, and agencies, in March, Chinese authorities accused several EU officials and civil society groups of “maliciously spread[ing] lies and disinformation,” and imposed vague sanctions on them. In July, Beijing announced another round of sanctions on US-based individuals and organizations, including Human Rights Watch.

China's Belt and Road Initiative

[Sri Lanka is struggling to pay back over $8 billion in Chinese loans, the previous Sri Lankan government handed over the majority share of the Hambantota Port, which is the second-largest port in the nation.

The port has been given to a Chinese state-owned company on a 99-year lease to raise $1.2billion. Recently Sri Lanka has asked for a new loan and buyers credit from China for $2.5 billion.

1. Drop-in tourism: The tourism industry which accounts for 10% of the country’s GDP was hit hard by the pandemic. Several countries including Canada, UK recently warned their citizens about travelling to the country due to the foreign exchange crisis

2. Ban of Chemicals: The government’s decision to ban chemical fertilisers to make agriculture 100% organic has hit agriculture as organic farming reduces production by half. Hoarding of essentials such as rice & sugar has also contributed to the factor.

3. Dept Trap: The country is facing a huge foreign debt as it owes over $5billion to China alone. It also owes big money to India and Japan as of November foreign currency reserves of the country were just $1.58billion

4. Foreign Exchange: With forex reserves dropping from over $7.5billion in 2019 to around $2.3 billion in February 2022, the supply of foreign exchange was hit while increasing the amount of money Sri Lankans have had to shell out to purchase the foreign exchange necessary. As a result, the Sri Lankan rupee value got depreciated.

5. Dependance on Imports: Sri Lanka’s high dependence on imports for its essential items such as sugar, pulses, cereals and pharmaceuticals has added to the troubles

Food prices have risen in recent times, shortages in medicine, scarcity of daily use necessary goods, such as cooking oil, ration like rice, wheat, sugar, paddy, fruits and vegetables, massive queues have formed outside gas stations due to the fuel shortage and daily power cuts of more than five hour.

The Ukraine-Russia War has further deteriorated the situation which does not seem to be getting any better. The dip in the reserves caused Sri Lanka to increase the amount of money they had to spend to purchase the foreign exchange necessary to import goods. This led to a depreciation in the value of the Sri Lankan Rupee.]

China's Belt and Road initiative (BRI), also called "One Belt, One Road" (OBOR), was launched in 2013 to boost economic integration and connectivity (such as infrastructure, trade, and investment) with its neighbors and various trading partners in Asia, Africa, Europe, and beyond.?At the APEC summit in November 2017, President Xi said the following:

The Belt and Road Initiative calls for joint contribution and it has a clear focus, which is to promote infrastructure construction and connectivity, strengthen coordination on economic policies, enhance complementarity of development strategies and boost interconnected development to achieve common prosperity. This initiative is from China, but it belongs to the world. It is rooted in history, but it is oriented toward the future. It focuses on the Asian, European and African continents, but it is open to all partners. I am confident that the launch of the Belt and Road Initiative will create a broader and more dynamic platform for Asia-Pacific cooperation.

Many U.S. analysts view the BRI differently than how Chinese leaders describe it. For example, Nadège Rolland, senior fellow with the National Bureau of Asian Research states the following:

The Belt and Road Initiative (BRI) is generally understood as China's plan to finance and build infrastructure projects across Eurasia. Infrastructure development is in fact only one of BRI's five components which include strengthened regional political cooperation, unimpeded trade, financial integration and people-to-people exchanges. Taken together, BRI's different components serve Beijing's vision for regional integration under its helm. It is a top-level design for which the central government has mobilized the country's political, diplomatic, intellectual, economic and financial resources. It is mainly conceived as a response to the most pressing internal and external economic and strategic challenges faced by China, and as an instrument at the service of the PRC's vision for itself as the uncontested leading power in the region in the coming decades. As such, it is a grand strategy.

Many aspects of the BRI initiative remain unclear, including which (and how many) countries will participate, how much China will spend to finance the initiative, and what projects will fall under the BRI. For example, the government's China Belt and Road Portal currently lists profiles of 70 countries on its website.99 ?However, China's official media in December 2017 stated that 86 countries and international organizations had signed 100 cooperation agreements with China under the BRI.Nadège Rolland said that China pledged it would spend $1 trillion to $1.3 trillion,?The?Economist?reports that China put the figure at $4 trillion,?and the World Economic Forum estimates that China could ultimately spend $8 trillion on BRI.

The initiative could provide a big boost to China's economy and soft power image. China hopes to gain a better return on its foreign exchange reserves, create new overseas business opportunities for Chinese firms, create new markets for industries currently experiencing overcapacity, and stimulate economic development in poorer regions of China.?However, the initiative could pose financial risks if borrowers do not repay loans or if recipient countries do not view Belt and Road as benefiting them. U.S. Secretary of State Rex Tillerson criticized certain aspects of Belt and Road initiative in remarks made in October 2017:

We have watched the activities and actions of others in the region, in particular China, and the financing mechanisms it brings to many of these countries which result in saddling them with enormous levels of debt. They don't often create the jobs, which infrastructure projects should be tremendous job creators in these economies, but too often, foreign workers are brought in to execute these infrastructure projects. Financing is structured in a way that makes it very difficult for them to obtain future financing, and oftentimes has very subtle triggers in the financing that results in financing default and the conversion of debt to equity.

China has undertaken other major financial initiatives as well. In July 2014, China, along with Brazil, Russia, India, and South Africa, announced the creation of a $100 billion "New Development Bank," which is headquartered in Shanghai, China. The new bank aims to fund infrastructure projects in developing countries. In October 2014, China launched the creation of a new $100 billion Asian Infrastructure Development Bank (AIIB), aimed at funding infrastructure projects in Asia.?Fifty-seven nations joined as founding members. The AIIB, headquartered in Beijing, announced it was open for business in January 2016. To date, the United States has chosen not to join the AIIB.

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Made in China 2025

The "Made in China 2025" initiative, announced in 2015, is one of several recently announced ambitious projects aimed at increasing the competitiveness of Chinese industries, fostering Chinese brands, boosting innovation, and reducing China's reliance on foreign technology by making China a major or dominant global manufacturer of various technologies.?According to Chinese media, the initiative intends to "transform China from a manufacturing giant into a world manufacturing power" by 2049.For example, the plan states a goal of achieving 40% of domestically manufactured basic components and basic materials by 2020 and 70% by 2025. An updated version of the plan released in January 2018 said China aimed to become the world's leading manufacturer of telecommunication, railway, and electrical power equipment by 2025, and that China's robotics, high-end automation, and new energy vehicles industries would globally rank second or third by 2025.The methods the Chinese government plans to use to achieve its goals have raised concerns among U.S. firms and policymakers because they appear to involve large subsidies, protection of domestic industries, directed policies to purchase technology and IPR from abroad, increased pressure on foreign firms to transfer technology in order to do business in China, and what appears to be a goal of deliberately reducing foreign participation in China's markets.

In an interview on November 3, 2017, U.S. Trade Representative Robert Lighthizer stated that China's Made in China 2025 initiative was "a very, very serious challenge, not just to us, but to Europe, Japan and the global trading system."The USTR's 2017 annual report on China's WTO compliance focused heavily on the initiative, stating that Made in China 2025 differed from industry support by other WTO members in the level of ambition and scale of resources dedicated to obtaining its goals, and the USTR report warned that "even if the Chinese government fails to achieve the industrial policy goals set forth in Made in China 2025, it is still likely to create or exacerbate market distortions and create severe excess capacity in many of the targeted industries."

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Challenges to U.S. Policy of China's Economic Rise

When the Trump Administration began levying tariffs on goods exported from China, starting in early 2018, the stated goal was to safeguard American producers and to punish China for its unfair trade practices around technology transfer, intellectual property, and innovation.

But as the tariffs escalated through 2019 to affect 93 percent of products exported from China to the U.S., researchers were finding that the only ones being punished were U.S. consumers. To offset the new costs from the tariffs, firms were raising their prices on domestic goods, which reduced the real income of American households. By the end of 2020, the New York Times was declaring “American Consumers, Not China, Are Paying for Trump’s Tariffs .”

New research from Davin Chor, an associate professor at Tuck and globalization chair at Dartmouth, shows that those earlier conclusions may have been premature. In a working paper titled “Illuminating the Effects of the US-China Tariff War on China’s Economy,” Chor and co-author Bingjing Li of the University of Hong Kong find that China has indeed paid an economic price during the trade war. They estimate that the tail two-and-a-half percent of China’s population who were most exposed to the U.S. tariffs suffered a 2.52 percent decrease in per-capita income and a 1.62 percent decrease in manufacturing employment.

If labor demand goes down, you might expect night lights emitted from those worker quarters to also go down.

It has taken some time for this part of the trade war narrative to emerge, because it’s very difficult to obtain reliable and up-to-date data at the subnational level on China’s economy. Chor and Li mostly circumvented this problem by measuring a common proxy for economic activity: night light intensity, as depicted in high-resolution satellite imagery. “This data has been passively collected since the 1990s,” Chor says, “and development and growth economists recognize there’s a sharp correlation between local economic outcomes and the intensity of the area’s night lights.” In the context of China, more light is emitted when factories are busy and running night shifts, and when the workers in those factories, who often live in nearby dormitories, are more numerous. Conversely, “if labor demand goes down,” Chor explains, “you might expect night lights emitted from those worker quarters to also go down.”

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An associate professor in Tuck’s economics group and a chair in Dartmouth’s academic cluster on globalization, Davin Chor teaches Global Economics for Managers.

Chor and Li analyzed night light data as it related to both the U.S.-based tariffs on Chinese exports, and on China’s retaliatory tariffs on intermediate inputs exported to China from the U.S. To do this, they closely studied night light activity in 100,000 grids across China, each measuring 11 square kilometers. Inside those grids, they geo-located 280,000 firms, and constructed a measure of the grid’s exposure to tariffs based on the initial product composition of its exports and imports. In their main analysis, they examined the impact of the tariff shocks during 2018 and 2019 on night light intensity during roughly the same period. They found that each one-percentage-point increase in exposure to U.S. tariffs lowered night light intensity by 0.59 percentage points. “By contrast,” they write, “we do not find statistically significant effects for the retaliatory tariffs on inputs.” They speculate that China was strategic about choosing retaliatory tariffs that wouldn’t harm its own citizens, such as tariffs on agricultural goods they could get from elsewhere, as well as by reducing their most-favored nation (MFN) tariffs.

The final step was to map the night light changes to changes in GDP and manufacturing employment, based on a historical relationship between those variables. Here they found that the impact of the U.S. tariffs was significant but also very skewed. Seventy percent of China’s population had a negligible amount of exposure to the tariffs, but the 2.5 percent of the population that was most heavily exposed saw a big impact to their income (2.52% decrease) and employment (1.62% decrease).

While the trade war began with the Trump Administration, it doesn’t look likely to end under President Biden. That means consumers will probably continue to pay higher prices for goods imported from China, and that China’s citizens in the most exposed industrial zones will continue to suffer from the overhang of these tariffs even as China’s economy seeks to rebound from the COVID-19 pandemic.

In Chor’s view, the impact of the trade war on firms may come into focus in the next few years, as they evaluate their options. “This is reaching a point where companies start to reexamine their global strategy,” he says, “in terms of where you want to locate your production facilities, and how exposed you want to be to China’s supply chain linkages. Those are questions I think managers dealing with complex global operations are examining very closely now.”

China's rapid economic growth and emergence as a major economic power have given China's leadership increased confidence in its economic model. Many believe the key challenges for the United States are to convince China that (1) it has a stake in maintaining the international trading system, which is largely responsible for its economic rise, and should take a more active leadership role in maintaining that system; and (2) further economic and trade reforms are the surest way for China to grow and modernize its economy. Lowering trade and investment barriers would boost competition in China, lower costs for consumers, increase economic efficiency, and spur innovation. However, many U.S. stakeholders are concerned that China's efforts to boost the development of indigenous innovation and technology could result in greater intervention by the state (such as subsidies, trade and investment barriers, and discriminatory policies), which could negatively affect U.S. IP-intensive firms.

Opinions differ as to the most effective way to deal with China on major economic issues. Some support a policy of engagement with China using various forums. Others support a somewhat mixed policy of using engagement when possible, coupled with a more aggressive use of the WTO dispute settlement procedures to address China's unfair trade policies.Others, who see China as a growing threat to the U.S. economy and the global trading system, advocate a policy of trying to contain China's economic power and using punitive measures, such as increased tariffs under Section 301, to either counter the negative impact of China's industrial policies on U.S. firms or push China to modify distortive and discriminatory policies (such as the Made in China 2025 initiative). Responding to China's BRI is viewed by some as a major challenge to U.S. global economic interests. While China's financial support of infrastructure projects in numerous countries could produce positive economic results, U.S. policymakers have expressed concerns that China will use BRI to mainly benefit its own firms, that the process of implementation of projects will not be transparent, that BRI participation could saddle countries with large debts, and that China will use the BRI to spread its economic system to other countries.

Retail sales in China fell 3.5 percent year-on-year in March. This was the first contraction since August 2020, according to a report in China's official media, Global Times. China’s consumer prices grew faster than expected in June, partly driven by a rebound in pork prices, although the government’s Covid Zero strategy continued to depress demand. Factory-gate inflation moderated on cooling commodity prices.?Consumer prices grew 2.5% last month from a year earlier, beating economists’ expectations of a 2.4% gain, the National Bureau of Statistics data showed Saturday. That is the strongest pace in two years and compares with 2.1% growth in May.

A State-Dominated Banking Sector, Excess Credit, and Growing Debt

China's banking system is largely dominated by state-owned or state-controlled banks. According to one analyst, the mangers of China's state banks are drawn from the ranks of the Chinese Communist Party cadre system, which "enables the party and government leaderships to exert influence over bank lending."?In 2015, the top five largest banks in China in terms of assets were state-owned entities.?The percentage share of assets held by state-owned commercial banks (including the five large state-owned banks), the three government policy banks,?and joint-stock commercial banks (where government entities are a major stock holder), together accounted for 68.5% of total bank assets in China.?Foreign participation in China's banking system is relatively small, accounting for 1.6% of total bank assets.SOEs are believed to receive preferential credit treatment by government banks, while private firms must often pay higher interest rates or obtain credit elsewhere. According to one estimate, SOEs accounted for 85% ($1.4 trillion) of all bank loans in 2009.?It is believed that oftentimes SOEs do not repay their loans, which may have saddled the banks with an ever-increasing amount of nonperforming loans.?Many analysts contend that one of the biggest weaknesses of the banking system is that it lacks the ability to ration and allocate credit according to market principles, such as risk assessment.

The Chinese central government uses the banking system to boost credit in order to help meet its GDP growth objectives and to, when needed, offset the impact of global economic downturns, such as after the 9/11 terrorist attacks and the global financial crisis. From 2007 to 2016, China's domestic credit increased in dollar terms by 218%, and as a share of GDP, the level rose from 125% to 212%. As indicated in, China's combined household, corporate, and government debt levels as a percentage of GDP as of mid-2016 are comparable to those of the United States and South Korea and lower than those of Japan and the European Union. However, China's debt levels (in both dollars and as a percentage of GDP) have risen sharply within a relatively short time, which, some have speculated, could spark an economic crisis in China in the future. From 2006 year-end to mid-2016, China's total nonfinancial sector debt as a percentage of GDP increased from 143% to 254% (up 111 percentage points). Much of the rise in that debt came from the corporate sector, which, as a percentage of GDP, rose from 107% in 2006 to 171% in mid-2016 (up 64 percentage points). In dollar terms, China's corporate debt rose from $3 trillion to $17.8 trillion (up $14.8 trillion) and currently greatly exceeds U.S. corporate debt levels. Several observers have warned that China's credit growth may be too extensive and could undermine future growth by sharply boosting debt levels, causing overcapacity in many industrials (especially extending credit to firms that are unprofitable to keep them operating), contributing to bubbles (such as in real estate), and reducing productivity by proving preferential treatment to SOEs and other

Why Is China Growing So Fast?

In 1978, after years of state control of all productive assets, the government of China embarked on a major program of economic reform. In an effort to awaken a dormant economic giant, it encouraged the formation of rural enterprises and private businesses, liberalized foreign trade and investment, relaxed state control over some prices, and invested in industrial production and the education of its workforce. By nearly all accounts, the strategy has worked spectacularly.

While pre-1978 China had seen annual growth of 6 percent a year (with some painful ups and downs along the way), post-1978 China saw average real growth of more than 9 percent a year with fewer and less painful ups and downs. In several peak years, the economy grew more than 13 percent. Per capita income has nearly quadrupled in the last 15 years, and a few analysts are even predicting that the Chinese economy will be larger than that of the United States in about 20 years. Such growth compares very favorably to that of the "Asian tigers"--Hong Kong, Korea, Singapore, and Taiwan Province of China--which, as a group, had an average growth rate of 7-8 percent over the last 15 years.

Curious about why China has done so well, an IMF research team recently examined the sources of that nation's growth and arrived at a surprising conclusion. Although capital accumulation--the growth in the country's stock of capital assets, such as new factories, manufacturing machinery, and communications systems--was important, as were the number of Chinese workers, a sharp, sustained increase in productivity (that is, increased worker efficiency) was the driving force behind the economic boom. During 1979-94 productivity gains accounted for more than 42 percent of China's growth and by the early 1990s had overtaken capital as the most significant source of that growth. This marks a departure from the traditional view of development in which capital investment takes the lead. This jump in productivity originated in the economic reforms begun in 1978. China’s plunging markets flash fresh warning signs on economy

• The Hang Seng China Enterprises Index of stocks has lost almost 9% since June 28 as a new Covid subvariant threatens to paralyze factories, dampen consumer spending and hurt construction activity. An electronic screen displays the Hang Seng Index in Hong Kong, China, on Tuesday, March 15, 2022. Chinese stocks suffered another deep selloff on Tuesday as concerns about the country?s ties with Russia and persistent regulatory pressure sent shares on a downward spiral. Photographer: Paul Yeung/Bloombergncial markets are flashing warning signs that another round of Covid shutdowns could create more turmoil for the economy. .The Hang Seng China Enterprises Index of stocks has lost almost 9% since June 28 as a new Covid subvariant threatens to paralyze factories, dampen consumer spending and hurt construction activity. China’s yuan, meanwhile, is renewing losses against the dollar, with the onshore rate the weakest in a month. Credit stress is also intensifying as China Evergrande Group teeters near its first?onshore?default, after another developer’s $1 billion delinquency revived broader contagion?fears. And iron ore prices have fallen to a seven-month low.A bullish case on China based on value alone keeps failing, as does the notion that the country’s assets can be a trusty refuge for investors during periods of global market turmoil. The renewed risk-off sentiment shows how Covid Zero and?crackdowns?on the tech and property sectors has continued to plague investors halfway through 2022.While official data Friday is set to show China’s economy expanded just 1.2% in the second quarter, some alternative indicators?suggest?activity actually shrank. At the same time, the central bank is scaling back liquidity?injections, which could create tighter financial conditions for the rest of the year.Investors’ primary concerns are the renewed worries about potential disruptions to economic activities,” said Peter Garnry, head of equity strategy at Saxo Bank. “Mass testing and VAT rebates have been putting a lot of pressure on local governments’ budgets and limiting their capacities to stimulate the economy.”

''STRENGTHS

• Sovereign risk contained as public debt remains mainly domestic and denominated in local currency.
• Reduced risk of (private) external over-indebtedness thanks to the high level of foreign exchange reserves.
• Gradual strengthening of global value-chains as part of China 2025.''

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China’s government is still betting on a stronger second half of the year for the economy to meet its growth target of around 5.5%. Beijing has been doling out more fiscal stimulus, including boosting infrastructure spending and cutting taxes for businesses, to shore up the economy. But reaching the growth target will prove increasingly challenging as China tightens restrictions again to stamp out every Covid-19 outbreak.

This week, a single case was?enough?to shut an entire city in one of China’s steel hubs for three days. Macau, the world’s largest gambling hub, is also shutting the majority of its businesses for a week in a?return?to its toughest pandemic restrictions.

The shutdowns were accompanied by a market rout that deepened in the past two days as the Hang Seng China gauge fell 4.8%, wiping out all of its June gains. Thin trading activity may have exacerbated the moves, with volume on the index about 19% below the daily average of the past year.Dollar bonds of Chinese developers also slumped, with stress spreading to investment-grade firms on Tuesday. Notes from China Vanke Co., the country’s second-largest builder by contracted sales, fell as much as five cents on the dollar, on track for the biggest decline since March 2020, according to prices compiled by Bloomberg. A Bloomberg index tracking Chinese junk dollar bonds is now near the lowest level in about a decade.This week’s market losses came even as?credit data?suggested stimulus from the People’s Bank of China is finally boosting lending -- key to offsetting the economic cost of pursuing President Xi Jinping’s Covid Zero strategy. While aggregate financing reached 5.2 trillion yuan ($773 billion) in June, far more than the average estimate, it’s unclear whether the lending will translate into better domestic demand.