Hello and welcome back to States of Play, the newsletter and podcast exploring how the world is changing - from geopolitics to technology, from defence to demographics.

Today’s States of Play is less essay and more column; it includes some thoughts on British understanding of China (plus some book recommendations) and the latest on whether the US will move on Iran. But it starts with some important news for the United States as it continues to build its defences against China.

Many thanks for reading - I’ll be back soon with more insights into the changing world order.
Sam

The US Is Now Stockpiling While the UK and Europe Dithers

Donald Trump this week declared that the United States will create a national strategic stockpile of critical minerals. This may sound rather dry, but it is incredibly important for a country that is finally beginning to realise how exposed it is to its main strategic partner in leverage terms.

The announcement was framed as a practical measure, but its significance is larger than that. It is an admission that markets alone can no longer be trusted to deliver security in a crisis, and that supply chains have become a frontline issue in great-power competition. This is not symbolism, but preparation.

Rare earths, lithium, nickel, cobalt and gallium are no longer obscure industrial inputs. They sit inside everything that now defines power: electric vehicles, semiconductors, data centres, satellites and precision weapons. A strategic stockpile is designed to buy time when supply is disrupted, whether by war, coercion or political pressure. It treats economic resilience not as a by-product of growth, but as a core component of national defence.

For Britain and Europe, Trump’s move should prompt unease. While Washington moves to insulate itself, the UK and EU remain dangerously exposed and strikingly complacent. Both are heavily dependent on Chinese processing of critical minerals, yet neither has a standing national or collective stockpile. Instead, London and Brussels continue to rely on strategy papers, consultations and pilot schemes, as if the problem were one of coordination rather than power. And neither the UK or the EU are ambitious with their plans, particularly the UK which seems to think that there is all the time in the world to have a modicum of critical mineral resilience. As America builds buffers and Beijing tightens control, Europe risks becoming the shock absorber in someone else’s economic conflict.

The logic of stockpiling is simple. Strategic reserves smooth volatility, absorb shocks and alter bargaining power. They allow governments to respond to crises on their own timetable rather than reacting under pressure. This is why oil stockpiles mattered in the 1970s and why minerals matter now. Stockpiles are not protectionist hoards. They

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Thanks again to Andrew Methven (check out his substack Realtime Mandarin, excellent if you want to learn more of the language).

I’ll be back next week with a geopolitical round-up of the year.

Happy Christmas

Sam

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Today in What China Wants we are joined by friend of the show Andrew Methven, the author of the incredibly interesting substack Slow Chinese, who will guide us through the linguistic and cultural aspects of Christmas in China.

Here is a summary of our discussion:

• Christmas is not a national holiday, but it is celebrated. It has been compared to St Patrick’s Day in the West, a carnival-like festival.

• The Western Christmas food tradition hasn’t really established itself in China outside of the major international hotels.

• Christmas Eve is known as “Silent Night”, a reference to the German carol of the same name.

• Father Christmas/Santa fits nicely into Chinese culture because he is old, wise, and dressed in lucky red. But the elves not so much, because in China they are thought of as supernatural beings.

• Santa is regularly portrayed as being helped by his sisters, and carrying a saxophone. Andrew explains the reasons behind those interesting cultural motifs.

You can also listen to the podcast on Apple, Amazon, or Spotify.

As always please do share, comment, and subscribe. We’ll be back soon with more What China Wants.

Many thanks for listening, and have a very Happy Christmas.

(In the meantime, if you would like more information about the Evenstar Institute and our research, then please email me sam.olsen@evenstarglobal.com)

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Here is the transcript:

Sam Olsen: Hello, and welcome back to What China Wants with me, Sam Olsen, and sadly no Stewart today who is off doing something he cannot get out of. But I am very excited to have someone back, a friend of the show, to talk some more about cultural aspects of China. Andrew Methven, for those of you who remember is the author of Slow Chinese, that newsletter on Substack which is doing rather well. It is designed to help learners of Chinese to maintain and improve their language, and also to showcase some of the latest language trends in China. I thoroughly recommend it if you want an amusing insight into the Chinese language every week. Welcome back, Andrew.

Andrew Methven: Sam, thanks for having me back. And yes, it is really great to be back and discuss this interesting and confusing topic of Christmas in China.

SO: Yes, Christmas in China. It is something that I - well, both of us - have had quite a lot of experience in over the years and being in and out of China around that time. It is a great time to be in China because it is so different, and that is what we want to do this podcast. Because if you did a thing about Christmas in Norway (where my dad is from), for example, there are quite a few differences with a British Christmas, but it is not quite alien enough to be of interest for a half an hour podcast. Whereas with China - I think we are going to be able to wring quite a lot of differences out in this particular episode, compared to what everyone thinks in the West.

I suppose to kick things off, Andrew, obviously, even though there are 100 million or so Christians in China now, no one is quite sure the figures. But, out of 1.4 billion, it is not that large, and also Christianity is not anywhere near a state religion in China. It is not a religious holiday, but it is celebrated to some extent. So, the question is for our listeners, Andrew, how do the Chinese celebrate Christmas? What are the main traditions that they have, compared to what we would find familiar?

AM: Okay, well, I think first of all, as you were saying, Sam, it is really different. But I think one of the confusing things is that it looks kind of similar on the surface. So around Christmas time - maybe not this year, because of the lockdown and COVID and what have you - but generally by this time in China, in the big cities, in shopping malls you can see enormous Christmas trees, there are probably armies of Father Christmases around doing stuff, even organised dances and things like that. In offices, especially those that have an international connection, you will have Christmas trees and things like that. So it looks similar to begin with, but maybe a lot more neon, and you might say 'Christmas on steroids'.

But actually, beneath that there are some really interesting differences. In terms of how it is celebrated in China, as you said, it is not a religious holiday first. It is not an official holiday either, so it is not a day off, but it is recognised and celebrated, but in quite a different way. So generally, it is more celebrated or recognised by younger people, so people I would say under the age of 40. I would say it is very commercial, it looks and feels very commercial. So, it is not really a shopping festival now, but I think before Double 11 Shopping Festival, there was definitely a very-

SO: Hang on Andrew, we spoke about Double 11 In our last podcast with you, but our listenership has tripled since then. So a lot of people perhaps will not be familiar with Double 11. Do you want to just quickly say what that is?

AM: Yes, sure. So that is a festival, it happens on the 11th November every year. Well, it is actually a three or four week campaign up to the 11th of November. It is called Singles Day, and it is a shopping festival. I think it was conceived by Alibaba, and it has turned into a huge commercial extravaganza, mostly online, but generally across China around November. It is a huge shopping festival, and I think maybe that has taken a little bit away from how Christmas had been commercialised before. Nonetheless, Christmas is still very much visible in China, particularly among younger people. I have read about it being compared to Valentine's Day or St. Patrick's Day where it is a single day where people go out, have fun, maybe go and eat out or just be out and about. So it is definitely not a family thing, it is not a religious thing. It is really for young people having it as an excuse or as a reason to either go shopping or to go out and socialise.

SO: Got it, and actually we have got a podcast coming up very soon about Chinese food and the relationship, including Christmas, and festivals and should be great fun. But in this specific context, have you ever heard of a Chinese restaurant is doing mass Turkey, or anything Western for Christmas lunch?

AM: I have not been in China during Christmas for years, and also I would caveat that I have not been to China at all for more than three years now. Maybe things have changed over recent years, but normally, in the big cities, you will have the international hotels doing Christmas dinner.

There are some interesting changes to the meal. There is a dish in Chinese called 'eight treasure duck', bābǎoyā. That is a little bit like it, it is a stuffed duck, and it is stuffed with different types of meats, and also sweet fruits as well. That seems to be something that has replaced the turkey. And so, if I were a 30-something Chinese person wanting to go out with my friends on Christmas evening, then I might find myself ordering an 'eight treasure duck' instead of a turkey. So, there is a kind of an equivalent dish, but apart from that, I have not seen any other kind of particular foods that you will eat around Christmas, in China.

SO: What else has been co-opted into making Christmas more Chinese? Are there any other traditions which are which we would not recognise but which are considered nonetheless to be part of Christmas in China?

AM: Yes, so I think and again, interestingly, it is a lot to do with how the language works; the Chinese language works around Christmas, and then how that has influenced how some of the traditions around Christmas have been Sinofied, or China-fied. The first thing is the word for 'Christmas Eve', in Chinese is not really what it should be. So, the translation for 'eve', the word 'eve' is 'qiánxī', meaning the night before. For example, Chinese New Year that's the word qiánxī. But on Christmas, Christmas Eve is 'píngān yè', which translates directly as 'silent' or 'peaceful night'. The reason why it is called that is because of the translation of the Christmas song, Silent Night, Holy Night. So that song is translated as píngān yè.

SO: That is good, that is very interesting.

AM: Yes, and so for some reason... and of course, don't forget Silent Night, Holy Night is originally a German song that was written in the 19th century. Obviously, that has come into the English language Christmas tradition, and then it has been translated into Chinese and become part of the Chinese tradition, but in a different way. So Christmas Eve is 'píngān yè', 'peaceful night' or 'peaceful evening'. And because of that, there is a homophone in Chinese, so píng is also the word for apple, 'píngguǒ'. 'Píngān' is 'peace', 'píngguǒ' is 'apple'. So on Christmas Eve, a gift that you would give someone is an apple, or a píngguǒ.

SO: Like a peace apple?

AM: Peace Apple, or píngānguǒ, is one tradition that is very Chinese, and you would not get as part of Christmas elsewhere. So generally, a great gift to give in China at any time is an apple because of the symbolism. And actually, I only recently realised that I think, a píngānguǒ actually has come from the Chinese version of Christmas. But now you can use it more widely, not just as part of Christmas. I think that is one of the big differences. It is interesting because it is purely because of the language and how it was translated in the first place that has then impacted on how you give a gift during Christmas in China. But then you still got the gift giving part of it, it is just quite different. So that that is definitely one of the main differences.

SO: What else is not included in Christmas in China in terms of the language?

AM: What else is not included? Well, first of all, the way you say Happy Christmas in Chinese is a very straightforward translation 'Shèngdàn kuàilè'. 'Shèng' is 'Saint' or kind of 'God', 'dàn' is 'to be born'. 'Shèngdàn jié' is Christmas, so 'saint-born Festival', and then 'Shèngdàn kuàilè'' is how you say 'Happy Christmas'. And that is pretty much a straightforward translation. As I said, the 'píngān yè', the 'peaceful night', Christmas Eve, I think is probably the main difference in terms of language. But then also, it's quite interesting in terms of what is the same. Father Christmas is definitely the main character in Christmas in China 'Shèngdàn lǎorén'. And I think that is because an older person in Chinese culture is generally seen as very respected and wise. So, an elderly white-haired man, you can see that kind of fits culturally, so that has been absorbed.

The colours also work, so red and white. There is a phrase In Chinese, which is 'hóng bái xǐshí', so 'red, white, happy times'. Red is the colour you wear at a wedding in China, white is the colour you wear in a funeral. And so generally, the phrase for everything to do with festivals and important events is described as 'in the colours of red and white'. Father Christmas wears red and white, so you can see how that culturally fits. Father, Christmas is definitely in there, because he fits culturally, both in terms of respect for the older generation, and also the colours that he wears. I think generally, he is just seen on his own, reindeers feature a little bit, as well, Christmas trees are also part of the symbolism. But other than that, I think everything else is quite different, both in terms of as we were saying, who celebrates it, how they celebrate it, that is all very different. Then of course, there are these really confusing parts of it around Father Christmas is sometimes seen with a saxophone...

SO: Now, I was going to ask you about that because that is definitely something which most Westerners would think was slightly incongruous, because Father Christmas and a saxophone is not a usual combination. Is that actually a thing? Or is it just sort of a bit of a joke?

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AM: I think it is a thing. I have not really thought about it until I was reading into it more ahead of our discussion, but yes, you will often see not a human Father Christmas, I have not seen many of them (with one), but a statuette of a Father Christmas, you will often see them holding a saxophone, a kind of life size figure. There is no good explanation as to why this is. There are a couple of theories, the main one being that generally during Chinese festivals, there is some kind of musical instrument associated with it. For example, around Chinese New Year, you have got drums or gongs or Chinese instruments.

Therefore, the main character of Christmas in China being Father Christmas, it is not unusual for him to be holding a musical instrument. The saxophone is seen as very much a Western invention, which it is. So, the best theory I have come up with is that, because it is a festival, the main guy involved in the festival needs a musical instrument in China, because that is just how it goes. And because it is a Western import, therefore, he should be holding a Western instrument, and a saxophone seems to be the one that people have decided - maybe because it is more portable than many other instruments. So that is the best theory I've found on why Father Christmas is often seen holding a saxophone in China.

SO: Okay, so that kind of works. There would have been many, many instruments you could have chosen instead, like a guitar or whatever, but saxophone so be it. But here is the question. Why is he also seen with sisters rather than elves? You very, very rarely see or even hear people talking about elves in China, which obviously, Will Ferrell must be a bit annoyed about for his film marketing?

AM: Yes. Again, Sam, this is one of those really annoying questions. Normally when you are researching something on the Chinese internet, Baidu has the answers to everything. But this is one of those questions that there is no good answer for. And so again, I am just coming up with my own theory on this, but I think it could be something to do with language, actually. So the idea of an elf, I think that is a really alien concept in China, and the word for 'elf' in Chinese, which is 'jīnglíng'. It does kind of work in translation but I think it may be it is just too much of an alien concept, to be part of what is absorbed into Christmas in China. And also, you know, a 'jīnglíng', 'an elf' in Chinese, well an elf is a supernatural, not necessarily a ghost, but something that is supernatural. And then within the imagery of Christmas in China, you have got a wise old man who is dressed in red and white. In the Chinese context, you can see that this kind of supernatural being does not really fit with it.

SO: Which is kind of ironic when the whole point is that Father Christmas is a supernatural being in the West, someone that can miraculously go through chimneys and fly through the sky.

AM: Yes, I mean, it is true. So again, this is just my theory, but I think because Father Christmas looks like a kind of wise old man, I think you can kind of get that. And of course, a lot of how China sees Christmas now is very much influenced by the more modern commercialised version of Christmas that we get in the western world as well, and so that is also part of it. But I think the fact that elves are not part of it, and instead Father Christmas apparently has sisters, maybe that is partly to do with how you see, perhaps more in the US, in terms of Santa's helpers often being women dressed in Christmas kind of clothing. Maybe it is just that the elf is a step too far to be absorbed into Chinese Christmas, and actually, they just want to stick with Father Christmas holding a saxophone.

SO: Fair enough, elves are not everyone's cup of tea anyway. So what about, you mentioned about shopping... now, one of the things I remember about being in and around China for Christmas was the sheer excitement about how much could be bought. Also, considering a lot of the people I would have been talking to are businessmen and women selling tat, wondering how much money they could make over the Christmas period. But you said that it has slightly been eclipsed by this new Alibaba phenomenon Double 11. But is Christmas still considered to be a big shopping bonanza? Or is it coalescing into something slightly different from that now you have got the competition with Double 11?

AM: Yes, so I think certainly the shopping festivals in China have definitely, I mean, they have just become so big. I think that is a response to what seems to be this need for people to consume, particularly younger generations, just the level of wanting to buy and shop and stuff. This is definitely a phenomenon of modern China. I think Christmas, I think it's still seen very much as a time to consume, whether that be shopping or going out and having fun, eating out. The word that I have most seen Christmas described as in Chinese is 'kuánghuān', which is a kind of festival or carnival type atmosphere. And actually, I just think there are so many festivals of various sorts in China, I think, generally, culturally, the idea of a festival a 'jiérì', it is just part of the Chinese calendar.

But the way these festivals have manifested in modern China can be quite different. So for example, the two main holidays in China to do with the country, i.e. National Day holiday in October, and the Dragon Boat festival. They are to do with China and the kind of nation, but people look at that now as time to go on holiday, or to go overseas and take a 7-10 day holiday. And so again, that is probably quite different to how people would have celebrated that holiday, 50 or 60 years ago. So I think consumption is just part of modern China, and the shopping festivals that have come about over the last 10 years have definitely overtaken Christmas as being a shopping-type festival in China. But I think there is still a lot of consumerism around it, much as there is here in the UK and elsewhere.

SO: Yes exactly. Consumerism is now a huge part, if not the dominant part, of Christmas in large parts of the West. So, I am not surprised it has gone that way in China. But I suppose just to finish off, what would you say the difference is between Christmas and Chinese New Year are? Obviously, there is a consumerism aspect in both, but what are the similarities and differences?

AM: I think, actually, I would say, in terms of how Christmas is celebrated in the West, there are lots of equivalents of how Chinese New Year is celebrated in China. It is about family coming together. Christmas holiday here, in the UK for me, that week is pretty much every single day, you have got another family home or you are doing something and seeing family and eating, giving gifts, and Chinese New Year is very much like that. Generally, people will try and travel home, when they go to their hometown, maybe they have not been back for a year. So, there is lots of seeing, obviously, parents, but then other relatives. There is a set calendar of the first day in the New Year, you see the grandparents on one side, and the next day, you see the grandparents on the other side. So, it is all about visiting family.

I think actually, for the younger generation in China, it can often be quite stressful, because they will be asked about, are they married yet? How much money are they making? What does the future hold? So actually, Christmas, therefore, can be seen as a bit of a release in China, because it is not about family. It is just about having fun, going out and either having a meal or going shopping. So, I think there are parallels between how Christmas is celebrated in the West and how Chinese New Year is celebrated in China. But then, of course, you have high levels of consumerism in China around Chinese New Year, as you do around Christmas in the West. So, I would say actually, those two they are quite similar in many ways, but just the version of Christmas in China is very different to Chinese New Year.

SO: Good. Well, on that note, I suppose it is best to say 'shèngdàn kuàilè' and to wish all our listeners a very happy Christmas and thanks again for coming on. It is always good to look at Chinese culture through language, and I hope people have learned a fair bit about the differences and a few of the similarities as well.

AM: Thanks so much for having me, Sam, it is great to be here. And yes, Happy Christmas. I look forward to seeing in the new year

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Today Stewart and Sam are talking about Beijing’s international media reach with Josh Kurlantzick from the Council on Foreign Relations. Twenty, even ten years ago, it could be said that China was underweight in terms of its press coverage in the West. Today, this has changed, in part because of active efforts by the Chinese Communist Party to dominate the media. The question is, is it working?

Josh joined us to talk about his new book, Beijing's Global Media Offensive: China's Uneven Campaign To Influence Asia and the World. Here are some highlights of our discussion:

• China’s media influence is split into two aspects: soft power, and sharp power.

• The country’s soft power was at its height in the 2008 Olympics but it has taken a dive recently as the traditional sources of soft power (like artists) are in exile or restrained.

• Sharp power is more covert and more nefarious, and Josh describes it in detail.

• China spends huge amounts of money pushing its news stories into the international media, spun to suit the CCP’s line, but with limited success.

• The CCP also conducts a lot of disinformation campaigns, as with Covid and Taiwan. They are not, however, often that successful.

• Democracies need to ensure their citizens are properly educated in digital safety to better recognise disinformation and to bring in measures to stop foreign governments from internal media influence, for example over elections.

You can also listen to the podcast on Apple, Amazon, or Spotify.

As always please do share, comment, and subscribe. We’ll be back soon with more What China Wants.

Many thanks for listening.

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Here is the transcript:

Sam Olsen: Hello and welcome back to What China Wants with me, Sam Olsen, and Stewart Paterson of course. So the Evenstar Institute, which What China Wants is a part of, is dedicated to measuring and understanding national influence, particularly that of China. And an important part of national influence comes from a country's ability to control and dominate the media. We are lucky today to be joined by Josh Kurlantzick, the author of a really good new book on China's international media activities, 'Beijing's Global Media Offensive: China's uneven campaign to influence Asia and the world'. Josh is a senior fellow for Southeast Asia at the Council on Foreign Relations, an American think tank. Welcome, Josh, it is really good to have you on the podcast.

Josh Kurlantzick: Thanks so much for having me.

SO: Now, I really liked your book, it was incredibly interesting. One of the most thought-provoking parts of it was that you split media influence into two different camps, 'soft power' and 'sharp power'. Can you explain the difference?

JK: Well, 'soft power' was originally a concept created by Joe Nye, a famous political theorist, but the idea is to use a variety of tools, which can be cultural, media, etc. Most of these tools actually do not come from the state. They come from actors that are not really the state, such as the NBA, Hollywood, etc. But the state also can exert soft power through its state media outlets, through its cultural diplomacy programming; the US did this very extensively in the Cold War, etc. But all the things that go together to creating potentially a favourable or unfavourable public image of a country in another country, and these things are done in an open and transparent way.

In theory, if you have a favourable public image in another country, there is no direct link, but it probably helps convince policymakers to take actions in your favour if the public is genuinely and largely supportive of another country. Britain would be a perfect example. Britain's hard power, and economic power over the last 50 years has declined fairly measurably. But at the same time, Britain's soft power, its ability to have massive influence culturally on the globe, through institutions like the monarchy and the BBC, the television industry etc. and the Premier League is actually still quite enormous.

'Sharp power' is a kind of newer concept. And what it means is, it is not hard power, where you are actually necessarily threatening someone with military or economic coercion, or actually invading them, or attacking them. But you are using means which can include media and, and information to wield power within societies more covertly, often with the intent of corroding that society rather than just creating warm public image. And in some occasions, like we have seen in Australia - I talk about in the book and in other places - quite corruptly, in terms of the ways in which the sharp power involves money exchanging hands in somewhat nefarious ways.

Stewart Paterson: Brilliant, so if we just come to China and the media then, most of our listeners will have stumbled across the China Daily, probably by accident, and they probably do not read it avidly. That is sort of one example of China's media outreach, but there are lots of them aren't there? And your point about a lot of soft power not coming from the state in the case of China, presumably the linkage between the Party State and the media is pretty total, isn't it?

JK: Yes, that is correct. China has the capacity to have significant reserves of soft power that is not linked to the state, and in fact, some of that was beginning to bubble up in the 2000s with the Beijing Olympics, which generally went well. They have world class artists and painters, they have quite a strong cultural influence. This is probably not an area that we focus on, but they have a quite strong influence in fashion and makeup culturally, particularly for younger men and women. And at that time, in the 2000s, and in the 1990s, they also had more of an influence culturally in some other areas, as well - art, film, etc. They have basically killed that now so that is basically gone because their famous artists are in exile, well the most famous is in exile, and writers and people who were publishing interesting things are in exile or in jail, and the television shows that they had started to make popular have been killed by Xi Jinping and mostly replaced by South Korean shows actually.

But yes, most of China's media soft power, it has to thus come from the state - all of it basically, since the few Chinese media outlets that are even semi-independent anymore are only producing within the country and in Chinese. So we are talking about China Global Television Network, which was their rebranded CCTV International, into which they have poured huge sums of money over the last 10 years, staggering sums. I do not have an exact figure, but at one point it was USD 6.8 billion. Some people say USD 15 billion since 2010. They opened bureaus in London, Nairobi, Washington and in about 25 other major cities, hired tonnes of local journalists, including in the UK, and many quality local journalists. A second one is China Radio International, which is their international radio station. And the third one I talk about at length is Xinhua. They have several state news agencies, but let's not get too technical, that is the main state news agency that deals with international issues.

SP: So, if we were to try and measure the effectiveness of China's media reach internationally, what would be the sort of narratives that sprang to your mind as being the best examples as of how Chinese media has successfully twisted or shaped a narrative recently, and therefore, this investment in global media reach has started to pay dividends for them?

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JK: Mostly, I argue in the book that China's massive investment has not paid dividends for them, thus the subtitle, that they have set on fire huge amount of cash on CGTN, and CRI, with little result. Those stations, and I have Gallup polling from a huge number of countries showing the incredibly minimal reach. That is not to say even countries that have actually just outright banned them, like Australia and the UK have banned CGTN. So actually, mostly, I have found that of the three big ones, they have wasted their money so far.

Most of the quality foreign journalists, and that includes when I say foreign journalists, maybe people come to mind, they think, journalists in London, but most of those people were really good journalists in Africa and Southeast Asia, people who were doing ground-breaking work. They even hired people in Africa whose ground-breaking work was exposing Chinese environmental abuses, so they were fairly open-minded about who they were hiring. Most of those people have left in the last five years, because the environment at those outlets, they will never totally free it. As China has become more 'one man' rule, and as Xi has become even more powerful, the attitudes become more turgid, and much more authoritarian, and most of those journalists have left, not to mention some of those countries have imposed laws where if you work for a state media outlet, you have to register as a foreign agent like in the United States, and journalists do not want to do that.

Xinhua, however, has had significant success, because it signed content sharing agreements with a lot of other countries, until they are being folded into the local media, in local languages, in many places without people really realising that the content comes from Xinhua, because most readers don't pay any attention to the by-line or tagline of where the content comes from, unless it comes from some famous columnist.

So a good example would be this. I believe, from Sam, that you have done research on this, but a lot of very prominent Thai media outlets - and Thailand as a country I know best - have signed content sharing agreements with Xinhua, including the most prominent group, the Matichon Group, which is the New York Times equivalent group. There is not a British example, because with the British press there is no 'one' outlet. I mean, I am sure Conservatives and Labour people would say there is one or whatever, but there is not really like the New York Times. Matichon Group is like the New York Times of Thailand; they produce the best political weekly, they produce the best coverage. You are supposed to think that if you pick up something produced by the Matichon Group, it is good journalism. And they have signed an agreement and increasingly use quite a lot of Xinhua copy without either labelling it as 'agencies' or often not labelling it at all. And so, Chinese propaganda essentially, because Xinhua is kind of a propaganda agency, is being filtered into quality Thai media without these readers - and Matichon is read by the elite, by everyone who's anyone in Bangkok - without them knowing it. So that would be an example of very good use of China's money.

SO: So, defenders of China would say that there are other state agencies around the world, and what is the difference between what Xinhua is doing and for example, Agence France-Presse, because surely these agencies belong to a certain country, and they are just folding in the news from their country's point of view, so it is just China trying to play the game that everyone else is playing. What would you say to that?

JK: Alright well, two things when we are talking about agencies that are not AFP, or the BBC, we are talking about the biggest news agencies,  AP, Reuters, and Bloomberg; those are private entities that are not owned by the state anyway, they have complete editorial independence. But AFP, which I actually worked for, and the BBC also, have Charters of editorial independence. It was a long time ago when I worked for AFP, and I worked in Bangkok, but we would get all the news from Paris overnight, and AFP would be running stories from Paris like 'Chirac's government polling at 15%', 'Chirac surely a sure bet not to run for re-election', 'Protesters in the street demand Chirac's head'.

And the BBC runs stories that are critical of the UK all the time. Or they just run stories, they are not necessarily designed to be critical. The AFP was not going out there saying we want to get Jacques Chirac, they were just reporting that Jacques Chirac at that time was really unpopular, and people were out in the street calling for his head. I do not want to defend Martin Bashir's editorial methods but on the BBC, the BBC literally ran an interview with the Princess of Wales, in which she took down the entire royal family. Yes, the royal family is just the head of state, not the head of government, but Xinhua would never do anything like that. They would never produce anything like that, because they enjoy no editorial independence at all. To think of and idea like that on Xinhua is completely unfathomable.

SO: So, we have spoken a lot about China's influence, or lack of influence, in the normal media channels. But there are also quite a few accusations, especially in the West, and in Europe and North America, about China's penchant for disinformation. That came particularly to light in COVID, but also, I think that you have spoken, or written a lot about how disinformation has been used in a Taiwanese setting?

JK: Sure, disinformation comes less from the state media, but rather from individual actors, and the network through them spreading disinformation. In the 2020/2021 presidential election in Taiwan, there were two candidates, the incumbent from the Democratic Progressive Party, Tsai Ing-Wen,  who is reviled by Beijing. She has not called for independence, but the DPP historically has been near the margins of looking for independence, and very, very hawkish in their China policy in many ways. And the candidate for the Kuomintang was Han Kuo-yu. The KMT has been historically more pro-China, shall we say?

Han rose very quickly to become the KMT's presidential candidate. He himself had some good qualities that led to that, like he was kind of a populist that was in at that time, but also, there was an enormous amount of sort of disinformation and bots-type activity, propelling his campaign as well as outlets in Taiwan, traditional media outlets, that have very, very strong links to Beijing. I do not want to say the name on a UK podcast, I would say it on an American podcast, but other UK news outlets which produce extensive reports on this major Taiwanese media company's links to Beijing and, according to this prominent British financial media outlet, how they were getting direct reports from China's Taiwanese Affairs Minister of what to cover. They were then sued for libel, and the laws of that in the UK are strikingly different than in the US.

So, they kept trying to keep ramping up both the traditional and this disinformation campaign to support their KMT candidate, but it backfired completely for three reasons. One, Taiwan actually has a pretty robust anti-disinformation armour, due to citizens being inundated with Chinese disinformation long before anyone started talking about this in Britain or whatever. They have some quality good local independent media outlets reporting on it, there is a good knowledge of it. And it also made Han Kuo-yu look like a tool of Beijing, which you do not want to look like. And then that combined with, around the same time, Beijing decided to destroy all the freedoms in Hong Kong. Tsai Ing-Wen just jumped on this, was roundly re-elected, and that is certainly not what China wanted.

SP: So Josh, that is a great example of the disinformation campaign backfiring. But in part that is down to, as you put it, "Taiwan's robust armour". Presumably in a lot of the global south and including parts of Southeast Asia, there simply is not that kind of societal resilience to disinformation campaigns. Can you point to any areas where China has actually been successful in influencing political outcomes through disinformation?

JK: I do not think China has yet become that successful in influencing political outcomes through disinformation because their disinformation is still quite unsophisticated as compared to Russia's. Russia is very good at taking organic divides within a society, like divides in the US over class and race, or divides in France over issues related to class and race, or divides in the UK, and building on those organic actual problems and using disinformation to augment them. China has not yet done so well, they are getting better at it.

I think they had some effect probably in using disinformation, that they had some positive effects in using disinformation to help Marcos Jr. in the Philippines. There is some evidence of that, but at the same time, it is hard to tell because Marcos Jr. himself was swamping Filipinos with a fusillade of his own disinformation. So I think that the die is still out, and that actually one of the things I argue in the book is that China's disinformation tactics still lag behind Russia's, at least Russia pre-Ukraine war when they were a little bit less distracted.

SP: And so Josh, if there is a takeaway for policymakers, and let's treat them separately policymakers in the sort of developed free-leaning world, and policy makers in the developing world. If there is a takeaway from your book as to how they should be pushing back against China's global media offensive, what is it? What is the takeaway? What is the policy prescription?

JK: Well, I think they need to separate between what works and what does not right now. And that means not worrying so much about some of the big state media outlets, except Xinhua, and they need to really think about Xinhua and how Xinhua operates. And in big countries where news editors still have money, they should think twice about signing agreements with Xinhua. Major Italian and German publications and news wires have signed content sharing deals with Xinhua, is that necessary, etc?

They should spend money on digital literacy programmes, they have one at my children's school, but it is a fancy private school. I know private school does not mean the same thing in the US, but it's a private school, and everyone should have extensive digital literacy training. There are good models of it from Finland and Taiwan. Policymakers should think that China is going to adapt, that China, while a one-party state, is still adaptable, and that China's disinformation state media apparatus, its use of - we did not get to this - but trying to use its control of information pipes, like Chinese satellite TV and etc companies getting greater access to the market in developing places, is going to become a tool of spreading Chinese influence, that these are all going to get better in the future.

And fourth, we did not talk about this at all, but they need to be really strict in developed countries, very significant policies that (1) prohibit foreign interference of any type in elections; and (2) treat the media and communication sector as an area where foreign investors should be subject to the same scrutiny - and that is not just Chinese, but any foreign investors - as they would be if they invested in a sector that traditionally had security capabilities. In the past, in the US if someone wanted to invest in a chips or steel sector that could have potential ramifications that can be built into a missile or etc, that investment by a foreigner would be subject to special scrutiny. Now the US is extending that to media and communications, I believe that that Australia is too. I believe that is the wave of the future, that the UK, Europe and Canada and virtually every other developed democracy will do the same.

For developing countries, it is harder, they do not have the same amount of money. I think that one thing that developing countries should do, and that all countries should do, is simply strengthen the quality of democracy as an ability to deliver effective governance. One of the reasons why China has been able to have any success with this, and also in promoting their model, is democracy has not had a great 15 years, so at least until zero-COVID China look good by comparison. Developing countries can promote digital literacy too, there are good digital literacy programmes in some developing countries. Developing countries, while maybe not being able to not use Xinhua or others, they should strengthen their independent media, particularly developing countries that are democracies, and the big aid agencies like DFID and USAID and others, should realise that spending money on independent media in developing countries brings back massive rewards, multiple fold so that is another area.

And then finally, I think in developing countries, there needs to be a recognition - and this is true in developed countries, too - that just to think twice about, in terms of media, China offers a massive number of training programmes primarily for journalists from developing countries. There is nothing necessarily wrong with them, the US does that too, etc. But to go into that with open eyes, thinking about what you are and are not allowed to see. And while you are on the programme, they are probably not going to arrest reporters from Kenya that they have wooed to come. You know, ask, push, etc. Ask to go to places that the Chinese government does not want you to go. When you are on tours, ask questions, push, etc, etc. Ask to go to Xinjiang, I mean the worst they can say is 'no', they are not going to arrest the best reporter at Kenya's business newspaper, after they have invited him on a lavish trip to China.

SP: Josh, thanks very much indeed. And for our listeners who want to learn more about it, Joshua's book, 'Beijing's Global Media Offensive' is published and available in the UK and around the world. Joshua, thanks very much, we have got a lot to learn about how to handle China's media offensive, and thanks for coming on What China Wants.

JK: Thanks so much for having me.

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Today we are talking China politics to coincide with the start of Xi Jinping’s third term in office. To do so we are rejoined by Professor Jinghan Zeng of Lancaster University, an expert on the politics of Beijing.

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Here are some highlights of our discussion:

• For Xi’s third term, there is likely to be continuity in his political stance (such as a reassertion of the Party over the economy).

• There might be some changes in economic policy as economic growth is still important, for example supporting the private sector more - but too early to tell.

• Chinese political moves are made behind closed doors (as per the old Soviet system) and not out in the open like in the UK or US, so it is hard to propery understand why things happen.

• It is also not always possible to understand the reasons behind personnel moves, and the West should be hesitant about making judgements given the opacity. For example, the appointment of Wang Huning (a trusted advisor to Xi) to oversee the reunification with Taiwan - we don’t know the reason behind this.

• On Taiwan, the West might be becoming more hawkish, but China’s public-facing position on the island hasn’t changed much recently.

• China sees the UK as balancing between Washington as a security partner and Beijing as an economic partner. If, however, the UK takes too strong a line on China, then retaliations will be expected.

You can also listen to the podcast on Apple, Amazon, or Spotify.

As always please do share, comment, and subscribe. We’ll be back soon with more What China Wants.

Many thanks for listening.

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Here is the transcript:

Sam Olsen: Hello, and welcome back to What China Wants with me, Sam Olsen, and Stewart Paterson, as always. You may have seen in the news over the last few weeks a steady stream of items coming out about changes in China's political scene, including, for example, the announcement that Xi Jinping has now being given an unprecedented third term in office. To be blunt, if we had been talking about this 10 years ago, even maybe five years ago, the internal workings of the Chinese political system would not have been of much interest to anyone outside of the China-wonk community.

But now, given China's importance to the world, and the state of geopolitics, Stewart and I thought that this is incredibly important to actually learn a bit more about what is happening internally in the Chinese political scene, and what this means for the rest of the world. And it also comes in a good week, when we have had the Integrated Review Refresh in the UK and the announcement about AUKUS with UK, the US and Australia, of course. So there are lots of things happening which relate to China.

To help us unpick this, we are joined by our old friend of the show Professor Jinghan Zeng from Lancaster University, here in the UK. Now, for those that have not heard Jinghan speak before, he is a Professor of China and International Studies at Lancaster University, and is the Academic Director of China Engagement at the Confucius Institute there as well. He was educated at the University of Warwick and the University of Pittsburgh, and has written extensively on China and surrounding fields, for example, 'Artificial Intelligence with Chinese Characteristics: national strategy, security and authoritarian governance'. Welcome back, very good to see you.

Jinghan Zeng: Thank you for having me.

SO: Just to get things started, what might be very useful is just to give us a reminder about the internal Chinese political structures that are being spoken about in the news at the moment, like the NPC and the CPPCC - just a brief description to make sure everyone is understanding why some of the changes in China's political leadership have been so important, and will be so important for the world.

JHZ: Well, the National People's Congress is China's national legislature. In constitution, this is the supreme state of sovereignty of People's Republic of China, it is where the Chinese presidents are supposed to be elected. So, I think, when the conference is commenced that is where the President will be elected from it, so that makes it a very important kind of event to showcase about new Chinese leadership. And the other one you talk about is the Chinese People's Political Consultative Conference. That is a political advisory body in China, where it has a function of providing political consultation with people from different backgrounds - ethnic background, class background, occupational background - and that serve a function of providing political advice to the government. Those two sessions are really organised as a way of setting the tone of general overall direction of the government, deciding about the leadership, officially appointing the leadership. So that makes it a very important event to the Chinese politics.

Stewart Paterson: Just to clarify for our listeners, obviously, some of them will remember that several months ago, the media was reporting that Xi Jinping had been installed for an unprecedented third time in office. And so, if we can just disambiguate this, he is President of China, and that authority stems from the National People's Council, the session that has just finished. But his real power comes from being Chairman of the Central Military Commission, and General Secretary of the Communist Party, and those were the posts that he was given for a third time back in the autumn. Is that correct?

JHZ: Well, I think in a way, it is correct in current context, but some people might say that being the Chairman of the Central Military Commission probably can be potentially powerful, if not the most powerful post. So, it depends on how you look at it. In Chinese history, I think in the past, we do have two separate people. One is being the President of the People's Republic of China, and then a Chairman of the Chinese Communist Party, it can be two people. But I think more in the past few decades, it has been combined into one. And I think they all have different functions, regarding the post and what are their remits.

SP: On the National People's Congress, it has just under 3000 members. Could you explain to our listeners where they come from, how they are chosen, and if there is anything in the make-up of this body, this time round, which people should be aware of in terms of the indications of where their loyalties may lie, vis-a-vis, the President and potentially other factions? Is there anything remarkable about the make-up?

JHZ: Well, I think with the National People's Congress, the members of that are being elected from a lower level. Let's say the People's Congress, so there are multiple levels of that People's Congress. At the top level, we have got the National People's Congress, and below that level will be the provincial level People's Congress, and then city level People's Congress, and then below. So, they will be electing who is going to be appointed as a member of the above one from the lower one. So the National People's Congress members are being appointed from the local People's Congress at a provincial level, and the local legislators, which are indirectly elected at all levels, except from the county level. And that membership is part-time, I think I have to emphasise here, and carries no pay, and you can spontaneously hold posts in different parts of the government, for example, or the Party, and usually it includes some senior officials there. So basically, I think it has been elected from a lower level kind of legislature.

SP: Just to be clear, Jinghan, all the members of the National People's Congress are members of the Communist Party. Is that correct?

JHZ: Well, I would not say 'all'. I think there is no formal rule to say all National People's Congressman should be Communist Party member, I do not think that is a required rule for that. In terms of proportion of it, I think we need to look into the new data, I think it really depends. There is no fixed rule set that you have to be Chinese Communist Party member in order to be a National People's Congress member.

SO: But whether they are Communist Party members or not, they have all come together to grant Xi Jinping an unprecedented third term. here has not been any debate about that, it has all happened quite smoothly, right?

JHZ: Well, I would not say there was not debate. I think obviously, we within the government and the Party they have their own internal system of having that debate. So, in the past, we can refer that to the USSR's democratic centralism. And that refers to, what we mean is that in a domestic meeting, people can come and debate things, and we can have different opinions, that is fine. But once the decision has been reached, everyone has to unconditionally support that decision. So that is something that the Chinese Communist Party learned from the Soviet Union. So I would not say there was not debate there. Clearly, there is debate within the Party, and within the government, about the new leadership, who should be there and who should not be there.

But I think from a certain point of view, those debates are not necessarily transparent, because the way China's politics is organised are different from the kind of way we think in the United States, or in the UK, where you can have an open kind of discussion about disagreements within the leadership, or challenging or even rebelling against the leadership. That is not how it works in the Chinese politics. There is a debate, but mostly taking place domestically in a domestic context. And externally, what they want to show to the external audience is unity and cohesion.

SO: See that is very interesting. And a lot of people will be surprised by that, because the NPC is considered by many Western commentators, as just being a "rubber-stamping" organisation. And I suppose if you just look at the outcome, then you might think that, but what you are saying is that there is a nuance and there is a debate before anything becomes public, so therefore, obviously, it is just a different way of doing something but there is a debate that happens before.

I suppose what is more important is not necessarily how Xi Jinping has got there, but the fact that he has got there, and has cemented his power. We spoke about this in October when we had the Congress then. And at that point, you said we should wait for a few more months to see exactly what Xi Jinping's consolidation of power would mean for the country and therefore the world. What do you think the latest indications are about Xi Jinping's consolidation of power? Do you think that this is a precursor to China changing tract? Are we looking at fundamentally different policies being pushed through now, or is it still too early to tell?

JHZ: Well, I think having Xi Jinping as a President for the third term, I think what it really means, or probably if you want a takeaway, probably it would be continuity. We already know what he has been working on in the past 10 years. I think it is fair to say that there was a lot more emphasis on national security, and the leadership of the Party and the consolidation of the political system. I think that also he put a lot of emphasis on ideology and within the Party I think a lot of emphasis what it means to be a 'Communist' Party, and focus a lot more on the political beliefs, ideological beliefs. I think there is a clear sense of that continuity being there.

But at the same time, I think we can see is that the changes will be at the government level, when you have the new State Council leader, the Premier, and what kind of economic policies the Premier wants to implement, and what precisely changes they want probably at a lower level. I think that is something we need to observe and pay more attention to.

SO: Yes, could you just tell us a little bit about the new Premier Li, because I think he is very unknown in the West.

JHZ: I am not surprised, because all the Chinese leaders are unknown to the West, right? If you go back from today, we would have this conversation 11 years ago when Xi Jinping was selected as the Chinese leader, and I think with all the media saying "we don't know Xi Jinping", "who is Xi Jinping?" and that is normal. For this new Premier, I think, obviously, he was known for being the one in charge of Shanghai, and also, the way of dealing with COVID, that has been widely reported in the media.

I think what is interesting is that he is a very different kind of leader from what we would be expecting, because usually when you have a new premier being selected, that premier needs to have the experience of being Vice Premier and working in China's State Council for quite a long time. That was usually to be a rule of the step-by-step kind of promotion system in China. So, what people usually expect will be that the new premier needs to be someone who was already working in a State Council for quite a long time, especially being the Vice Premier. But his career development trajectory is very different. He has been promoted from a local leader directly into the centre of the Chinese government, so not something that happens very often.

And what is most important to me, I think, is the message sent by the new premier on the Chinese economy, and the discussion that has been happening in the past few weeks is about emphasis on private sector, how we can support the private sector. Because there was a big concern within China, about whether it will mean, a lot more emphasis on getting rid of the private sector, or if moving to a 'communist' society, what does this mean for private entrepreneurs, for the private sector - that they are losing the support for the government? And also what will be the future of it to the market economy, things like that. So I think what is new with the new premier being appointed, is a lot more emphasis on economic recovery, and we are going to continue to support the private sector, the private economy. I think that is probably the most important message to the Chinese audience and maybe to the to the rest of the world.

SP: That is very interesting Jinghan, because obviously, a lot of the economic data coming out of China, in the last year or so has been showing the ascendancy of the state sector. Whether you look at their share in corporate profits, or their share in fixed asset investment, the state sector has been increasing in importance in the last couple of years. What would you say should be the key performance indicators that market watchers and potential investors should look at to determine whether this rhetoric about restoring the importance of the private sector is actually being translated into action?

JHZ: Well, I think that is a very good question. I think a lot of things to watch out for will really be the kind of policy that has been implemented. You can see that in the past three years, I think the biggest barrier of Chinese economic growth will have been the zero COVID policy. I think that is the area people has been concentrating on, it has taken away a lot of resources, and because that policy requires strict compliance with state rules. So, you can see that kind of state power being there to play kind of role in people's day to day life, but then the emphasis or the priority of economic growth has been less prioritised. I think you can fairly say that preventing people from being contracted with COVID was the priority, and economic growth has become secondary.

And now I think a good thing is that the rhetoric has changed, which signals a good direction of travel, that now economic recovery is coming back to the agenda. Zero COVID is gone, permanent and forever. I think that is already significant to the Chinese people, because in the past three years, the way the society has been organised, and economic activity has been organised has very much around the clock of zero COVID. So I will say that even for the rhetoric being focused on economic growth is already a big step at this stage.

We all know that zero COVID is away, and you can see the concrete kind of policy of restoring international travel for example, and giving more visas to the foreign investors. I think all these things are moving to the right track. And then you are seeing the kind of GDP growth target of 5% being set there. I think, again, that is a target for government to achieve, and I think it is likely to be achieved. So I think you can say very much of the return of economic kind of priority or seeing the economic growth of the pre-pandemic time.

So, all the messages are there. But having said that, we have to recognise the challenge China is facing at the moment. The slowdown of Chinese economy is there, and everybody knows there are considerable systematic risks for the real estate industry in China, lack of domestic consumption, and I think the government needs to work out how to restore people's confidence in business, especially sectors like tourism, catering, retail service, which have been significantly damaged by the zero COVID policy, as they did in all countries in the world, so the question is how to restore people's confidence?

I think what has been happening now is people tend to save a lot more in China, and nobody really wants to invest or wants to spend because of that insecurity of nobody knows what the future of China is going to become, what the economic future of China is going to become. That makes it quite challenging. I think what the government is trying to do now is to say, "Okay, all things are coming back, economic growth is still very important." That rhetoric I think matters to help a bit.

We have already seen that the government has been sending messages to attract foreign investment. I think in the past few years, we can say that that door for foreign investment, or even for travels for our foreigners has been closed, right? Zero COVID made China really isolated during that time in order to fight for this virus. And now, I think we see a clear message and also concrete policy to welcome foreigners e to go to China. And in the university sector, we have seen lots of kinds of Chinese government funding, or different kinds of funding from China, to welcome students to go to study in China, to do cultural exchange kind of programmes. So those fundings were there and available in the past few months, and are concrete there. And also, we saw the message of the pilot free trade zone for examples the Hainan Free Trade Port.

So, I think all those things are moving to the right track. I understand that for foreign investors, you still need to wait and see about probably a little bit of certainty in the long run of the direction of travel. At least in the past few months' time, you can see that China very quickly dropped its zero COVID policy, very quickly made the changes, and there is no return of zero COVID. And now, I think China is ready to promote economic growth. I think all those rhetoric are being there and concrete, which is good. But I understand why some foreign investors still want to wait a bit longer to say whether it is the right time for them to come back.

But again, I think in the investment world, we always know risk is associated with the returns, right? So, I think it depends on which side your view is on, what do you think the future of China is going to be? If you think that China has continued to deliver and is going to be the future largest economy in the world, you still believe that, then coming to invest in China now will lead to very good return. However, if you think that China has already reached its peak, and is not likely to continue that growth, and you already have that kind of views, then you are unlikely to come to invest in China and the diversification in all the things is being there. I think it is less about confidence of what has been happening now, but more confidence of your own judgement - for investors, that is your own judgement on the economic future of China.

SO: So of course, one of the big risks that comes to investors' lips, especially in the last few months, is the risk about a conflict over Taiwan. There have been moves internally in the Chinese political system, which perhaps have raised a few eyebrows, for example, moving Wang Huning, who is a trusted adviser to President Xi Jinping to be Head of Unification with Taiwan. There are also lots of discussion points in the Western media about how China is hoarding gold and putting its economic preparations in place for potential conflict. In other words, the rhetoric seems to be around China preparing for some kind of move on Taiwan, and 'damn the consequences' in terms of the economics and the politics. What do you think to that? What is the messaging coming out of China? And do you think that the recent NPC political manoeuvrings, for example about Wang, will make a difference to that?

JHZ: Okay, I think it depends on the personnel changes. I am being very careful, I think in making any kind of judgement on what we should be reading from personnel changes because, let's be honest, we do not know much about Chinese politics because of the way that the Chinese Communist Party and the government organise the leadership changes, to try to make things behind closed doors, they want to decide within themself and to show externally cohesion and unity, and so it is very challenging to really read those personnel changes.

I think, currently, you can also read that the movement of Wang can be another Chinese attempt to find and promote peaceful unification, through having someone with an academic background, things like that. There are multiple hypotheses out there, and it is very difficult to verify one or another, so making any decisions based on partial information, or where we do not have that information, that would not be a good decision. So, I think that is something we should be very careful about. I think a lot of people believe in a specific hypothesis, because they already have their own view about China, and its values and belief systems. So that would not very be good for investors, for example, to make decisions in a real world.

My view is that China is still committed to peaceful unification, that is continuing to be the most important goal of China. And when we have really seen the hype - I would call the hype - of the threat of a war in Taiwan, to me, I think there were two major factors. One is Nancy Pelosi's visit to Taiwan, and the other is war in Ukraine.

So for the first thing, I think China has always been consistent in the way they do not want a high profile US state visit or US visits to Taiwan, because they think that is going to encourage the independence movement in Taiwan, and this is why China has been responding in military exercises. And if you really compare that with the previous kind of tension we had in Taiwan district in 1997, for example, I do not think this time is rather more serious than that. Has this changed China's calculation of 'when' or making them more likely or a lot more likely to use military ways to unite with Taiwan? I do not think so. And regarding the war in Ukraine, I think a lot of rhetoric in the West is "we already made a mistake about Russia, so we shall avoid the same mistake about China".

So, what has been really changing is a Western perception of this matter, it is not the Chinese perception of the matter on Taiwan. China's perception of Taiwan has been consistent. China considers Taiwan is part of China, and China wants to unify with Taiwan. Obviously peaceful unification is the most frequently mentioned option, but China does not want to give up other options; this would mean potentially minimum options. And when those kinds of lines are coming out in the in the news, people were getting a lot more nervous nowadays. But is that new? I cannot find anything new here. China has been having the same rhetoric, same message for the past four decades. Has anything changed in China's eyes? I don't think so, the message has always been there, and there is no war really been happening there. So why suddenly should we change our risk assessment about it? I think that's a question...

SP: Jinghan, maybe I can chip in there and say that I think there is a general perception that for much of the last 20 years, China's economic growth and deeper engagement with Taiwan was supposed to eventually make reunification in a peaceful way irresistible to both populations. What we have seen in the last few years, I think, has been China's growth model being questioned. And certainly, if one believes, as perhaps I do, that the growth numbers have been exaggerated, the attractiveness of China as a market has been diminished. If you combine that with the demographics, then perhaps there is a growing sense that China's window of opportunity, the period during which the appeal of reunification is at its maximum, is actually starting to pass. And I think the fear is that China, faced with domestic problems, and faced with a falling level of appeal to the Taiwanese, might choose a different course of action. I think that is where some concerns are coming from.

JHZ: Well, I think that is clearly one hypothesis of that. Again, I think there are many hypotheses, I can provide another hypothesis here as well. So, if you go back to Mao Zedong's era, or Deng Xiaoping's era, and think about the issue of Taiwan in the mind of the Chinese Communist Party leader, what are their roles? By then they probably would not be thinking China will become the second largest economy in the world. They would not be thinking that economic hands will be in China and for China to find economic ways to win with Taiwan. Despite so, I think Deng Xiaoping has made it clear let's leave that issue to a future generation. And the same thing has been happening in the territorial disputes between China and Japan in the East China Sea. China calls it Diaoyu Islands, and Japan, calls it Senkaku Islands. So, was that thinking being driven by the view that in the longer term time is on our side, we are going to become better and better, you are going to become smaller and smaller, so in that way, I will eventually reunite with you in economic ways. I think, yes, probably that will be one consideration.

But I think the main consideration is, “This is a very challenging issue, a very controversial issue. We cannot solve it now so let's pause it, maintain the status quo, and leave it for the future”. That would be my hypothesis of interpreting what has been happening in all generations. And obviously, yes, you can see that in Jiang Zemin's era, Hu Jintao's era and now Xi Jinping's era, you see the rise of the Chinese economy, so there are a lot more tools that China can use than previous leaders. But the view that China is losing its ring of opportunity, because of the slowdown of Chinese economy, and time is not on China's side so you have to solve this problem quickly - well, I think I have my doubts, in that.

I think at least in China, a lot of people still believe China’s future will still be optimistic, and there will be opportunity and more economic tools available for China to do things. And I do not think that China is being pushed to say “We have to find a hard way to deal with the Taiwan issue because time is not on our side.” I think it is fair to say this is a new argument being made recently, because a lot more economic forecast has been making that prediction, and then the demography of Chinese going down, again, is a recent phenomenon.

SO: Jinghan, just looking at the time, we have got only time for one more question, and I want to just finish off by looking at the two announcements made by the UK this week. First of all, around AUKUS, along with the Australians and Americans. And secondly, it was about the Integrated Review Refresh, which had a mixed view on China. It said that the UK needed to collaborate with China on big issues, but it also said that China was a challenge that needed to be looked at in much more detail, hence the doubling of government expertise on China. What do you think China and Beijing are going to think about those two announcements? And how do you think that will impact the UK-China relations moving forward?

JHZ: Well, we have seen the Chinese Embassy released a statement about China's view on this matter. But there my reading is that this is not a significantly different precision from that, let's say in the first Integrated Review. I think the UK is still probably balancing between China as an economic partner, and China as a security threat. That is my reading of it. And it is more about the UK domestically, how you can figure out the ways of working on those kinds of things. In the past few months’ time, ever since the election for the prime minister, China has been taking a very low profile in quietly observing about what has been happening in London. Even when Liz Truss was being appointed, and she had some views on China, China has been avoiding trying to directly respond to it, because China is quietly observing what is happening in British politics.

With Rishi Sunak, with a big campaigning view on China of being tough, and now he has slightly changed his tone. I think on the Chinese side, they are avoiding direct confrontation on it or avoiding a high profile response on it because they know that things are quite unsettled in the UK’s politics, and things are changing. And so, I think at the moment they are still observing this thing. But I think at least it will be a welcome move to say that China is not being labelled as a ‘threat’ because that would be really jeopardising the foundation for any UK-China collaboration and will lead to retaliation from China. So, I think what they see now it's not likely to attract a very harsh response from China, and China will continue just to observe how the different parts of the UK, different voices of the UK have been playing against each other.

SO: Brilliant. Thank you very much for all that very interesting insight, and let's see what happens in the next few months when Xi Jinping’s new term really gets underway. But as always great to talk to you Professor Zeng, and we look forward to having you back on the show again soon. Thank you, goodbye.

JHZ: Thank you. Thank you.

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Today we return to one of our audience’s favourite topics, the economy of China. Sam interviews Stewart on the latest figures and what this means for the rest of the world.

Here are some highlights of our discussion:

• Economic figures for the last year show that China’s state sector outperformed the private sector. The problem is that the private sector is much more efficient than the state, and so as the former struggles it will impact negatively on the wider economy.

• We will likely see solid growth return soon. A key driver of domestic growth in China post-Covid is likely to be domestic tourism.

• But China’s investment to GDP ration has been running very high for many years, leaving China with a capital stock that is much higher than other countries. This is the same situation that Japan found itself in before its 1990s economic bust.

• In the long term there is a question as to what role foreign capital plays in China. For instance, by default the parts of the economy that Beijing wants to drive forward are important to the state, and so foreign capital may not be wanted there.

• The trouble is, no country can offer what China can when it comes to its manufacturing scale, so not many countries can eat China’s lunch there.

• China’s economy is likely to be less commodity intensive moving forward, and so this may be bad news for countries like Australia.

• Decoupling between China and the West continues.

• Because of the headwinds facing it, there is a good chance that the Chinese economy won’t be that much bigger in ten years than it is now.

You can also listen to the podcast on Apple, Amazon, or Spotify.

As always please do share, comment, and subscribe. We’ll be back soon with more What China Wants.

Many thanks for listening.

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***

Here is the transcript:

Sam Olsen: Hello, and welcome back to What China Wants with me, Sam Olsen. Today I am going to be interviewing not a guest, but my co-host, Stewart Paterson, on the state of China's economy. Now, obviously, a lot of people listening to this podcast have a stake in what China's economy is doing around the world and they might have exposure to the Chinese economy directly itself. But one of the things that everyone has in common is that no one really knows what is going on, other than perhaps Stewart.

Stewart, we are going to be talking today about its state and about how things have gone right or wrong for it in the last year or so and what you expect moving forward. But could you just sum up in one sentence, is the Chinese economy doing well or doing badly at this present second?

Stewart Paterson: Oh, well, I am an economist so I cannot give you a one word answer, Sam. It is doing very badly relative to what people are used to out of China. But clearly, the relaxation of the COVID restrictions are giving China a fillip at the moment. So, let me just put that in a little bit of context for you. In 2022, the year that just finished, according to the official data, China's GDP grew by 3%, which sounds pretty good in comparison to our own growth rates. But for context, with the exception of 2020 - the big Covid down year as it were, in which according to official numbers, China's economy grew by a little over 2%, although, obviously, that is highly questionable - the 3% growth in 2022 would be the worst year of economic growth in China since 1976. So, it does actually represent a very poor performance for China. There are reasons for that, obviously, with the lockdown, but it is an indication I think of where the new normal will be.

What is quite interesting, I think, is if you drill into the numbers for last year, because there are a couple of trends that are apparent. The rural economy did better than the urban economy. So, household consumption amongst the rural population was significantly stronger than amongst the urban population, where actually consumption expenditure and urban population in real terms actually shrank a little bit. The other issue is state versus private, and there is quite a stark dichotomy there. For example, if you looked at fixed asset investment, that made by state-owned enterprises (SOEs) grew by 10%, whereas the private sector grew by just 1%. Those are nominal numbers, so private sector fixed asset investment in real terms probably shrank.

There is a slight dichotomy there between foreign and domestic as well. So, the foreign shrank by 5%, whereas domestic-funded fixed asset investment grew 5%. What we have been saying for a long time - and I think most people would agree with us - is that the most efficient use of investment expenditure has, broadly-speaking, been the private sector in China. And although the gap has narrowed between foreign and domestic, the foreign investment is also a sort of productivity-enhancing element to that fixed asset investment. Both those areas are in retreat and that is a big cause for concern going forward.

SO: Stewart, that is interesting that you say about the private sector shrinking. Well, we have known for the last few years that the private sector has been attacked by the government, whether it is the property sector, or technology. We also know that the private sector has been a massive generator of jobs and productivity for many years now. So, my question to you is, if we continue to see a political attack on parts of the of the domestic private sector, doesn't that mean that we are looking at a brake on growth over the next few years, even with the fillip provided by the freeing up of the economy?

SP: I think the short answer is yes, it does. So, the fundamental problem that China faces with its economic model is excess investment, and malinvestment, low-yielding investment. China's investment to GDP ratio has been running at extremely high levels, in excess of 40% of GDP now for many, many years. That, over time, builds up a capital stock that is much larger than other countries in proportion to its GDP. This excess investment has been far greater than we saw in Japan, for example, in the run up to its sort of economic bust in the late 1980s, early 1990s.

The incremental capital output ratio - the amount of GDP growth that you get for a unit of investment - has been declining very sharply in China, reflecting the inefficiency of that investment. If what we are seeing in China is actually an increase in the proportion of investment that is inefficient, and a shrinkage in the small amount of investment that has actually been driving growth, then that is very bad news indeed, because the incremental capital output ratio will continue to deteriorate, leading to less efficiency. In our report that we put out for the Evenstar Institute a couple of years ago, it was entitled "China's bloated capital stock and the lost decade", what we were arguing there was that China's economy would struggle to grow at all, if they did not address the inefficiency of investment. What this data seems to suggest is that they are not addressing that inefficiency of investment. In fact, it is getting worse.

SO: Okay, so where are the bright spots for the Chinese economy moving forward? If you were sitting there as a foreign investor into China, what sectors would you be most excited about?

SP: Well, I think there is a difference to be drawn here between the short-term, by which I mean the next couple of years, and the longer-term outlook. If we start with the obvious sectors that were impacted heavily by the COVID restrictions, domestic tourism fell from about a RMB 7 trillion business and then fell about 80% as a result of Covid. Obviously, when you come off such a low base, you get very spectacular growth numbers coming through. The addition of RMB 3 trillion to RMB 4 trillion to GDP from that sector recovering over the next couple of years will provide a fillip to the Chinese economy that means that it might well be able to beat the 3% growth of last year, this year and the year after potentially. That is the sort of main short-term driver of better growth, although obviously that is contingent upon the parts of the economy that performed last year not deteriorating substantially. We can talk about that but there are question marks over some of it.

Longer-term, looking forward, I think the jury is still out as to what role foreign capital actually has to play in China. Remember, China has plenty of excess savings of its own, and at the moment, the politics behind foreign involvement in the economy seem to be decidedly unfavourable. So, looking at it from an investor's point of view, you have to consider the jurisdictional risks that you're going to be taking there. Obviously, the parts of the economy that the Party-State are trying to drive forward, are almost by definition, very sensitive to the Party-State, and therefore foreign participation in them is either limited or tightly scrutinised, and potentially not even welcome. And so that puts foreign investors in a big conundrum; they do not have good visibility as to what kind of operating environment they will be facing over the medium-term in China.

SO: Stewart, so in terms of foreign investors into China, that is all very well, but what about foreign investors outside of China reliant on the Chinese economy, for example, commodity producers in Australia? How do you think that they are going to fare in the next few years with the Chinese economy, in terms of what the Chinese economy needs from the rest of the world?

SP: Well, I think Sam, in that particular case, there are two very strong headwinds. The first is that China's economy is going to become less commodity intensive, as we move forward, and the mix of commodities that it uses, are going to change very dramatically, as steel production goes into decline, for example, but electric vehicles rise. And so, that is going to lead to a sort of geographical shift, and the shift in who benefits from that commodity importation. The second thing is that under dual circulation strategy, looking at China's imports through the prism of national power and great power competition, clearly there is a move by China to diversify supply, with preferred supply coming from countries over which it maintains substantial levels of structural influence in order to guarantee the solidity of that supply.

And so, those factors combined mean that again, the outlook is very unclear for people and probably disappointing relative to the way it has performed in the past. And so I think, you know, there is a general recognition that less growth in China and more strategic thinking from China in terms of where its imports come from, in terms of looking at the geoeconomic potentiality of imports, mean that it is a less attractive market from a pure profit maximisation standpoint.

SO: And how does this impact the relationship between China and the West? Now, we have spoken many times before about the decoupling that is happening between China and America, and China and other countries in the Western alliance. But how do you think things are going to change in the next few years, with all the things you have just said, coming to fruition?

SP: There are indications of decoupling. I think the most obvious one is in the foreign investment flows, both into China and the wave of capital flowing out of China is being orientated towards the global south and away from the large Western economies - the EU, the United States, etc. So, there is evidence there. The United States remains China's largest export market, so China has not managed to diversify away its exports as substantially from politically sensitive countries as it perhaps might have liked. But on the import side, China has moved substantially away from the EU, and the US, of course, was never a great source of Chinese imports anyway.

So, I think the decoupling is there.  I do not see any evidence that it is going to slow down, I would suggest it will increase. And the reason for that is that multinationals are becoming more aware of the jurisdictional risk. They have suffered, obviously, during COVID, and from the sort of geoeconomic policies of both sides in terms of piling on costs of doing business in both jurisdictions, both Western jurisdictions and China. And that is starting to sink in, and obviously, these companies cannot reorientate supply chains in very short order. This takes years of planning. Vietnam has enjoyed a substantial success in attracting manufacturing. But it can only grow so fast in terms of accommodating those that shift out of China. And so, this is many years in the making, but I think that psychologically, that break has been made now. And therefore, it is a matter of time before it starts to flow through into data in a more apparent way.

SO: Okay, so Stewart, what relationship do you think that companies in the West should have with China moving forward? Do you think that there should be optimism about investment, into China and also accepting of investment from China outwards? Do you think there should be optimism about that? Or do you think that, given the geopolitics around Taiwan and the perhaps further fall in relations between China and America that looks likely to happen over the coming years as America pushes back on China's rise. Would you advise, rather than being more investment-happy, do you think that companies should be more circumspect on engaging with China economically?

SP: I think very much so. First of all, just looking at a profit maximisation model, and what prospects China holds out for you, this over-investment that we have talked about a lot means that returns on capital decline, because you are getting less GDP out of every unit of capital, and therefore the profitability of investment is massively diminished. So what we have seen, for example, prior to 2021, was a stagnation of corporate profits in China over the preceding seven years. Corporate welfare from the Chinese Party-State to support corporates during COVID led to a rise in in corporate profitability, but that has started to unwind. Last year, for example, corporate profits amongst industrial companies fell, down about 5% year-on-year. Interestingly, state-owned companies saw their profits grow, so the fall amongst private sector companies was larger.

I would not read too much into that one year simply because obviously, the state tends to own a lot of the commodity producing companies such as oil and gas and coal and what have you. And those companies did well, in the particular environment of higher energy prices. And so there is an element of that baked into it. But the core structural decline in returns on capital in China is still very evident, and that does not bode well for the profitability of foreign investment in China. So, even leaving aside the jurisdictional risk, there are good fundamental economic reasons to be very circumspect about the outlook of profitability coming from China. You have got slower top line growth, you have got a shrinking population, and you have got a bloated capital stock. Those are not good ingredients for good returns on investment.

SO: Okay, so would you be looking somewhere else in Asia, for your investment? I mean, is Southeast Asia trying to capture some of China's lunch or are the options for international investors and international businessmen and businesswomen very much restricted? I am thinking perhaps about the garment industry or other manufacturing sectors, because it does not seem to me that, despite there being a big call on divesting away from China, that companies have been divesting away.

So then it makes me think it's not just about the profits, and so on. But it is actually the use of China's manufacturing hub, given its capabilities, and its breadth of experience, that is going to be much harder for people to move away from rather than those people that just want to sell things into China. And obviously, you have explained very well the difficulties there, but from a manufacturing point of view, is there anything that people should be worried about? And why aren't people divesting away from it as quickly as perhaps American government and others would like them to?

SP: Well, there is capacity constraint; there is no single country in the world that can offer China's scale and competitiveness in terms of manufacturing. I mean, that is evident, I think. China has invested a huge amount in its infrastructure around trade, so ports, rails, technology. Countries such as Vietnam, Indonesia, India, Bangladesh, Cambodia, that have been taking lower-end manufacturing from China for a while, do not have the capacity as things stand at the moment to dramatically up the quantum of investment there and therefore take market share any faster than they are doing.

But there is a lot of evidence I think, that greenfield investment into China and manufacturing has collapsed, that we are moving away from the 'China + 1' sort of supply chain ethos, to a more diversified, friend-shoring or nearshoring model. You are seeing manufacturing investment into Mexico picking up very substantially. The European corporates are looking at Eastern Europe and Africa as alternatives to the Far East that have been driven not only by geopolitics, but by the sort of green agenda and concern about the potential for disruption to supply chains, and therefore, the pure merits of diversification. And so, I think that this is an ongoing thing and it is well underway.

SO: Stewart, in the report you wrote for Evenstar on the property sector a couple of years ago, you said that the sector posed a critical risk to the economy, the financial sector and government finances. So how has that panned out, and can the sector bounce back to drive economic growth again?

SP: It is a good question, Sam, because over and beyond the rebound and economic activity from the opening up from Covid, we require a structural driver for the Chinese economy, and we require at least something that is going to compensate for the drag that is likely to come from real estate. As you rightly point out real estate had become a huge part of China's GDP. So, in 2022, what we saw, really for the first time, was a decline in the level of investment in real estate; it fell 10% year-on-year. But what is interesting about it is that that actually did not result in any deleveraging of China's property companies.

So going into the year, real estate developers had total liabilities of about RMB 91 trillion, which is about 80% of GDP. That is where the systemic threat to the financial system lies. And the rationale behind China's 'Three Red Lines' policy was to encourage a de-leveraging of these property development companies. The problem is that de-leveraging your balance sheet into a declining market is incredibly difficult, which is why China had left it too late. So while overall investment into real estate last year fell 10%, what is interesting is that new starts of property actually fell by 40%. Sales were down 25%. But the inventory of property that is still under development, as it were fell a very modest 7%, and it is still at about 9 billion square metres of property under development, which is seven years of sales.

So, there is not really, in my view, any light at the end of the tunnel in the real estate market. We were in a situation where China was massively over-building. And what we have seen so far is a collapse in the land sales, followed by a collapse in the housing starts, the new housing starts. But what we have to do is shift this level of inventory that amounts to seven years of sales as things currently stand, in order to facilitate a deleveraging of the property developers' balance sheets. And so, the systemic risk remains and I think people holding their breath for a recovery in the real estate market to be a driver of Chinese growth are barking up the wrong tree.

SO: Ok Stewart, so what knock on effects will this structural decline in the property market have on other parts of the Chinese economy?

SP: Well, I think severe ones Sam. Although real estate development was only about 7% of GDP directly, construction is a large part of GDP as well. And obviously, real estate development is a source of demand for steel, for cement, and construction workers. What you are seeing now is a big drag on household income growth, as employment opportunities in China are starting to diminish. So it has been well reported the sort of surplus supply of graduate labour coming into the Chinese labour market. But at the lower end of the spectrum as well, you have substantial numbers of construction workers being laid off, and that is starting to impact household income growth. So we are now starting to see a stagnation in urban household income growth, which is feeding into a stagnation of urban household expenditure as well.

And so, if you like, the big hope of a lot of multinationals was that China's economy would rebalance away from investment towards consumption, driven by households in urban areas. That does not seem to be happening at the moment, which is a big challenge to a lot of the companies that have invested heavily in their businesses in China, revolved around the assumption that consumption would grow very quickly. So we will see how the relaxation of Covid regulations impacts consumption over and beyond domestic tourism, which is the obvious place. But there is a lot to prove here for people who have been arguing that the economy will be rebalanced towards consumption, because there is no evidence of it yet.

SO: Okay. Well, Stewart, thanks very much for that. It is a good place to ask this last question, which is, looking ahead five to 10 years, how do you think China's economy will perform?

SP: Well, I would refer people to this report we wrote about the bloated capital stock. The scenario we paint in that report is one in which 10 years from now, in dollar terms, the Chinese economy might be really only very marginally larger than it is now, if at all. And I think that is based on very sound analysis of the impact of declining working age population, combined with an inefficient and bloated allocation of capital.

SO: Well, that is a slightly pessimistic note to end, but thank you very much Stewart. We will be back next week for more What China Wants, and I think we are going to be looking more at the political side rather than economic side next week, but to be confirmed. Goodbye, everyone, thank you very much.

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One of the most commonly held notions about China in the West is that the authorities there have a dismal record on human rights. There are weekly, if not daily reports in the press about Beijing’s latest assault on its peoples, whether it be Uighur camps, or the crackdown in Hong Kong, or the erasure of Tibet’s indigenous culture.

There are however many who disagree with (and robustly reject) the labelling of Beijing as a habitual breaker of human rights.

To get to the truth of the matter and to understand more about China and human rights, we are joined today by Benedict Rogers, a noted veteran on human rights and a co-founder of the NGO Hong Kong Watch.

We discuss the following points:

• It is important to differentiate between China and the Chinese Communist Party (CCP).

• In Benedict’s view, the Hong Kong National Security Law is very draconian. But did the authorities have no choice but to introduce such a law given the unrest on the streets?

• The Uighur situation in Xinjiang is something that some lawmakers in the West are increasingly referring to as genocide. We debate whether what is happening there is what Beijing claims it is - anti-terror operations.

• We discuss the accusations of organ harvesting by the Chinese state, for example from Falun Gong activists.

• Christianity is seen as a threat by the CCP, and we hear how Christians are being treated in China today.

• North Korea is being propped by by China, and we hear Benedict’s thoughts as to why.

(As a postscript to this, it might be of interest to note that when we were searching for images of The China Nexus to use here, we found that Google categorised the book as “fiction”. Is this Beijing getting at Benedict through the US company? Or is it a reflection on Google’s own algorithmic beliefs? We will let you read into this what you will…)

You can also listen to the podcast on Apple, Amazon, or Spotify.

As always please do share, comment, and subscribe. We’ll be back soon with more What China Wants.

Many thanks for listening.

***

Here is the transcript:

Sam Olsen: Hello, and welcome back to What China Wants with me, Sam Olsen and of course, Stewart Paterson. We normally talk about the economic and political elements of China and its influence around the world on our podcast, but one of the things that comes up time and time again, in the press, especially in the Western press, is China's attitude to human rights. Indeed, many would argue that China's relationship with human rights is absolutely crucial to understanding its economic and political programmes. And there is no one in Britain certainly, who is more famous for his stance on China's human rights record, than our guest today - Benedict Rogers.

Ben is the co-founder of the NGO Hong Kong Watch and has been very much in the news the last few years, as Hong Kong has slid under the waves of the National Security Law. But he has also done many other things in Asia to do with human rights, for example, being the co-founder of the International Coalition to Stop Crimes Against Humanity in North Korea and is the Deputy Chairman of the Conservative Party's Human Rights Commission, full stop. He is also on the advisory board of the Inter-Parliamentary Alliance on China, and has been in fact, visiting China for a very long time. And so if there is someone that actually we want to talk to who knows about China and human rights, it is Ben Rogers. Thank you very much for joining us today.

Benedict Rogers: It is a great pleasure, Sam, great to be with you. Thanks for inviting me.

SO: The reason we have got you on is because you have just written a new book called The China Nexus, which steps out the attitude of China to human rights in lots of different areas from Tibet to Hong Kong to Taiwan, and North Korea, of course.

My first question is that people would and often do criticise critics of China and its record on human rights and its record on other things not to Western sensibilities, of being 'anti-Chinese'. But you say in your book this is not the case, you are not anti-Chinese, you are anti-CCP, the Chinese Communist Party. How do you reconcile that difference? Because surely, there has to be an element of not liking what China as a whole stands for a given that the CCP is in control of the country?

BR: Well, I think it is incredibly important to make this distinction, because what the CCP want to put out as a narrative is that the CCP and China are one and the same and they are not at all. China predates the CCP by many, many centuries, and is a great ancient culture and civilization that has given the world so much. I would say not only am I not anti-China, I am actually very pro-China as a country, as a culture, a people. I first went there when I was 18, to teach English in Qingdao for six months, made lots of friends there. And it is because I'm pro-China that I want the people of China to have their human rights, their human dignity respected, and it is the CCP that is the threat to those basic human rights. So making that distinction, I think, is not only possible, it is essential.

Stewart Paterson: Thanks, Ben, can we just talk a little bit about Hong Kong, then as a starting point in this discussion. Many of our listeners will have lived in Hong Kong at some point in their lives, and will remember it as being a very free society. Tragically, that appears not to be the case anymore. Perhaps we could just start by just outlining how repressive you think the National Security Law is, and to what extent that has actually diminished Hong Kong as a jurisdiction in which to live and in fact, to do even business?

BR: Well, I think the National Security Law is one of the most draconian laws that I have ever seen in all my years of working on human rights issues. And part of the problem with the National Security Law is that it is so vaguely defined, and the red lines keep moving, so one cannot be certain from one day to the next, whether what one says or does might be a violation of the National Security Law. But its impact has been that civil society has almost completely been shut down, certainly civil society of any political meaning. Civil society that is engaged with social issues probably is continuing, but human rights groups, political advocacy, trade unions are all pretty much shut down.

It has completely silenced a democratic movement. Most pro-democracy leaders in Hong Kong are either in prison or in exile or keeping their heads down and keeping a low profile. Just anecdotally, before the National Security Law came in, I was in pretty much daily contact with dozens of people in Hong Kong. I am now not in contact with basically anybody in Hong Kong because all the people I know are either in jail, or they are in exile - in which case I am in touch with them - or they are keeping their heads down and I do not want to endanger them. The other important thing to say is that of course, press freedom has been totally dismantled as a result of this law.

SP: And some of the people who have been imprisoned as a result of this National Security Law are in fact, British citizens. Is that correct?

BR: That is correct. So, the most high-profile example is, of course, Jimmy Lai, the founder of the Apple Daily newspaper, and he is a British citizen. He has been in jail now for more than two years on multiple charges and faces his National Security Law trial later this year. At the age of 75, it is unlikely with all the charges that he is facing, that he will come out of jail, he will probably spend the rest of his years behind bars.

SO: Okay, so it is very, very sad from, from a human rights point of view that Jimmy is imprisoned, but also the people that have been exiled it is, for them, a tragedy. But Beijing and people that support Beijing within the former colony, will always say that the reason that the National Security Law had to come in was because there was too much trouble being made on the streets, and it was damaging Hong Kong's position as a city of international business. And the fact that it was the protesters that started it, perhaps backed by the CIA, which is something which is commonly referred to. And actually, if that had not happened, if there had not been pro-democracy protests, then the Chinese authorities would not have been forced to clamp down on this. And so, Beijing would argue that the National Security Law, and all of the things that surround that, are actually designed to make Hong Kong a better place to live for the people. How do you respond to that?

BR: Well, I think that it is certainly, I think, quite likely that the National Security Law was introduced at the time and in the way that it was as a result of the protests in 2019. But I think what I would dispute is the idea that it would never have happened at all. I think the consequence of the 2019 protests was probably to accelerate the crackdown. But I think the crackdown was coming anyway. And in fact, we already saw indicators of that even before 2019. We saw the disqualification of a number of pro-democracy legislators who had been elected, we saw the abduction of the Causeway Bay booksellers, the imposition of mainland Chinese law at the High Speed Rail Terminus. So this kind of creeping erosion of Hong Kong's freedoms was already happening. And I think the National Security Law in some form would have come anyway. I mean, Beijing was wanting the Hong Kong government, of course, to introduce Article 23, the anti-subversion law, and instead, because of the 2019, protests, Beijing imposed, without any consultation with Hong Kong, this National Security Law.

The other thing I would dispute, of course, is the idea that the 2019 protests were Western-backed or Western-initiated, CIA-initiated/ I think not only is that nonsense, I think it is actually insulting to the people of Hong Kong, because it implies that they are not able to think and act for themselves. They are perfectly able to think and act for themselves and the 2019, protests, whatever your view of them, were a genuine initiative by thousands of Hong Kong people, of course, initially in opposition to the proposed extradition law, and then it transformed into a broader pro-democracy movement. But the international community morally expressed support but certainly didn't initiate them.

SP: So in a similar vein, maybe we should talk a little bit about Xinjiang then, because that is the other subject that is most front of mind in in the Western media when they think of China and human rights. The camps were first of all denied in terms of even their existence, I believe, by the CCP. They, I think, clearly exist. The Chinese would argue that there was terrorist activity in Xinjiang, that they have successfully reduced the level of terrorist activity, if not eliminated it, and therefore these camps need to be thought of as a method of integrating the minorities into mainstream society. Why do you disagree with that? And what evidence is there that there is more to it than that sort of argument?

BR: So I think there are two points. Although the CCP initially denied the existence of the camps, actually, they do now acknowledge their existence. They call them something different. They call them vocational re-education centres, but they do at least acknowledge that they exist.

Secondly, on the question of terrorism. I would certainly acknowledge that there were a few terrorist incidents, that there were a small minority of Uyghurs that did engage in what we would regard as terrorist acts. But the idea that a million. perhaps as many as two or three million Uyghurs are all terrorists, or that they al support such acts, and that they all deserve to be locked up in these camps is absurd. And I worry that in the long term, the totally disproportionate and horrifically repressive response of the CCP towards the Uyghurs is actually counterproductive, because it is going to sow further resentment. I hope this does not happen, I hope particularly for the sake of the Uyghurs that this does not happen, but it has the potential to transform into more terrorism, not less.

And crucially, what is happening in Xinjiang has actually been increasingly regarded by a growing number of experts as a genocide. Both the former US Secretary of State and the current Secretary of State have designated it genocide, several Parliaments have done so. And crucially, an independent tribunal a couple of years ago, chaired by very respected British barrister Sir Geoffrey Nice, who had been the prosecutor of Slobodan Milosevic, they came to the conclusion that this is a genocide. It is not just the camps. It is forced abortions, forced sterilisation, forced organ harvesting, forced labour, and very severe religious persecution of Muslims. So, it is a really horrific assault on the Uyghurs of Xinjiang.

SP: Some of our listeners might not be so aware, but as you have alluded to there, in addition to the camps that the Chinese authorities would claim were 're-education camps', there is a sort of conservative effort as I understand it, to eradicate Uyghur culture more broadly. Can you just give us some examples of activity orientated around that?

BR: Yes, absolutely. Looking first at the religious culture of Uyghur Muslims, it is now highly likely that if you are a Uyghur with a beard of a certain length, or you are wearing a hijab, or you are fasting during Ramadan, you abstain from pork or alcohol, or you are reading the Quran, all of those acts are enough to land you potentially in a prison camp. Many mosques have been destroyed or closed, Uyghur Muslim cemeteries have been desecrated and closed. And crucially, the CCP has a policy for those who are not in the prison camps, of moving into Uyghur homes, literally sending officials to live with Uyghur families in order to monitor their activities 24 hours a day, seven days a week. And the Uyghur language I think is also now very much under threat. It is really a process to turn Uyghurs, culturally at least, into Han Chinese.

SP: Perhaps that is an important point that we just need to explain to those less familiar with it. Xinjiang has not always been part of China has it? In fact, I think, is it a semi-autonomous region notionally, in terms of the sort of constitutional existence even if in fact, it is ruled directly from Beijing?

BR: That is exactly right. Throughout history, it has sort of changed hands, and the borders have changed at different times. But yes, that is right. Currently, it is supposed to be a semi-autonomous region but in reality, it is totally ruled by Beijing,

SO: There will be people listening to this, especially many of our Chinese listeners, who will deny that many of the worst things that you said are happening in Xinjiang. They will say that a lot of the evidence has been planted, and perhaps made up and fabricated, but instead, going back to Stewart's point, it is all about terrorism. And in fact, the parallel that has been drawn from me by a number of mainland Chinese over the years has been with Northern Ireland and the fact that the British did internment in Northern Ireland against people from the Catholic background. And not only that, but they look at the wider record of human rights within the West, especially the treatment of prisoners and the black population in America, and say that the West has got its own problems with human rights. And so, how dare we have a go at China, when actually it is not a question about human rights, it is a question of misunderstanding the way that China needs to get to grips with controlling a population for the sake of the wider population.

Again, Ben, surely there is something to this because China has got 1.4 billion people, it is a huge landmass, it has got a culture very different to that in the West. Isn't it fair to say that there are parallels between what we in the West are doing to keep our society safe and what the Chinese are doing?

BR: Well, I think firstly, it is definitely important for Western countries to acknowledge our faults, to acknowledge that we are far from perfect, but that does not mean we should not speak out on human rights issues in China. I think one key difference is that when bad things happen in Western countries or by Western governments, because we are open democratic systems, we have, by and large systems of justice and accountability; when these things are exposed, people are held to account both through press scrutiny but also through judicial ways. And that does not happen in China. The other thing I would say is that the abuses that occur in the West, by and large, I would say are not systematic. They are the acts of bad actors in the system rather than the system itself whereas in China, it is the system itself that is responsible.

On the question of evidence for what is happening in in Xinjiang, I think it is remarkable given how limited access is and how closed the Xinjiang region is to outsiders, it is remarkable how much evidence has emerged through the testimonies of survivors who have managed to escape, through satellite footage, and crucially, through several Han Chinese journalists who have, at great risk to themselves, gone into the region to see the situation for themselves. I do not recall his name, but there was a very brave Chinese reporter who put out a film I think through AP, a couple of years ago. There is also a remarkable guy, Shawn Zhang, in Canada, who went through satellite imagery to prove that the camps exist. So it is not just Westerners that are doing this, there are some very brave Chinese who have helped expose the situation.

SP: Ben, you mentioned fleetingly human organ harvesting. And obviously, this has been a story or a reality that has been around for a while; in fact, some has been admitted to by the Party, but has been dismissed as what, as you described, sort of bad actors, rogue actors within the Party abusing their power. Is there substantial evidence that human organ harvesting, by which we mean here - just for sake of clarity - the forced removal of organs from living donors for medical purposes, and they are usually prisoners, or at least that is the accusation, often prisoners of conscience. Is there a credible body of evidence that this has been going on, and that it has been done with official approval in a sort of systematic way?

BR: There is, indeed. When I first came across this issue, probably six or seven years ago, I was initially quite sceptical because it sounded so appalling and shocking, I thought “Can this really be happening?” Also, of course, the evidence is very difficult to find, unlike other human rights violations; by definition, there are not really any survivors and the people who carry it out are the only witnesses, so it is difficult to prove. But there is a growing body of evidence, both through a number of witnesses or survivors who have talked about it. There is a very brave Uyghur surgeon, Enver Tohti, who has publicly admitted to taking part in an operation to remove human organs from a prisoner.

But crucially, and I mention him again, Sir Jeffrey Nice KC, a few years ago, chaired an independent inquiry into this very issue. What was important about that tribunal was that it was made up of people who had no previous involvement, either in this particular issue or in China human rights. So they were coming at it entirely independently, but with great expertise, and it consisted of Sir Geoffrey Nice, and a very prominent surgeon, and a number of other lawyers and academics. They heard many hours of evidence and lots of written evidence as well, all of which can be found on the China Tribunal website, which I think is chinatribunal.com. They came to the conclusion at the end of a very exhaustive process that this is happening, and that it amounts to a crime against humanity. So in terms of the evidence, it is all there on the China Tribunal website.

SO: A country which has definitely got a problem with human rights is North Korea. Now you have been studying North Korea for a while, and you mention it in your book, The China Nexus. But today, you might have seen the news that they fired two more ballistic missiles off the east coast. and Kim Jong-un's sister is now upping the ante about using the Pacific as a firing range for their testing, and basically just pushing back on America and South Korea, and Japan, of course. To what degree though, is the stability of the regime in North Korea, helped by China, and, if indeed China is helping to prop up that regime, why?

BR: So definitely, China is helping to prop up that regime. I would say that without the economic lifeline, the political and diplomatic lifeline that China provides, the regime might well not survive. Why is China propping it up? I think, primarily because it does not want a unified Korea, and it certainly does not want to unified pro-Western, democratic Korea on its doorstep. I would say that I think the relationship between China and North Korea is not easy, and China is not necessarily in favour of everything Kim Jong-un's regime does. But it is a sort of marriage of convenience because China regards North Korea as its patch, and it wants a regime that it can prop up and influence rather than either a regime that collapses and there is instability, or a unified democratic Korea.

SO: And of course, South Korea, is increasingly Christian; I think someone told me that it is one-third Christian now with very much the evangelical wing of the religion, but with a large Catholic population too. Christianity is something else you write about and something that I have been thinking about for a long time in terms of China's adoption of that religion. It is now said that there are more Christians, or Protestants in fact, let alone Christians as a whole, in China than there are members of the Communist Party. And again, I have heard from Chinese friends saying that this represents a threat to the stability of the Chinese Communist Party and it is therefore not a wonder that the CCP is clamping down on Christianity in the country. To what degree are Christians under threat there? And do you think that they do represent a threat to the power of the CCP moving forward?

BR: Certainly, the persecution of Christians under Xi Jinping has intensified to a level not seen probably since the Cultural Revolution. There was a period in the 1980s, 1990s, and early 2000s, where the picture for Christians varied throughout the country because it was much more dependent on the attitude of the local provincial authorities than Beijing. And there were parts of China where things were a bit more relaxed, and unregistered Christian churches - sometimes quite large ones - were tolerated, a blind eye was turned and it was a sort of grey area. Now under Xi Jinping, most of those unregistered churches have been shut down, lots of people been jailed.

And then there is the state-controlled Church, which has always existed under the CCP. In those state-controlled churches, there is now a campaign by the CCP to have pictures of Xi Jinping on the wall alongside, or sometimes even instead of, religious imagery, to have CCP propaganda banners in the church, surveillance cameras monitoring everybody who is coming to the church. People under the age of 18 are prohibited from going to places of worship. And I have also been told that on WeChat, or Weibo, if you share a hymn or a verse from the Bible, that very swiftly disappears, and you can end up in trouble for doing so. So it is a very severe crackdown. Why does the CCP fear Christianity? I think it fears any idea that is different from its own ideology, and that has the ability to bring people together in large numbers. That is what it fears. And Christianity is a prime example of that.

SO: Ben, thank you so much for that, and it has been a very interesting conversation. But I have got one final question, which I think I need to ask you, and it is certainly something that the business people listening to this will want me to do, and that is around China, human rights and actually doing business with China. Because many would argue that trade and the exchange of economic activity is the only way that we are going to be able to make China more like us and to improve the lives of the people within China - and actually the focus on human rights, the perhaps narrow focus on human rights, that NGOs such as Hong Kong Watch, and others in the West, look at and publicise, is actually doing harm for the long term development of China - and therefore, we should probably just keep quiet and let the business people do their work, to make everyone richer and more prosperous. And by that we would make life better for everyone in China and the West. Obviously, I am pretty sure you are not going to agree with that. But for those listeners, why wouldn't you agree with that?

BR: Well, I think for several reasons. I was actually of the view in the 1990s and first decade of the 2000s, as it looked like China was opening up, relaxing, certainly opening up economically, but relaxing, to some extent, politically. There was some space, albeit restricted, for some degree of civil society. There were Chinese lawyers who I met who were defending human rights cases within China. And so, at that time, I was much more optimistic about this idea that engaging and trading with China is the way to open it up. And I was, at that time quite low-key on the human rights questions publicly. I think I would say that approach simply did not work. And it simply emboldened the CCP to become even more repressive at home, and also even more aggressive abroad. I think the connection between what the CCP does at home and abroad is clear, and therefore it is in our interest to speak out and to hold the CCP accountable for its human rights violations because ultimately, they are becoming a growing threat to our freedoms as well. That does not mean we should not trade at all. But I think we should be much more strategic about our business relationship, and much bolder in speaking out for our values.

SO: Great, well thank you very much, Ben. And your book, The China Nexus, is out now. It has been great speaking to you. I am sure this is going to encourage a lot of debate on our comments' pages. If you would like to comment, please do, on What China Wants. Stewart and I will be back next week for more discussion on China and its influence abroad. Thanks, Ben. Goodbye.

BR: Thank you very much.

Today we discuss another potential technological vulnerability, something that is really not well known, but which has the potential to be far more widespread than Huawei ever could. Cellular Internet of Things (IoT) components are ubiquitous in devices in the home, in the car, and at work - and China makes most of them.

To discuss the threat, Sam and Stewart are joined by eminent China watcher and former diplomat Charlie Parton to discuss a paper he has written on this very topic.

A summary of our discussion:

• Cellular IoT modules are small pieces, only a couple of centimetres squared, but very powerful and embedded with sensors, software, antennae, and geolocation capability. They connect to the internet, rather like your cellular phone does.

• They pass data to and from each other, and they have the potential of passing the data back to the people that manufacture them.

• Chinese companies like Quectel or Fibocom have an almost monopoly on their manufacture. Thus cellular IoT modules, when installed in Western devices, can send data back to China.

• Much of this data can be very sensitive, for example spotting where a car is parked (thus potentially unmasking MI6 or CIA agents if they are parked at Vauxhall or Langley). It is likely that the component the British authorities just removed from a Ministerial car was a cellular IoT module made in China.

• Western companies do manufacture these components, but are often restricted in their success by unfair Chinese subsidies.

• The West needs to take this threat seriously and find a way to marginalise China’s presence in the cellular IoT market.

You can also listen to the podcast on Apple, Amazon, or Spotify.

As always please do share, comment, and subscribe. We’ll be back soon with more What China Wants.

Many thanks for listening.

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Here is the transcript:

Sam Olsen: Hello, and welcome back to What China Wants with me, Sam Olsen and of course, Stewart Paterson. Today we are talking about technology again, but specifically around a bit of technology that not many people even know exists, but which is completely vital to our day to day lives - and increasingly so - and that is the Internet of Things (IoT).

To do so, Stewart and I are joined by Charlie Parton, who many of you that listen to this podcast will already know given his commentary on what China is up to around the world. He is officially a Senior Associate Fellow at RUSI, the Royal United Services Institute here in the UK. Charlie spent 22 years of his 37-year diplomatic career working in or on China, Hong Kong and Taiwan, and was actually chosen as the UK Parliament's Foreign Affairs Committee's Special Advisor on China. The reason we have got Charlie on today is to talk about a new paper he has written about the Internet of Things. So welcome, Charlie.

Charlie Parton: Thank you for having me.

SO: Charlie, in a nutshell, tell us about your paper and about the risks it highlights?

CP: Well, it all stemmed from the past when I was looking at the Huawei business, and several of us were deeply opposed to what the British government's policies seemed to be at the time. Eventually, the British government, I think, made a wise decision on that. But then looking around, we could see that governments would tend to play Whack a Mole and say, "we don't like Hikvision", or "we don't like Dahua", or whatever it is, when there are many more serious threats, that perhaps should be counteracted in a more generic fashion.

The most obvious one of those was cellular Internet of Things modules, not a phrase that I have to say I was that familiar with a year ago, but I have certainly become so, and it is not an item that most of our politicians on either side of the Atlantic have ever heard about or ever really considered. And yet, as you said in your introduction, these are increasingly important. They are in so many different uses, whether that is industrialisation, energy, transport, security, point of sale terminals, smart meters, and when you start getting into the home, cars, doorbell cameras, you name it. I mean, they are just enormously important. Perhaps, I should just start by explaining what exactly one of these cellular modules is, that might be helpful, I suspect.

SO: I think so, yes.

CP: In essence, it is a very small piece, only a couple of centimetres squared probably, but very powerful and embedded with sensors, software, antennae, geolocation capability, processors, and it connects to the internet, rather, like your cellular phone does. But it is very useful because when you have systems that you really cannot afford to drop out, like the Wi-Fi dropped out. These do not connect through Wi-Fi, so if you have a multi-million-pound industrial line, which cannot afford a break in production, it will cost you a lot of money, you want to connect through these things.

They link up with each other, they pass data to and from so that you can improve your systems, and they have the potential of passing the data back to the people that manufacture them. And therein lies a really big danger. Because increasingly, what the Chinese are doing is trying to ensure that the three companies which produce these cellular modules, the Chinese ones; there are plenty of European American and Japanese and Korean companies that also produce them. But what they want to do is establish, you might say a triopoly, or monopoly on the market. They currently have 54% by sales, 75% by connectivity. And I dare say, very few of your listeners would have heard of the likes of Quectel or Fibocom. They may have heard of China Mobile, which is actually the smallest of three, whereas almost everyone would have heard of Huawei. And yet, I think in the longer term, these cellular modules by these companies are probably as great, if not a greater, threat to our systems and societies.

So again, just if I may very briefly say why it is such a threat. First of all, if you create a dependency by holding a monopoly, and these companies like so many Chinese champions are given very advantageous financing and subsidies and various other methods to ensure that they try to achieve this. But if you achieve that, then we in our countries become dependent upon them. And we have seen what Chinese companies, or the Chinese Communist Party will do when you get a dependency. Just look at what happened during COVID with PPE and other equipment, they will use it for political ends. And so that is one danger, the dependency danger.

Another is the fact that vast amounts of data are going back to China, and you can make some very interesting one might say 'tools' or 'instruments' out of data, and we can discuss how that might be. And thirdly, of course, because the whole point of these things is that data goes in and out and you update the software to improve system or whatever, you could put into them some software, which, again, allows you in effect to do some really disruptive things like mess up a country's grid or bring its traffic to a halt. Again, we can discuss instances of how this might happen. So from those three areas we have got, I think, to be very careful not to allow this quiet plan to proceed unimpeded.

Stewart Paterson: So, Charlie, we have been here before, haven't we, in terms of China cultivating dependencies on new technologies and seeking to establish monopolistic positions. In your view, at the moment with regards to the Internet of Things, is the biggest barrier to concerted action, an economic one in terms of corralling the necessary support to push back against this attempt at creating a dependency? Or is it still a political one in the sense that there is not yet a realisation amongst Western policymakers that China is capable of a sort of malign intent in using this sort of geoeconomic policy to create influence?

CP: Well, much of it, I think, is what you say at the end there. First of all, I think governments - 'free and open countries', if you like, it is a better expression than 'Western' - are beginning to realise that China really is a threat, it really is hostile power, and therefore, we should not allow these dependencies to be created. That is still not necessarily so embedded in our government's mind that it achieves a higher priority than sometimes some of the more immediate gains of let's say a cheaper alternative, and it is cheaper for a reason precisely so that they can get these monopolies. So that is one thing. The other thing is that, as I have gone around talking to governments on both sides of the Atlantic, and indeed, in Brussels, people simply do not know what a cellular IoT module is, they have not heard of it. And again, I will be quite honest and say that back at the start of last year, I did not either. So it is a learning process.

There are other differences. I think that the sorts of instruments that the Americans in particular have been drawing up and using, do not quite apply in the sense that much of what America is doing, if you take the CHIPS Act and semiconductors, is stopping the export of technology to China. But these things, these modules are not actually that high tech for a start. Furthermore, it is not a question of exports, it is the imports of these into our countries that that is the problem. And so, we need to devise ways of ensuring that individuals, companies, governments, defence contractors, whatever, do not put these devices in whatever equipment or processes they have got, because of the dangers that I have outlined.

SO: Okay, Charlie, so what are these dangers? Let's drill down to that, because if we had someone from one of these companies here today, I am sure that they were do exactly what Huawei did when that whole Huawei issue kicked off a few years ago, and say the dangers that you are saying could happen just simply are not true. We are an honourable company with no links to the Chinese Communist Party, and what you are saying in terms of the actual specificities of the backdoors and stuff just is not correct. So tell us, looking at it from a slightly cynical point of view, how would you argue back or push back on someone from these companies, if they challenged you, on your view that there is a danger? And how do you qualify that danger in the first place?

CP: Well as a sort of general comment of course, these companies, I mean, Huawei is a particular one, I think they probably love discussing its ownership, and they say "we are a private company" or whatever. It is entirely irrelevant, in a sense, even the security laws that China has, which oblige companies and individuals to hand over any data requested by the security organisations, you do not need to say, "Oh, well, let's point to those". Because anyone who has spent any time in China knows that if the Chinese Communist Party says to anybody, company or individual "Jump", the only answer is "Certainly, how high?" And so, of course, Huawei and others, if I asked would have to pass over this data. And of course, when you think about Huawei and TikTok and others who solemnly said, whether it is to the American Congress or to our parliament, "no, no, we don't repatriate as it were the data back to China", and then have been caught lying, they do.

Ultimately, it comes down to a matter of trust because these devices are updated on a very frequent basis. That is the whole point, you improve the processes, not just their own functioning, but the processes they control. And so, to devise a piece of software that you could then put in would be a matter of a day's work probably, and trying to find it would be very, very difficult. You can actually egress the data, or you can switch the device off remotely. And I just think that given the nature of the Chinese Communist Party, its control over its companies and individuals, it would be irresponsible of government to allow such weapons to be placed in their hands.

SP: And presumably Charlie, one of the issues here is that the United Kingdom tends to import a lot of these things indirectly, in the sense that they are already embedded in hardware that we import. And so, in a way, it is not our decision, it is further down the supply chain where a decision has to be made to change supplier, cut the Chinese supplier out, and that requires quite a high degree of sort of multilateral cooperation, I would imagine.

CP: Well, and decisions by individual companies. You may have seen on 6 January a report in The i newspaper about the British security authorities worried about data emanating from a government car. They did not give the full details, but it was not just one car, it was many cars, and it was from some quite important people. The car company will have not thought very hard about it, the cellular module will be part of a larger computer component that would have been slotted into the car, and they will be looking at price and performance and not really worrying that it was from China. What we do not know is what exactly turned the British authorities' attention to that particular car, whether it was routine, or whatever. But the point is that, yes, your car has one of these things, and if it is a Quectel module or Fibocom module, then indeed your data can be accessed remotely from China.

I think cars are quite a good example to take, because as you have seen in the papers, some of the comments about this issue in recent days, there has been a lot of sort of jokes "ho ho well my fridge is informing on me, or my doorbell - and isn't that funny?" Well, it is not really very funny. Cars are a good example. If every day your car is registering through its computer, and the cellular module too, that it is parked in, let's say, in a certain place in Cheltenham. Well, yes, you work at NSA. Or if you parked every day in Langley, Virginia, yes, you work for the CIA. And then you start following those cars and being shown exactly where they have gone, et cetera. It is not just individuals, of course, governments buy fleets of cars, and then you have problems there. So now I think we have got to be a lot more knowledgeable, and security conscious. And that, I am afraid, means not having these Chinese said in the modules, but buying from the plenty of other countries, which would be trusted suppliers, because of the risk.

SO: So you say that, but one of the things that we came up with in our recent reports on 1 December on the UK's direct and indirect exposure of its supply chain to China was just how difficult British companies especially, but European companies, more broadly, were finding it to deal with the onshoring and friend-shoring team that has now sort of taken hold of a lot of the industries; in other words, moving manufacturing out of China, and giving the contract to a German company or British company.

First of all, they have not got the supply line capacity, they have not got the people who are properly trained. But also, they have not got actually a lot of the inputs that they need, because those inputs themselves come from China. So my question is, it is all very well us highlighting this as a threat, and the report is very credible in its analysis, but it is the 'what to do' that kind of stumps me, because if China is making huge amounts of the components that are needed for the cellular IoT modules, then how do we actually remove a whole supply chain of those parts out of China? Is there a plan? And if there is not a plan, which country, which government, which department can come up with one to reduce our dependency on China?

CP: Well, yes, I can see that this is of course a really big problem. But first of all, there are plenty of other companies that produce these things, and of course, they have probably been held back by the unfair competition they are receiving. Secondly, and again, this is something that governments, one hopes that GCHQ, or NSA are really taking these things apart, and looking at it, but it is not necessarily the hardware within them that is the problem. It is the software, and I think you have to make sure that it is not software that is coming from these companies - Quectel or Fibocom or China Mobile - but is actually put in by a supplier that you trust.

Of course, if you are saying, "Well, ultimately, if the Chinese really want to mess around, they could withhold some of the other components of these modules." Well, that is true of just about anything in a sense, that is not a problem that is specific to these cellular modules. But if they start doing that, or you fear that they are doing that, then you have to start manufacturing them yourself. But as I say, these are not particularly complex pieces of kit.

SP: It strikes me that this is a very clear cut example of "where there is a will there is a way", because as you rightly pointed out at the beginning, the Chinese have not yet been successful in monopolising this part of the supply chain. Therefore, the door is still open for us to push back and support those companies that are competing with the Chinese, and ensure that the products we buy come from a more immediate supplier. So, in that sense, the report is very timely, because it is not too late, we are not having to start from ground zero. But I think the question I have really is on the broader application of this kind of policy, you mentioned 'Whack a Mole' earlier. It appears to be the case that there is constantly another product coming up in which the Chinese are cultivating a dependency, and we must be alert to it. Where does this sort of responsibility lie within government for spotting these ahead of time? Where is the departmental responsibility?

CP: Well, that is a very good question, and in some of the sort of technical matters, I would imagine that GCHQ is the one that, just as it did with Huawei, when it had the cell looking at the Huawei, so GCHQ should be looking at these sorts of data egress threats. But again, it goes to a much wider problem that I have been talking about for some years now, in that China's intent is to dominate the new sciences and technologies and dominate the new industries from them, because from that, you get economic rents and that leads to being a sustainable superpower and having geopolitical power. Yes, it is developing quite a lot itself, it has considerable powers of innovation, etc. But it is also using other methods to get hold of it, either buying our brains i.e. our start-ups, or hiring them in our universities and getting our professors to do what is really at times highly inappropriate research into things that either help the repressive state or China's military.

SP: What is the answer to all this?

CP: What I have been saying for a long time is that we need a sort of SAGE-type committee that gives a quick answer to companies or to academics that says, "I am sorry, cooperating with China in this, or selling your company or taking Chinese investment into your company in this area is simply not permissible. It is either helping the repressive state or the military and it is a threat to our national security or long term prosperity, or our values." In other cases, "Yes, that is fine. Go ahead, work with the Chinese, they are good. We need to maximise cooperation wherever we can" or "this area, it is a bit grey on balance, we say yes" or "on balance, we say no".

Certainly, that sort of committee is needed now, where it lives in government, or who contributes it is, says he ducking the issue, a matter for government. And you can see that there would be security services input - NSA, Ministry of Defence, Foreign Office to give a political angle, BEIS (Business, Enterprise, Innovation, Science Department) etc. But the expertise would come from those who really understand the technology, giving advice to government in that sort of SAGE-type committee way.

SO: So Charlie, in the last few months, we have seen America really up the ante against China with its announcement of the banning of exporting advanced chips to China. There is obviously a lot of people in America who actively want to curtail and push back on China's influence globally. But we are speaking now in the in the aftermath of the balloon issue, what do you think was going on there? And how is that going to impact China-American relations? Because I am thinking that what you are saying here is just yet another part of the relationship to be sorted out. How much can America rely on China, and if stunts like the balloon thing keep happening, is that just going to increase the antagonism between the two countries and make it even more difficult for America and China to cooperate on anything, let alone on advanced technologies?

CP: Well, I am sad to say, I mean it would be nice if everyone could act in a very mature way and say look we have to differ, and in these areas, we are going to work separately. I always quote the American poet, Robert Frost, "good fences make good neighbours". Indeed, we need those fences, and from those, with those, we can then go out and cooperate with China in areas which are not sensitive. But I do not think we should get too distracted by balloons, it is just one incident. But the underlying truth is, and if you, as you do, read what the Chinese say, I think it is a fair characterisation to say that China's entire foreign policy is based on a deep anti-Americanism, on a systemic competition between their version of systems and ideologies and what they perceive basically to be an American, and then they lump us all in with that.

So I think there are going to be increasingly these incidents. The balloon one, well, it does not seem on the surface from what the Pentagon and others have been saying, that the actual technological threat was that great. But we will see other things. It may well be that in the next year or two, in the Taiwan Straits, an aeroplane will tip another aeroplane as it did in 2001, and then we have an incident there. So I am afraid we are destined for a world in which the 'D word' dominates, whether that is decoupling, de-risking diverging, take your pick. And we would be unwise not to prepare for that, just as the Chinese are. I mean, if you look at their policies of dual-circulation self-sufficiency wherever you can, et cetera. They see it quite clearly, I think we sadly have to recognise it too.

SP: Charlie, thank you very much indeed for joining us today. Quite clearly, I think the Internet of Things, and China's penetration of our communication networks and its ability to harvest data is something that our policymakers need to get on top of as soon as possible, especially since there is a viable alternative at the moment that needs protecting and nurturing. So thank you very much for a very timely report and for joining us on this episode of What China Wants.

CP: Thank you for the opportunity of contributing.

Today the Evenstar Institute launches its latest research, measuring and understanding China’s influence in one of the world’s most strategically important regions, Southeast Asia. (A summary of the report can be found here.)

The culmination of six months of research, it is titled Southeast Asia’s Emerging Geopolitical Order: China’s Structural Influence and The Evolving Regional Balance Of Power and looks at the way China’s influence has evolved in the region over the last decade, across multiple domains (including Economics and Finance, Politics, Critical National Infrastructure, and Defence and Security).

The research was carried out using Evenstar’s proprietary data models, analysing hundreds of thousands of data points, together with AI-powered data enrichment from our technology partner Adarga.

In today’s episode Stewart discusses the paper with Sam, the report’s co-author, and Evenstar’s Director of Research Dr William Matthews.

Here is a summary of the main findings:

• Southeast Asia is strategically important to the West and its allies, in terms of its commodities, political and defence ties, and location at the heart of the Indo-Pacific.

• However, China’s influence has increased rapidly over the last decade in every Southeast Asian country assessed. The greatest increases were in Technology and Telecoms, Defence and Security, and Economics and Finance.

• China has been able to dominate digital infrastructure in many ASEAN states, allowing it to lock in long-term influence. This extends China’s influence to other areas reliant on digital platforms, such as Defence and Security, and excludes foreign competitors.

• China has developed economic ties which allow it to rapidly scale up its influence via investment, elite capture, and dominance of digital infrastructure and critical national infrastructure projects.

• China’s highly asymmetric economic relationships with many ASEAN nations enables a high degree of influence across sectors.

• China has used the opportunities created by the distancing of the USA following the 2014 coup to rapidly increase its influence in Thailand, and attempt to “flip” a US treaty ally. The diplomatic isolation of Myanmar similarly means it is now highly dependent on China.

• Indonesia, Malaysia, the Philippines, Singapore, and Vietnam have proven more resilient to China’s influence due to their diverse economic relations, allowing them to better balance engagement with China and the US.

• China’s evolving influence is driving the emergence of a new geopolitical order in Southeast Asia, with Cambodia and Laos effectively client states; Brunei, Myanmar, and Thailand susceptible to realignment; the Philippines and Vietnam remaining resistant to China’s influence; and Indonesia, Malaysia, and Singapore having the potential to act as a regional economic counterweight.

You can also listen to the podcast on Apple, Amazon, or Spotify.

As always please do share, comment, and subscribe. We’ll be back soon with more What China Wants.

Many thanks for listening.

(Note that a summary of the report can be found here. If you would like to receive the full report please email Nick Zambellas nz@evenstarglobal.com)

***

Here is the transcript:

Stewart Paterson: Hello, and welcome to What China Wants, my name is Stewart Paterson. Today, I am joined by two co-founders of the Evenstar Institute think tank, my normal podcast partner Sam Olsen, and Dr. William Matthews, the Director of Research.

We are going to be talking today about China's structural influence in Southeast Asia. Sam, let me come to you first, the Evenstar Institute has this wonderful report out on Chinese structural influence in Southeast Asia. What is structural influence? And why is Southeast Asia important?

Sam Olsen: Well, thanks Stewart, it feels a bit weird being interrogated by you on the other side of the desk. As you know, have been putting together a report on Southeast Asia for the last six months, using the influence models that we have created for the Evenstar Institute, which is the think tank that What China Wants fits into.

Those models came about after many years of analysis as to what actually influence is. We started thinking about this a long time ago, because there did not seem to be a proper analysis undertaken about what China was actually doing in the world. There was lots of conjecture, but there was no real data. So we thought we could put something together in a model, which would be a quantitative basis for understanding exactly what China was doing in Country A, B, or C. And on that we have a qualitative layer as well, which I might add, is powered in part by our technology partner Adarga, the AI platform, who we do a lot of work with. So Adarga has helped us to come up with a lot of the insights into this, as well as our huge quantities of databases of what China is doing across a number of things from trade and investment to academia, to critical national infrastructure ownership, to defence and security etc. All of that is brought together into this report on China's influence in Southeast Asia.

And to your question, why did we look at Southeast Asia? Well, that region is just vital for the whole world. It is big in itself; it is about 680 million people, which is about one and a half times the size of the EU, and double the size of America. But it has also got huge amounts of resources, whether it is fish in the South China Sea, or mineral resources - 12% of the rare earths that we need are processed in Malaysia, for example.

But it is geographically vital as well, because it is the gateway to China and it is the home of many alliances with the UK and the US and Australia and other countries in the West. For example, Thailand and the Philippines are treaty allies of America. Brunei is where a lot of British Army soldiers do their training and we have got strong historical connections there through the Commonwealth, and through increased interaction through the ASEAN dialogue partnership that we have done in recent years. So, the region of Southeast Asia is vital, and it is good to be able to see exactly what China's influence is there, for the West to understand where they stand with regard to their own influence in the region.

SP: William, you are in some ways, the brains behind the methodology and the process of analysing influence. So, if I could come to you and ask, could you just talk our listeners through the way that you approach structural influence and how you set about analysing it?

William Matthews: Sure. Our concept of structural influence essentially refers to the capacity of a country - in this case, China - to bend another country to its will based on its ability to compromise that country's autonomous decision-making. The way that we approach this is to think about nine what we call 'strands', which are basically domains of a country's activity in which China is able to establish influence. So those includes things like economics and finance, politics, defence and security, critical national infrastructure, technology and telecoms, and so on.

The way that we look at this is we draw on our huge quantitative database and those qualitative assessments to basically derive a quantitative metric for influence over each strand. So for that, we will be looking at things for example, in terms of politics, things like number of diplomatic engagements, level of United Front activity in the country, and so on, and thinking about what that means for the targeted country's exposure to Chinese influence, and how asymmetrical the relationship is, and the extent to which that country is dependent on China within that strand. Then we derive scores for the country overall, and that is done basically using a weighting system where we think about how influence in each of those strands is able to compromise that country's overall autonomy. That allows us basically to trace the development of China's influence over time, as well as compare it across countries, which is one of the things that we have done in this report.

SP: And so, Sam, when you look at these various strands, are some of them more important than others? Do some of them lead and others lag? And how can you sort of spot a rising trend of influence, be it from China or any other country for that matter?

SO: The most important thing to understand is that some strands are more important than others. The ones that are most important are those that would bake in the longest term, and the most important influence. That, to be honest, is the economy and politics. But there is another one as well, which is really vital to talk about, which is digital infrastructure. One of the things that came out very vividly in this report is that, of course, China is massively important economically... I mean, China's massively important economically around the world, the largest trade partner with 140 countries, 30%, of global manufacturing, and so on. But within Southeast Asia, it is really pushed out to America as the number one trading partner to quite a degree. And although it's FDI does not fit in as much as America's, the overall economic relationship is stronger with China.

What became more interesting was the spread of Chinese digital infrastructure in the region, which obviously are very closely linked to the economic development. What we mean by digital infrastructure is 5G networks for mobiles, undersea cables for broadband connectivity, space - so for example, using Beidou, which is the Chinese GPS equivalent, rather than GPS, which many countries are doing from everything, from transportation, to agriculture, to security, like facial recognition and smart cities and stuff. All of those things come together under the banner of digital infrastructure.

The reason that that is so important for influence is because once you have spent billions and billions putting it in, it is very difficult, both in terms of actually getting it out of the ground, but also in terms of cost and political will, to replace it. And as China builds out the digital infrastructure - 5G, space, etc - then lots of other things in the modern economy and a modern society fit around that, which gives China a long-term ownership or dominance, at least of many of the aspects of the modern economy.

SP: Thanks Sam. William, when you are looking at Southeast Asia, obviously, our listeners will immediately observe there are some idiosyncratic features of the region that lend themselves to Chinese influence: its geography, the fact that it is on China's doorstep, but also, large ethnically Chinese populations in most of the countries, if not all of them, and particularly the business elites in those countries tend to be of Chinese ethnicity. To what extent is Southeast Asia, in your view, a sort of special case in terms of the degree to which Chinese influence is received, or the ease with which China can penetrate?

WM: That is an interesting question. There are two dimensions there that link into that which I think do make Southeast Asia a special case. One is something that is reflected in the patterns of influence that we have noted in the report, is that China's influence tends to be greater on mainland Southeast Asia than maritime Southeast Asia. In part, this is due precisely to issues of geographic proximity, including, for example, China's effective control over the Mekong River through dams. This gives it a high degree of potential influence over the five states downstream - Cambodia, Laos, Vietnam, Thailand, and Myanmar - simply because China then has the potential, the capacity to influence things like water supply. But this also includes things like, overland access into China and from China and so on.

In terms of the region's ethnic Chinese population, this is absolutely something that Beijing targets through the activity of its United Front Working Group. What the United Front Working Group attempts to do is essentially target ethnic Chinese business elites in the region, with a view to trying to get them to reorient more in line with their interests than in the interests of their own countries. Now this is not always successful, it is much more successful in cases where you have ethnically Chinese business elites who are relatively recent migrants from the People's Republic of China. Beijing has been less successful in cultivating it where you have sort of older ethnic Chinese populations who do not necessarily feel particularly sort of warmly towards the People's Republic.

But in some countries, this has been particularly effective. Thailand is an interesting case where there is a United Front sort of penetration at very high levels of the economic and political elite in the country, to a point where that is having an impact on the internal debate in Thailand as to where the country should be orienting itself between China and the West. However, you know, it is important to note that also, we see other countries like Vietnam, which have taken a very active stance against allowing any kind of activity like that to operate in the country. So it can be a very important vector for China's influence, but it depends a lot on the sort of response of the country being targeted.

SP: That is really interesting, and let's come on to Thailand in a moment, because obviously, clearly, it is a very important sort of 'swing state' in the region. But Sam, one of the conclusions of the report is that Laos and Cambodia are effectively client states, although you do not go quite that far necessarily in labelling them as such. But perhaps you could just talk us through how that has happened and how deep China's influence over those two countries is?

SO: Yes, so Laos and Cambodia have over the last 10 years, gone from being autonomous in their decision-making for the majority to being very heavily dependent on China. China's influence is economic, so huge amounts of the FDI and trade that both countries have with the rest of the world is actually with China. For example, in Cambodia, a large part of the roads and the infrastructure has been built by China and in Laos too, the high-speed railway has been built by China, and the dams that now provide 80% of the export earnings for Laos through the electricity they generate, that was all built by China as well. Not only economically is China dominant, but militarily, they provide a lot of the weaponry now. Politically, there are huge connections between Laos and Cambodia and China. And of course, as William said, there is a reliance on the Mekong River, which China can now basically cut off because of its 11 upstream dams.

For those two countries, their autonomy is determined by China. A good example of that would be in 2019, when Cambodia was asked, or in fact ordered, by China to stop online gambling, which huge numbers - about 700,000 we think - of Chinese people had moved into Cambodia in recent years to indulge in. That was providing an enormous amount of tax take to the Cambodian government, which is one of the poorest countries in Asia. China told them to switch off their online gambling, which they did, obviously depriving them of quite a lot of tax revenue. But we know that Cambodia really does not have a leg to stand on when it wants to stand up to China, simply because of the economic impact that China can have on the country. And just a final stat on that is that two thirds of Cambodia's exports come from garments, but two thirds of the inputs into the garment industry come from China. So, just like Laos is dependent on the water from China for its exports, Cambodia is dependent on China for the inputs into its main export as well.

But I want to just build on something that William was saying a second ago about the United Front. The United Front are also very active in those two countries. We know this because the United Front actually publicise an awful lot of what they are doing online in Chinese, which we read and monitor. And another country which we will talk about in a second for sure, is Brunei, where the United Front have been very active too.

SP: So William, our listeners probably thinking, "Well, hold on, isn't it quite natural that China should have a significant amount of influence in these countries, given its size, and the relative size of itself vis-a-vis the Southeast Asian nations?" I suppose the question is really, to what extent is structural influence something that just 'happens' naturally through international relations between two countries? And to what extent is it cultivated? And to what extent can these Southeast Asians countries enjoy some sort of agency themselves over the level of influence that outside powers gather in their societies?

WM: Sure. So obviously, part of it naturally occurs. China is a huge economic power right next to Southeast Asia, so of course, it is going to have, you know, one would expect it to have major influence in the countries of Southeast Asia. To a significant extent that is inevitable, if you like. There are other dimensions like we have been talking about with the United Front activity, which are sort of wholly targeted and deliberate cultivation. I think, even though in terms of things like China's economic relationship with the region, we do see though, that there are patterns of activity there where China is clearly seeking to - it is hard to know whether or not the deliberate intent is to create structural influence, or however they sort of conceive of it.

WM: But there is definite deliberate targeting of certain areas and sectors with a view to advancing China's interests. This includes, for example, investing in things like critical strategic resource production, things like that, and things like digital infrastructure. Digital infrastructure does seem to be part of something which is a much more sort of deliberate attempt to cultivate influence. That relates to things like China's pushing of a setting of Chinese technical standards and using those as a basis for things like digital infrastructure, critical national infrastructure development. And those are things which have the potential to lock-in China's influence through things like the need for continued maintenance, upgrades, and so on - like Sam talked about earlier, the difficulty in switching to alternatives.

But of course, these countries all have agency themselves. We have identified in in the report sort of various ways in which countries do push back or are able to resist China's influence. In some cases, these come from sort of just the country's existing sort of economic situation. Indonesia, for example, as the largest economy in Southeast Asia, is also the sort of the country in Southeast Asia which really has a very diverse economy, and relies on a very wide range of trade partners and so on. That that kind of diversification of economic ties correlates with a lower degree of China's ability to cultivate influence. Vietnam is another good example in that Vietnam has cultivated closer economic ties with Japan and South Korea. That also means that it is then inevitably less dependent on China.

SO: William, can I just come in there, because I think it is important to talk about this agency. Some of the critics of China's influence and some of their critics of America's influence in the region and in fact, the world, say that by discussing things from a point of view of China or America, you are removing agency from the countries affected. I think that it is really important to note that in our research for Southeast Asia, one of the things that comes across very well, is the fact that these countries do have agency, massive agency in fact, and right up until the point where they end up in China's orbit, in which case their autonomy is somewhat reduced.

That is especially the case for Laos and Cambodia. But how did Laos and Cambodia get there? Well, they made decisions, which were either for the best of the country, or because of elite capture, which ended up resulting in those two countries having such great ties to China that they cannot really operate without them. The United Front does help to encourage the decision-making which might not necessarily be in the best interests of that country. But it is a decision made, and that is a reflection of the agency.

And just getting back to Brunei, I think one of the things that we have noticed is that whilst Brunei retains a very strong close connection with the UK and the West over its military side - as I mentioned, the British have got a base there. One of the things that has become clear in the last few years is that the economic side of Brunei's relationship with the outside world has been completely dominated by China. They have built a new refinery there, PNB refinery, which is absolutely massive, to the extent that our analysis shows it is likely this will completely change the pattern of Brunei's economic engagement with the rest of the world simply because China now dominates the natural resources, which in turn dominates the exports of Brunei. And the United Front actually publicise the fact that the United Front people working on that refinery, the ones that helped to get it built, were given a public award by the United Front to reflect their service to China. So yes, there is agency but this agency within these countries is being helped along by Chinese efforts, at the obvious level and at the perhaps less obvious level as well.

SP: And Sam actually, maybe that is a point we ought to mention here. Is there a big difference in the level of Chinese influence between the democratic states within the ASEAN bloc, and the non-democratic states within the ASEAN bloc?

SO: Great question, Stewart, William what are your thoughts on this?

WM: I think we do see some differences there, but I would also caution against thinking that there is necessarily a clear-cut line. So, for example, two countries that we focus on in the report as being notably resilient to China's influence are the Philippines on the one hand, and Vietnam on the other. Now in the case of Vietnam, a lot of that resistance to China's influence comes from a long-standing history of difficult relations between the two countries.

In the case of the Philippines though, the Philippines being democratic has had an impact. We see across many countries in Southeast Asia, not necessarily a particularly favourable public opinion of China, and its actions in Southeast Asia. Now in a country like the Philippines, where there is a high level of civic engagement, that has an effect, because it means even when the Philippines was under Duterte, for example, Duterte tried to cultivate most closer ties with China. But in a context where you also have high levels of popular political engagement and an unfavourable opinion of China's activities, that is inevitably something that elected leaders are going to have to take into account, and which will therefore impact on the capacity of that country to counter China's influence and potentially hinder the ability of China to establish that influence in the first place.

SP: Sam, let's talk about Thailand, because obviously Thailand was a democracy, then we had the military coup, and in many ways, it is kind of pivotal to the region, isn't it? Which way Thailand goes or what balance Thailand chooses to strike, will have quite a broad ramification for the whole of ASEAN won't it?

SO: Yes, Thailand is one of the most important countries in Southeast Asia and Asia as a whole. It has got a large population, it has got a thriving economy, which is vital to the international supply chain for its factories, and its components, etc. And geographically, it is very importantly situated at the heart of Southeast Asia mainland. And so whatever Thailand does is going to have an impact on the region and on the continents as a whole.

Since basically, the Cold War, America and Thailand have been very close. Thailand is one of the few treaty allies of America, and it is a country that has received huge amounts of international Western support and investment. But in 2014 there was a coup, a military junta took over. Because of that, the Americans decided to pull some of their support for Thailand, which included stopping for example, the young officers going to West Point Military Academy in America. There was an awful lot of anger by the military junta, and they felt betrayed by the Americans, and since then, China and Thailand have become a lot closer.

We see that in a number of ways. First of all, trade continues to increase. China is building Thailand's digital infrastructure. China and Thailand are creating a very strong scientific relationship. For example, China recently gave Thailand one of its own nuclear fusion reactors as an experiment, and set up a think tank there on science and technology. But also they have become very close in terms of military engagement. Thailand is one of the only countries in Southeast Asia, which has actively increased at a significant level its arms from China. It has also done an awful lot of joint exercises with China too. That is not to say that they are not still doing joint exercises with America, they are. But the fact that they do them with China as well is problematic for Washington.

What this means is that China's influence in Thailand is increasing rapidly, and has done over the last sort of nine years. Now, if China does manage to get Thailand to flip away from being an ally of America to be an ally of China, then that would cause a very big headache for America in Southeast Asia.

SP: Sam, obviously, there is a huge amount of detail in this report, and we have only really scratched the surface in this discussion. If our listeners want to get a hold of the report, where can they get a hold of it?

SO: Well, it is going to be published on our website, which is evenstarinstitute.com. But, if you are a member of the What China Wants community, we will also send you a copy in the newsletter there very soon. But in summary, I think this is just a fantastic opportunity to show off our influence models and to show how powerful they are, and how broad ranging they are as well. And so, you will be looking forward to talking to us soon about some other research we are doing in different parts of the world on China's influence and how that compares to the influence of other countries like America, the UK, and potentially India as well.

SP: William Matthews and Sam Olsen, thanks very much indeed.

SO: Thanks Stewart.

WM: Thanks

***

About The Evenstar Institute

The Evenstar Institute is a non-partisan, not-for-profit think tank focused on measuring and understanding the evolving nature of national influence in the twenty first century.

Our current core programmes are the China Influence Index, and Macro Supply Chain: Risks, Challenges, and Opportunities.

For more information on our research, methodology, and proprietary models, please contact Sam Olsen, CEO and Co-Founder, at sam.olsen@evenstarglobal.com

About Adarga

Adarga is an AI software company that specialises in information intelligence. Adarga’s AI platform is used by the Evenstar Institute’s specialist team to enrich their research and enable better, faster and more robust analysis from deeper, wider and broader sources.

Adarga is helping organisations in defence, national security and the commercial sector to more rapidly identify threat and opportunity signals buried within huge volumes of information. By leveraging the power of Adarga’s Knowledge Platform users can accelerate and enrich reporting, rapidly understand intricate networks and perform complex situational analysis in order to mitigate risk, act at speed and gain a competitive edge.

To find out how your organisation can augment its information analysis capabilities and more effectively derive critical insight from in-house and open-source data, please contact
Mike Hepburn at hello@adarga.ai

A lot of print is dedicated to discussing China’s overseas aid, some very anti (“they’re creating debt traps”), some very pro (“China is just giving the world what it needs”). What is often lacking from these conversations is any data - until now.

In today’s episode we interview Rebecca Ray, a Senior Academic Researcher at the Boston University Global Development Policy Center, which has published a fascinating dataset outlining what China is doing with its aid programme.

Here is a summary of our discussion:

• China’s overseas development financing has fallen off a cliff in recent years, down to $10 bn. This coincides with COVID.

• Overseas aid is now really a small part of China’s international balance sheet, with the majority of foreign spending being bank lending and FDI.

• An interesting finding from the research is that most countries that receive aid from China also receive aid from the World Bank, but the funds received go to different types of project. World Bank and Chinese lending is not so far apart.

• World Bank projects tend to take longer to approve, and so the speed of China’s aid decision making is an advantage for countries that want quick investment wins.

• Its pattern of overseas financing has changed too, with bilateral mass loans (e.g. giving a bucket of money to Country X for them to do with as they please) has been replaced with small, direct projects (such as a certain bridge or road).

• As China reopens to the world, and their economy gets back on track, are they going to prioritise domestic spending or overseas aid?

• If Rebecca was going to advise President Biden on how the US can be more successful in pushing back on the influence Chinese aid brings, she would tell him to be more aware of what these countries actually want: need infrastructure, they need connectivity, and they need investment.

You can also listen to the podcast on Apple, Amazon, or Spotify.

As always please do share, comment, and subscribe. We’ll be back soon with more What China Wants.

Many thanks for listening.

(In the meantime, if you would like more information about the Evenstar Institute and our research, then please email me sam.olsen@evenstarglobal.com)

***

Here is the transcript:

Sam Olsen: Hello, and welcome back to What China Wants with Stewart Paterson and me, Sam Olsen. You will have seen if you have any interest in China whatsoever, that over the last few years, there have been accusations and promulgations of China's largesse around the world in terms of investments, sure, but also in giving lots of loans to countries, especially in the developing world. And that has led to accusations, again especially amongst Western commentators, of phenomenon like debt trap diplomacy. But on the other side, people who are more fond of what China is doing, say that this is delivering a public good through  the loans, which are not provided by other organisations. And so the question is, is what China is doing in terms of these loans good for the world? Or is there actually another side that needs to be explored?

But before we have any of those conclusions, it is really important to get the data. Thankfully, we do have the data now, and that has been produced by a unit of Boston University called the China Overseas Development Database. We are lucky enough today to be joined by the person who produces that database. Rebecca Ray, welcome, Rebecca.

Rebecca Ray: Well, thank you so much for having me. Great to talk to all of you.

SO: So Becky, you hold a PhD in economics, and you are the Senior Academic Researcher at the Boston University Global Development Policy Centre? That's right, yes?

RR: Yes, that is correct.

Sam Olsen: And how long have you been doing that for?

RR: I have been focusing on China, and specifically to give you a little background on myself, focusing on China's role in Latin America, in particular, for about 10 years now, at BU at what we call the GDP centre. It really sprang out of our Global Economic Governance Initiative that focuses on multilateral efforts for our global goals that we have all agreed to; whether it is mitigating climate change, whether it is the Sustainable Development Goals, financial stability, how are our multilateral and international cooperation efforts getting us towards those goals?

So about 10 years ago, we realised China is the story in development, finance in the world. And at that point, I was just a Latin America expert. And so China was the story, specifically in South America. So we spun off our own separate initiative, the Global China Initiative within the GDP centre, just to focus on how China changes the landscape of what is available in development finance, in investment and trade, and how that changes the prospects for global development in general. So that is where I am coming from, as someone who cares deeply about our consensus goals, whether it is climate change mitigation, and adaptation, whether it is ending food insecurity, or having a better-connected world, and interested in how the global development finance landscape has changed or altered for the better or the worse, or both, by China.

SO: Good. Okay, so you just released your latest iteration of research. But could you just set the scene for the listeners in terms of the size of Chinese overseas development finance, and especially its trajectory in the years covered, the last 13 or 14 years, because I think there are some quite surprising findings in terms of its trajectory, right?

RR: Sure. So, our database covers starting from the last global business cycle peak in 2008, our first edition of it came out covering through 2019. When we put that out, we did not realise that 2019 was also going to be a business cycle peak, and that was our first edition of it. And now we have been able to update it through 2021. To give you an overview of the whole time period, in that time, China's two development finance institutions, the China Development Bank, and the Export Import Bank of China, these two banks, have issued about USD 500 billion in sovereign finance commitments. And to put that in context, that is about 83% of what the World Bank has committed to governments around the world in the same time period. So here we have one country that is doing the same amount, almost, at least in the same echelon as the preeminent global development finance institution that we are all members of. So it absolutely merits understanding what gaps it is filling, what particular risks and cautions need to be applied, and how best it can help us get to our goals.

Stewart Paterson:  Maybe I could just come in there because clearly those are the two leading Chinese development banks, but there has been considerable overseas lending obviously by other state-owned Chinese banks or state-controlled banks, such as the Big Four commercial banks, for example. So, your database specifically only covers the two leading banks, is that correct?

RR: Exactly. Our goal is to be comparable to World Bank data or regional MDB data like the African Development Bank, the Asian Development Bank, or the EBRD, or national development banks in Europe, right, KFW or AFD. How does it compare? How does it contrast? How does it add to what is globally available in development finance?

While there are state-owned commercial banks, ICBC for example, they are hugely important but they are not development finance, they do not lend for policy aims. We do not look to them for the climate finance that the world needs, we do not look to them to lay the groundwork for investment that is necessary, but that cannot happen until a certain level of infrastructure or a connectivity is established.

Development Finance are first movers, before private industry has an incentive to move into a place. They are first movers for necessary investments that are cost-prohibitive for that first mover like green energy often has a high cost upfront, but pays for itself in the long term. Development finance steps in when there are projects that are absolutely necessary, but that one company cannot capture all the benefits of and so the private sector does not have an incentive to be active in that area. Here I am thinking of public infrastructure projects that need to be accessible to everyone, like water and wastewater projects. The private sector does not step up to fill those spaces, because one company is not going to capture all the benefits.

So, development finance serves this purpose of creating public goods that serve broader public goals. Where one firm is not going to capture all the benefits, we all agree that we need these things and so let's publicly finance them. That is what development finance does, and so we create this database to compare how China approaches that space, in comparison to all of the many other DFI's that exist in the world. Now, these DFI's are members of the International Development Finance Club, which is a group of DFI's around the world; they meet every year for the Finance and Common Summit, and they have goals for green lending, for example. So it is important to understand what everybody is doing in this space.

We do not think about all of Chinese overseas economic engagement through this particular dataset. It is meant for comparison to other DFI's. But we have other data sets that serve other purposes. We have a Chinese Loans to Africa dataset that looks at those commercial loans, as well. We have a Global Power database that also includes direct investment. But this database is just to think, "how does this change our understanding of what is out there for development finance?"

SP: And when people think of development finance, they usually think that there is a concessional dimension to the development finance, that it is not a sort of commercial transaction, or at least not a purely commercial transaction. And some of the multilateral organisations actually sort of weight their lending according to the concessionality that is embedded in it. Is that possible with the Chinese development banks or are they slightly different in that regard?

RR: That is not possible for most national development banks, Chinese or others, actually. So that is an OECD definition, and the OECD members will use that definition in their own development banks and in their own reporting. And that is great for OECD members, but it is not a broadly-held definition beyond the OECD. And so, when we look at other countries' development lending, it might use instead simply which institution is this going through, and that is the way that works with Chinese development finance.

So there are three major Chinese development finance institutions. The third one that we do not cover is the Agricultural Bank of China, which does not really operate overseas, and so we do not include it. These three have development mandates: Export Import Bank of China, or 'Chexim' as we kind of casually referred to it, is where all the concessional lending goes through. Notably, however, the China Development Bank is a member of the International Development Finance Club and calls itself the world's largest development finance institution. They both have mandates to further development policy or to lend for projects that further development policy, and so we include all lending that comes through these two institutions, in the same way that the World Bank, for example, counts all of its lending as development finance, whether it is going through the IBRD or the IDA. The IDA concessional finance for low-income countries, the IBRD, non-concessional finance for middle-income countries, it is all development finance through the World Bank.

The OECD has its rules about concessionality, and that is wonderful and we would love to have that kind of transparency for national development banks around the world. But it does not exist, and so we use this World Bank-centric approach, that we are all members of the World Bank, so we can rely on those definitions and say, "You know what we can do? We can very clearly say these two institutions exist for development goals. Let's see what they're doing and how well they are doing compared to their peers."

SO: Can I just ask, if this is all about development financing, then surely, the last few years would have been very good for development financing opportunities, since we have all had such a big shock from COVID and the Ukrainian war etc. But your data seems to show that there has been a massive slump in Chinese outward-bound development financing. So what is going on? Why has China not taken advantage of this international situation to push its development finance, and obviously its influence thereby?

RR: Sure, so here is one of the situations in which multilateral development banks have a big advantage, because they do not have a domestic economy to worry about. So here we see multilateral development banks like the World Bank continuing to increase the finance that they can make available, because the need was so great. China, on the other hand, faces its own internal issues as well, of course, and here, I want to talk about maybe a supply side and maybe a demand side, if we can think about it that way.

On the supply side, where do those dollars come from that China lends out? One of the main places that those dollars come from is their current account surplus. Those are the dollars flowing into China's economy from exports, minus imports, as well as remissions and other forms of flows that are similar. That fell by 90% between 2015 and 2018. It went from about USD 300 billion a year to about USD 28 billion dollars a year in that time period. So, the flow of dollars with which China could work really dried up. And during those same years, of course, these were the years when US President Trump and Xi Jinping had that trade dispute, and you really see trade beginning to have those frictions, fewer export dollars flowing into China, less that they can mobilise.

Of course, during those peak years, China is also sitting on a mountain of US Treasury bonds that are earning historically low interest rates, essentially collecting dust. Why not leverage those reserves, and lend them out during a time when global interest rates are so low that from a borrowing country's perspective, it makes sense to borrow? That has not been the case in the last few years, especially in 2021 and 2022, we start seeing currency market fluctuations, rising global interest rates, it does not make as much sense to borrow.

At the same time, China's supply of dollars really is not what it used to be. Now, China's current account surplus has rebounded significantly just in the last year or two. But of course, that has coincided with COVID, and they have their own domestic spending priorities right now. We will have to see if those things align as China reopens. And that is what I will be looking at, to see as China reopens, do they have an interest in pushing that money out the door? Or are they still needing to use it to help smooth out the reopening and their property sector, for example, domestically?

SP: That is really interesting, Becky, because you are absolutely right about the shrinkage in the current account. But 2018 was quite an abnormally low level at the USD 28 billion, and it bounced back to sort of USD 1 trillion dollars in 2019, and the best part of USD 2.5 trillion in 2020. And so, we are left with this situation where and of course, those numbers are augmented by capital inflows, right. So as the domestic capital markets opened up in China a bit more. China was able to induce foreigners to invest, which augmented the dollar availability for the Chinese to recycle out.

And what is quite noticeable, I think is, clearly, China's international balance sheet shape has changed very dramatically. Foreign exchange reserves are no longer predominant, international bank lending has taken a large share of it, along with FDI. But the overseas development finance side of it seems to have shrunk to a very, very small proportion. I think one of your key findings is that we are looking at about USD 10 billion of overseas financing. I cannot remember which two years that was for?

RR: 2020, and 2021 - so the two most intensive COVID years really bottomed out to these very low levels, as you said.

SP: But also, those were years of big capital inflows from markets and large current account surpluses. So you know, in fact, the best part of maybe USD 2 trillion was available to them to dispense. One of the things you seem to be saying, is that it is too soon to say?

RR: I do think it is too soon to say. There is another element too though that we have not mentioned, and that is part of development finance lays the groundwork for the private sector to have the incentive to invest. Right, a certain amount of infrastructure connectivity has to be there in order for it to make sense to invest. And we are now seeing Chinese firms having the experience in a variety of host countries to be able to invest directly more easily. I will give you an example. The East African crude oil pipeline, major investor is CNOOC, the China National overseas oil firm. It is I think, a 35% owner in that project. Now this is an oil pipeline project akin to the ones that China has financed for sovereign governments around the world. But at this point, CNOOC has been in Africa long enough it can just invest directly. There is no need for sovereign finance to go along with it. There is no need for countries to take on the debt. There is no need for concerns about corruption, about what is happening to the money, it can simply be an FDI project, because China has been there long enough to have that experience.

So, it does not necessarily signal an end to Chinese overseas engagement, but rather a maturing of the economic relationship, which is not really surprising. I, as an economist would expect to see sovereign finance for particular contracts, turn into mergers and acquisitions, or minority stakes and joint ventures where a Chinese firm may take on some of the business risk in the long term, but does not really need to have the understanding necessary to establish a company from the start, and then eventually mature into greenfield investment where the Chinese firm needs to understand the regulatory environment etc. to start something from scratch. So it is not surprising to me to see this transition of JV's with minority stakes from Chinese companies, as they are willing to take that risk. It might be less risky financially to have that equity stake, than to have debt, which a country may or may not be able to pay back, depending on what happens to currency markets, interest rates, etc.

SP: Yes, I mean that all makes perfect sense in terms of a sort of debt-for-equity swap going on with China's capital. But your specific database is obviously very much focused on the environmental impact, isn't it? And perhaps you would just like to tell our listeners a little bit about how you are measuring that, and what your observations are about Chinese development finance, when juxtaposed alongside Western institutions development finance, into how it is impacting the key areas that concern you?

RR: Sure, well because we have a precisely geo-located dataset, users can use it for all kinds of things. They can look at corruption, where the money is going; they can look at potential impacts with conflicts. What we look at it with is environmentally and socially sensitive territory globally, certain risk factors that have global definitions, so they mean exactly the same thing in Ecuador, as they do in Angola. There are three of those that are pretty widely used by analysts to look at general environmental and social risk factors. They do not cover all kinds of risks. But like I said, they are globally harmonised, so they mean the same thing everywhere and we can compare across contexts.

Those three are 'national protected areas', that is pretty straightforward; 'indigenous and tribal peoples' lands'; and 'critical habitats for biodiversity conservation'. These vary dramatically in the amount of kind of legal protection that host countries give them, but they occupy about the same percentage of the world's land. It is really interesting that Chinese money is going much more into the lands that are not legally protected - critical habitats - much more into critical habitats, than they are into protected areas, which of course, have host country regulations on them.

So, what does this tell us? This tells us that host countries do not need to be afraid of putting on their own environmental and social regulations scaring off any foreign capital. Sometimes the Western media has an idea that environmental and social protections will scare off foreign investors. But we do not really see that here, we see China money simply going into areas that are where the host country prioritises it. If the host country protects an area, the money is less likely to go into that area. If it is critical habitats, but it is not legally protected, it is more likely to get that Chinese money. So, it is up to host countries to set their own standards and to enforce their own standards, because that is how development finance works. Countries develop an idea, they develop a proposal, and then they take it to the bank, they shop around, they say "who wants to finance this project?" China is not imposing ideas on countries; they are taking applications, just like any other development finance outfit.

SO: So one of the things that you say in your findings is that there has been a change in the sector focus, and it is moving from extraction and pipelines towards transport and power. And so, one of the things setting the agenda for what we are trying to find out in What China Wants generally is looking at China's influence around the world. If you take that change in sectoral focus, first of all, why is that happening? And secondly, how does that impact China's influence, are the two things connected?

RR: So, let me start with the first point. As China's supply of dollars dwindled dramatically and their overseas development finance shrank so dramatically in those years between 2015 and 2018, after which it has basically stayed low. During those years, we see Chinese development finance really start to prioritise particular projects that they want to support, not just giving general purpose support. And so, if you think of the world's top five state-owned oil and gas companies that used to borrow from China; we are talking about Russia's Rosneft for example, Angola's Sonangol, and three state-owned oil companies in South America - in Brazil, Venezuela, Ecuador. These five companies together would be the top borrower from these development finance institutions in China if they were one country. So if these five firms were a country, they would borrow more than anybody else. But they have not had general purpose support from China since those boom years.

So, China is moving away from this kind of general purpose support for other state-owned enterprises, state to state financing this way. They do not do that anymore. Now they are funding target-specific projects, maybe a road, a railway, a dam, rather than "Venezuela, here's USD 5 billion, do with it as you will". And so this prioritisation of smaller, more targeted support for particular projects is part of what we hear from China analysts and from Western analysts who study China, they call it a "small is beautiful" framework, that we are going to pick out specific projects that we think are most likely to succeed, where our money is going to get the most utility, and stop pouring money into countries like Venezuela where they are not getting paid back., and the money is not going to anything particularly tangible.

As someone who thinks about sustainable development in the global development finance world, this is a good thing when it comes to better targeting the money towards projects that are actually building up public assets, public goods. However, of course, as the world faces climate change, we are going to need large projects that are also well-targeted. So the question in my mind is, "can China keep the beautiful part?" If it is someday not small, can it keep the beautiful part? Can it stay targeted towards environmentally and socially well-targeted projects, if it scales back up, again? Because regardless of where the money is coming from, the world is facing climate change and we are going to need big projects done well, in order to have just and inclusive and sustainable energy transitions around the world.

SO: Stewart, can I just bring you in on this because we are obviously fascinated on Chinese influence, and climate change is incredibly important. But it is difficult to see how China would want to break the habit of a lifetime and invest in climate change projects or any type of project without some kind of payback. But Stewart, just listening to what Becky is saying there, do you think that there is a change in mindset about the use of this development finance in the way that they try and spread their influence? Is there anything in the data that springs out to you as effective of a change in mindset? Or do you think it is the reasons that Becky is saying about the fact that they want to get the money back for a start as being more important?

SP: Well, I wonder if Becky hasn't hit the nail on the head when she was talking about the decline in development finance overall coming from China, and its shrinking proportion of overall capital exports from China, and the diminution in the amount of money going to state-owned oil companies and hydrocarbon projects generally, from the overseas development finance portion. What would be interesting to know is how much of that shortfall or fall in investment has been offset by FDI, or commercial bank lending to equally sensitive, potentially detrimental to the environment, projects, and so the funding has just come from other sources, for example. Because of course, what Becky's database here is tracking is very much just the development finance portion, which, as we have already ascertained, is a very small part of the capital outflows.

But I think when we look at the country breakdown, Becky has got some very interesting observations about that in terms of the bifurcation or not of the global economy along political alignment. Because I think I am right in saying, Becky, that one of your findings is actually that the vast majority of countries by number, actually are taking development financing, both from Western multilateral organisations, and from China in relatively equal portions. Is that correct?

RR: Absolutely. This is a story about finance ministries around the world with a portfolio of projects saying, "Who do we want to take each of these projects to?" World Bank, you are a shoo-in to say yes to a health or education project. You are going to say yes quickly, we are going to get that money quickly. Let's give you the health and education projects. But the World Bank may take two years to say yes to this road project, and we may have a change in government within the next two years, and our whole project portfolio is going to get thrown up in the air. Let's take that to China, because they will say yes next week.

To borrow a phrase from my friend and colleague Chris Humphrey in the UK, we see countries essentially "shopping for development", taking their shopping lists to different DFI's for different purposes. So while Western observers like to sometimes couch this in terms of a competition, I see no evidence for that, from the perspective of the borrowing countries who essentially want lending for health education and highways. And so, they are simply taking each of those projects to whoever will give them the fastest and best deal on those projects. Of course, as I am speaking to colleagues in the UK - of course, you know better than anybody how government spending priorities can shift with shifting executive branch personnel. And so, finance ministries have an incentive to push whoever the head of the executive branch, Prime Minister or President, whatever their priorities are, as quickly as possible through that process.

Now, from a sustainable development perspective, we might say, "You know what, we want this dam to last 100 years, maybe we should give it two years to make sure we are doing it right?" But that is not the political reality of how finance ministries get their infrastructure financed, they need shovels in the ground right away. And this is particularly true, as countries come out of COVID. We all know that infrastructure is one of the fastest ways to get an economy moving again, right? It has that high fiscal multiplier effect, meaning you put money into infrastructure, you get shovels in the ground right away; that turns into jobs, that turns into consumer spending faster and more effectively than just about any other kind of spending. So countries want that to happen quickly. The World Bank can do that very well. But it cannot do that very quickly. China can do that quickly. So we see countries saying yes to both just for different reasons.

SP: But is there also an element here of Chinese construction companies, largely state-owned enterprises, such as China Communication Construction, being able to take some of the value-added at least that the Chinese financing is creating, and extracting that because they are not having to operate under the same sort of restrictive practices that a Western engineering company would have to operate under, if they were to be financed or engaged in a project that was financed by a multilateral development bank. So there is this sort of asymmetry of requirements faced by Western engineering companies vis-a-vis Chinese ones, which means the Chinese package is very attractive to China, and that is why they are prepared to undertake it at a great speed, if you like.

RR: So national development banks in general, have an outbound financing strategy that involves boosting their own firms overseas. That is one of the main reasons they do what they do, right? We have export credit agencies like the US Export-Import bank, which exists specifically for that purpose. So yes, of course, that is a very important purpose of any bilateral development finance.

And here I am going to put on my Latin Americanist hat on for a moment and say, we have a recent book project called "Development Banks and Sustainability in the Andean Amazon", where we compare the Chinese DFI's to other DFI's, who finance infrastructure in the region, we really look at their environmental and social governance, and how it works out in the end. And what we found was before China showed up, Brazil's national development bank was the major lender to its neighbours for its neighbours to build infrastructure using Brazilian firms, so a very similar model to China. And well now every living and one now dead, Peruvian former president is either in jail or under investigation for a massive corruption scandal from that era. So national development, lending is really prone to corruption because it is meant to push the origin countries firms overseas, that is what it does.

And so, for countries that have really serious histories of corruption in this area, and here, again, I am thinking of Peru where I believe five or six former presidents are either in jail under investigation, and one having killed himself as authorities were closing in on him to arrest him because of the scandal, countries like that may want to look to co-finance projects between China and multilaterals, where there is an open bidding process, but they are really being able to harness China's interest in building up infrastructure and working together. So that is one of the reasons why it is useful to see where are the gaps from the World Bank? Where can Chinese financing fill in? And how can we best raise those standards so that it is not undercutting either on corruption or environment or social standards, the way national development finance, Chinese or otherwise, can do?

SO: Okay, Becky, just one last question, looking at the clock. You are sitting in America, obviously, but you have been giving a worldwide analysis of this. But if you were called in to see President Biden tomorrow, and he said to you, "Well, Becky, with your data, what would be your suggestion to us to basically push back on Chinese influence that they are gaining through this? How could we make a difference to American influence?" What would you say?

RR: Well, as Janet Yellen is in Africa right now, my Twitter feed is full of African analysts saying "Every time China visits, we get a railway. Every time America visits, we get a lecture." And unfortunately, we are seeing that pattern play out again. It is very clear from our data that developing countries don't want to choose between partners, but they have needs that are not being filled by existing development finance institutions. So that is where you need to be relevant. It is very clear why countries are going to China; they are going to China because they need infrastructure, they need connectivity, and they need investment.

So if you want the Partnership for Global Infrastructure and Investment (PGII) to be real, if you want it to be meaningful in your bilateral relations around the world, that is the space you need to be active in is coordinating policy investment and infrastructure in the way that the PGII hopefully promises to do. I hope that our work shows where there is a void that traditional Western development finance has not filled. A few episodes ago, you had on Eric Olander of the China Global South project, and I just want to underline something that he said. Countries are going to China for something they are not getting anywhere else. And if you want to be relevant, it is very clear that that is the gap, that there is more demand than supply right now, so step into that gap.

SO: Yes, I must say, some people disagree with Eric and because he has been slightly more problematic with America than others. But I am sure I speak for Stewart as well, we completely agree. We have said this many times on What China Wants. If we in the West want to push back on China's influence, then you have got to take into consideration what the world actually wants. And the world wants infrastructure, the world wants to be given connectivity, etc. And so it is very hard to see how that is a wrong message to be given. And if China is willing to do that, then that is something that's going to make China quite popular and spread its influence. It's as simple as that.

RR: Simple as that. Also, one more thing I'd like to add, if Joe Biden were listening, one more thing I would like to say is, we have just finished an era in which we had an unprecedented US Representative at the Head of the Inter-American Development Bank. That is the development bank that has always been led by a Latin American until the Donald Trump administration when he pushed through a US leader, and he pushed through a US leader with a very specific agenda of isolating China in a region that did not want to be asked to choose between China and the West.

I would say do the opposite of that, crowd-in Chinese money to multilaterals. Why? Because there is open bidding in multilaterals. What percentage of bids US firms win if they are not going through multilaterals, and they are just going through China - 0%. Of course, you do not win anything you cannot bid on. So why not have that money flow through multilaterals where you have a chance of bidding at it. And it has got to reach those environmental, social and transparency standards. Why not increase cooperation at those multilateral fora where you have a voice, your firms get to bid, there is harmonised agreed-upon standards. Chasing them out of multilateral fora is not going to reduce their influence; it is simply going to push it into bilateral directions, which is the opposite of what Western leaders say they want.

SO: Wise words. That is brilliant, Becky, very well said. Well, thank you so much for your time, that has been very illuminating indeed. And hopefully people, maybe not President Biden, but we know that a lot of policymakers listen to the podcast. And so hopefully, some of your wise words will be thought or ruminated on by those policymakers if we want to actually see a world where China's influence is not left unfettered through the development finance channel. So, thank you so much, and we will be back next week with some more What China Wants.

RR: Thank you so much, everyone. What a delightful conversation.

In today’s episode we interview Sarah Kirchberger, one of Germany’s and Europe’s leading experts on the Moscow-Beijing relationship, to tell us more.

(Sarah is the co-author of the recently published “Russia-China relations: emerging Alliance or eternal rivals?” and we make frequent reference to the book in the conversation below.)

Here is a summary of our discussion:

• There is no treaty between the countries, nor is the relationship based on commonalities of values or trust as with NATO; instead, it is an arrangement of interests.

• Russia and China, having fallen out in the 1960s, only really started to come back together in recent decades. Russia’s invasion of Georgia in 2008, it is argued, kickstarted the rapprochement as Moscow violated the (then) norm of not invading your neighbours.

• Russia needs China as it is now less integrated into the world economy; China needs Russia for its arms and hydrocarbons.

• India is in a position where it cannot break with Russia. If it did so, it would be to risk Moscow throwing its whole weight behind Beijing in an anti-Delhi pact.

• China may be trying to distance itself from the quagmire of Russia’s involvement in Ukraine, but Xi is still keen. As someone recently said, "There is really only one fan of Russia left in China right now. Unfortunately, he's very powerful".

• Western efforts to decouple Russia-China may have to wait until there is a change of leadership at the top of these nations.

You can also listen to the podcast on Apple, Amazon, or Spotify.

As always please do share, comment, and subscribe. We’ll be back soon with more What China Wants.

Many thanks for listening.

(In the meantime, if you would like more information about the Evenstar Institute and our research, then please email me sam.olsen@evenstarglobal.com)

***

Here is the transcript:

Sam Olsen: Hello and welcome back to What China Wants. As normal, we will start off with a little quote. "Putin's Russia and Xi's China can be seen as cyclists travelling in parallel on separate bikes, but on the same bumpy road of Via Anti-Americana." That was taken from a new book called "Russia-China Relations", which examines how and why Moscow and Beijing are now co-operating, something which obviously has come very much into like recently with the travails in Ukraine and the threat to Taiwan. To discuss this Stewart and I are joined today by one of the editors of that book, Sarah Kirchberger. Welcome, Sarah.

Sarah Kirchberger: Hi, Sam. Many thanks for the invitation to join you here.

SO: It is great to have you on. Now for those that do not know, Sarah is one of Germany's leading China experts. She is currently the head of Asia-Pacific Strategy and Security at the Institute for Security Policy at Kiel University. She is a Nonresident Senior Fellow at the Atlantic Council, and a Vice President of the German Maritime Institute. So quite busy these days, Sarah?

SK: Well yes, not least due to the war in Ukraine and everything it brings about, security specialists now have their hands full.

SO: Before we get started on the main meat of the of the conversation about Russia and China, would you say that the Ukraine War has actually changed the perception of security analysis and political analysis, especially regarding China in Germany?

SK: Yes, I would definitely say so. Some of our leading politicians have mentioned they felt that they were waking up in a different world. Security specialists, of course, they will say, in that case, you have been fast asleep during the years before. But yes, the general perception is that many people were taken by surprise. And this has, of course, led to an increased interest in security analysis, and a lot of activity on that front.

Unfortunately, Germany, the country where I am based - so I am not only German, I also have Finnish nationality - so I am connected to two different, you could say, 'security cultures'. Finland has a very different story, they have never been asleep. But in Germany, I can tell you, it is a very hard endeavour to try and get, in particular political decision makers, to pay attention to pressing security issues. Very often, the wishful thinking among parts of our political elites and the preconceived notions of how they want the world to be, tend to interfere with their ability to take in expert advice. I think the Russia situation, whether it is regarding Nord Stream, or whether it is regarding the Russia-China relationship, or whether it is Russia's intentions on Ukraine are all examples of that.

SO: Got it. Okay, well, to get things started, specifically around Russia-China, what is the score there? I mean, are Russia and China aligned? Are they allies? How do you actually define their current relationship? Maybe if you can add some historical comparisons to that, what do you think is the most relevant historical parallel? Would it be Germany and the Soviet Union post-World War One? Or is it America and the UK in World War Two? How do you define that relationship?

SK: Yes, thank you. That is an excellent question. It was actually the question that drove our work on this book, where we started from, because that was indeed difficult to say at the outset. What is this relationship really about? Is it just a partial relationship about particular interests where they converge, but in reality is there still the old enmity that we saw during the Cold War between the Soviet Union and China? Or is it something else, is it developing towards a treaty alliance even? So there was a broad spectrum of possibilities.

Actually, to clarify the situation and learn about the actual nature of this relationship? What we did was we conducted a research process over two years, convening a couple of expert workshops, where we brought together Russia experts, China experts, military experts, and also officials from NATO, and so on, to discuss the available empirical evidence of what is actually happening on the ground, where are China and Russia actually cooperating, and what is coming out of that cooperation. Because the problem with both governments is what they say publicly is not necessarily a good indicator of what is actually happening.

One can of course, look at the rhetoric level as well, how they themselves describe the bilateral relationship. So the latest description right before the outset of the war against Ukraine was a "friendship without boundaries" or a "limitless friendship". That was what Putin and Xi proclaimed in early February 2022. Leading up to that we had a couple of other statements by Putin and by Xi, and they seem to flirt with the notion that anything was possible that even a formal alliance would be possible.

However, looking at what is actually happening, we came to a couple of interesting, you could say diagnosis. So, one diagnosis is that the economic relationship between both countries has characteristics of you could say a synergy, because Russia is a country that, compared with China, economically speaking, relatively weak, so a relatively small national economy, that is mainly able to export two types of goods: arms technologies and hydrocarbons. Those happen to be particular products that China desperately needs and wants. So China is the largest market probably for both of these types of commodities that Russia is able to sell. So there was a natural synergy there. And also lack of capital for investments and all kinds of purposes in Russia, is something where China with its ability, at least before the pandemic and before the growth started to go down, able to promise a lot of investments and so on. So, there were natural synergies developing there.

But what interested me in particular was the arms trade. Because when you look at international relations, from this perspective, military technological cooperation, then you can see that actual alliance relationships are very often underpinned by great projects in that field. Because military-industrial relations is really a field that tells you what is the actual status of trust between two countries. It is very hard to sell advanced arms to a country that you consider not just a competitor, but maybe a possible attacker or aggressor at some point. There has been a lot of discussion of the past history of enmity between Russia and China, and the possibility that they could see each other still as a military threat.

SO: Well they did have that that skirmish in 1969, where I think a few hundred people died. That is obviously within close memory, what you are saying is that that has not really come between them, that recent history of military clashes, in terms of the exchange of military equipment?

SK: It did come between them for a long time. So actually, until the demise of the Soviet Union, there was very little going on in terms of good relations between Russia and China. And only after the Soviet Union came to its end, which coincided almost with the 1989 Tiananmen massacre when China's brief honeymoon in terms of military-industrial relations with the Western countries, including the United States, also came to an end. So China suddenly found itself in a situation where it was no longer able to import advanced arms from any of the partners of the United States, which it had relied on for about 10 years, up until that point. And suddenly, the Soviet Union ended and left several states, as you could say, years of the Soviet Union's military-industrial complex.

Of those, the most significant ones were Ukraine and Russia. China started to forge the military-industrial import relationship with both countries, with Ukraine and Russia, and started to import whatever they were willing at the time to export to China. Russia still was very wary of China at the time, and not willing to give China its most advanced arms. So that was a state of being that lasted, I would say, until roughly 2005 or 2008. So during that period, from 1992 to 2008, actually, Ukraine was more open to exporting advanced arms to China than Russia, Russia was still very cautious. And there were lots of problems where China reverse-engineered the arms that it had been given by Russia and industry experts saying, "they cannot be trusted, they are not good partners" and so on. Then something changed. And that was, I think, Russia's decision to invade Georgia, which so blatantly violate this norm.

SO: In 2008.

SK: Yes, in 2008. So this was the first moment I think, where Russia positioned itself towards this road of becoming very, anti-American, anti-Western and violating these norms of not invading your neighbouring countries. This was the moment when I think China as well, began to warm more towards Russia maybe. That was the start, and then they negotiated apparently, their remaining differences over the common border. There had been border disagreements, and in that year, they came to an agreement. This enabled both countries to withdraw large amounts of troops from their common border. This is one of the most important indicators of distrust or trust, if you think you might be attacked by your neighbour, you will have to fortify your border, right? If you feel that there is no threat coming from your neighbour, you can use those troops elsewhere. And this is what we saw, we saw that Russia and China stopped fortifying. Even the largest military exercise that Russia or the Soviet Union used to conduct was the Vostok exercise that was usually done with a view to China as a potential adversary. This is now an exercise that China regularly joins, so where China joins Russia, and no longer is the power that is exercised against. So this is this is one of the important indicators.

But then in 2014, the occupation of Crimea, that was really the watershed moment that changed this relationship, because from that moment on Russia had a little alternative than turning to China, because of all the sanctions, of course, that were levelled on Russia, and also because Russia had shown itself to be the aggressor against neighbouring country, again, in this case, Ukraine. China, for some reason, probably had not the same qualms about that, and also maybe with a view to Taiwan, maybe with a view to saying, "Okay, we also have territorial claims that we want to maybe at one point follow through on and if we support Russia now, we can perhaps count on Russia's support later". So that may have been one of the reasons for China to warm to Russia.

But in any case, Xi Jinping and Putin both have been in power since about 2012. So that was also maybe one of the factors that drove the closeness between Russia and China, these two leaders being sort of on the same page, in their opposition to the West, the political West. And so, yes, the invasion of Ukraine, and 2014, and the occupation of Crimea, they really brought about a massive change. And from then on, we can see Putin and Xi both taking charge and ordering, you could say, the rest of the country to fall in line and start supporting this partnership with the other country.

Stewart Paterson: So Sarah, you seem to be painting a picture of really quite a deep level of trust developing between the two of them. Do you see the dynamics of the bilateral relationship being a basis for a broader coalition of authoritarian states? We are hearing more and more about Iranian weaponry being used in Ukraine. And so do you see this sort of bonding between China and Russia as forming the sort of kernel of a broader alliance, with bigger implications than just the bilateral relationship?

SK: Well, Stewart, I think this question can be tied back to something that Sam asked about, the nature of this relationship. So far, we have seen empirical evidence of coordinated action and reduced perceptions of mutual threat. But what does this mean? Is this really trust? Is this really something akin to what, for instance, the United States and Britain experienced during past wars? Is this because it's a Treaty Alliance? Is this something that could be enlarged to incorporate other countries as well, like NATO? So I would say no, it's not something that resembles a Treaty Alliance based on actual trust and friendship, or commonality of values like, for instance, NATO, I do not think that would be a good comparison. It is also questionable how far authoritarian countries of this type, Russia and People's Republic of China, are even capable of trusting another power in that sense. So authoritarian countries of this type, in particular post-Communist countries, Leninist countries, trust is not really a category of political life there at all. Not even within the country. Would you say that there are political figures in China that really trust some of their colleagues? Maybe there are a couple, but I would say trust is generally absent from the political life in both of these countries. So I would not expect actually, China and Russia to develop in that sense, the trust that is based on respect for common values.

But they do have interests in common. And these types of countries, they really go about pursuing their interests in a very hard-nosed way. So I don't see a Treaty Alliance coming because a treaty in that sense is also an obligation to follow through whatever you promised to do in a treaty. It is also something that relies on the notion that treaties are inviolable, and have to be adhered to. And I do not see that in either Russia or China, that law is regarded as being on that level of inviolability. I don't see that, I think neither China nor Russia will respect any treaty that they signed, if it is not in their interest to respect the treaty. So we have seen it multiple times, violations of that sort. But what we see is we see a relationship that has maybe something in common with authoritarian countries cooperating sometimes only for short term common interests. The most notorious example would, of course, be the Hitler-Stalin pact in well, 1939 that basically started World War Two, where two countries that most certainly did not trust each other, however, agreed to common goals, leaving each other alone and giving each other licence to do in their own backyard, whatever they deem necessary. We know that this was a very, very short-lasting agreement, and in the end, Germany turned on Russia. But nevertheless, it created havoc, it started a war that cost the lives of tens of millions of people. And so in that sense, I think asking whether it is going to be like NATO is maybe the wrong question to ask. The right question to ask is perhaps rather, how far could even short-term co-operation go? And how dangerous could the ensuing situations be?

SP: So maybe then we should just focus in a little bit on where the commonality of interests are, and what the limits of those interests, the commonality of those interests are, where they start to diverge? Which would then lead us on to perhaps a discussion about what the West could do or ought to do, if anything, to try and highlight the divergence of interests?

SK: Yes, absolutely. I agree. It is important to note that there are differences between both countries, in terms of for instance, their exposure to trade. Russia is a country that has now basically become completely dependent on China as an economic partner because Russia is not as integrated into world trade. It used to be a major supplier of hydrocarbons, but by its own actions, it has now become harder and harder for other countries to import Russian oil and gas, and so on. So Russia is is becoming more and more restricted in its choice of partners there. Whereas China is a country that is hugely reliant on economic exchanges with the outside world, even though China has been trying to become less dependent and strengthening its own autarky through this dual circulation strategy, and so on. But still, for China, it is hard to see how a country that is reliant, for instance, on food imports, and energy imports, and technology imports could completely cut itself off from these dependencies, that is hard to see right now. So, there are levers that the rest of the world can use to show both of these countries that the way forward, it is maybe a better idea to stop the threatening behaviour, to stop the aggressions against neighbouring countries and start orienting themselves more towards what most of the rest of the world, consider civilised behaviour.

SO: Well, actually, on that point, you say "most of the rest of the world". One of the things that I saw in your book is something that we at the Evenstar Institute have been looking at too, which is the commonality of voting patterns from the rest of the world in support of either Russian or Chinese or both motions, at the United Nations and other inter-governmental bodies. And what it does look like is that the world has split into three. You have got the Western bloc and the Western alliance, which includes Japan and South Korea, of course. And you have got Russia, China and Iran and Venezuela and maybe Bolivia and a few others like that. And then you have got a huge number of countries which are non-aligned. I suppose, how does this alignment between Russia and China - this alliance or whatever word we want to use - how is that attractive or not attractive to the third of the world which is currently non-aligned between these blocs?

SK: Thank you, Sam. Yes, that is indeed a big question because some parts of the world such as Africa, they have a huge amount of countries and huge amount of votes in the United Nations, and are not necessarily in either of these camps. It is not maybe in their interests to be in either of these camps, strictly speaking, it is true. So that chapter, you are referring to by Olaf Wientzek, who was working in Geneva, and is one of the people looking regularly at voting patterns, shows that there has been difficulties getting some of the countries for instance, in Sub-Saharan Africa and other parts of the world on board. Also India, one of the major examples, a country that is hugely reliant on Russia as a supplier of not just hydrocarbons, but also arms technologies, because the Indian armed forces have been built up for decades relying on Russian arms technology. So the dependencies that come from that in terms of needing you know, supplies of spares and maintenance services, and so on, they are huge. You cannot just from one day to the other decide to switch your supplier. If you have your whole fleet of naval vessels or your tanks sourced from one country, then you are basically stuck with that for quite a while.

India is definitely in that situation where they cannot really afford to break relations with Russia, or offend Russia really, really badly. At the same time, India has a big problem with China, and they had these border clashes recently, or are still having them actually. India feels very much under threat from China, also from China's intimate relationship with Pakistan. So, from India's point of view, balancing China also requires keeping that Russia relationship alive in order to keep Russia from throwing its weight behind China against India. That would be a horror scenario, from India's point of view. So every country that deals with both of these powers has such types of considerations going on. So it is a little bit hard to demand from a country that is not in similar position to ask a country for instance, like India, to throw everything overboard and neglect its own national interests, its own security interests and throw its vote in with a camp, such as the Western camp in the Ukraine war. I do understand the Indian considerations.

However, that does not mean if you talk to some of these diplomats from some of these countries, Vietnam would be another country with strong historical ties to Russia. I recently visited Vietnam, and it was striking to hear diplomats and experts from Vietnam talk about that Ukraine war situation, because Vietnam is actually a country that has fought wars, with every member of the UN Security Council except Russia. Russia has always been a good friend to Vietnam, and that means something to a country like Vietnam. They have fought the United States, China, France and Britain in their colonial wars. And then the latest was the war with China when China invaded Vietnam in the late 1970s. So for them, Russia has always been the stable partner compared with everyone else. But even the Vietnamese counterparts I talked with indicated that while they have to publicly, sort of not throw Russia under the bus at least, privately they were very critical of Russia's war against Ukraine, very critical. So what I expect to see is that a lot of the countries that did not vote with the Western camp to condemn Russia on Ukraine, however, privately, probably still, many of them disagree with the war and maybe privately communicate to Russia their concerns. We have seen evidence of that even publicly when Modi said something to that effect at the SCO summit in Samerkand.

SP: Sarah, so that is really interesting, what you are saying about India and Vietnam. But one of the recurring themes seems to be that a lot of Russia's influence into the global south and the sort of non-aligned movement broadly, stems from their armaments exports and the dependency that countries have on Russian military technology. To what extent do you think the reputation of the quality of that armaments industry has been damaged by the progress of the Ukrainian war as we are seeing it play out?

SK: Well, I would expect that the reputation of Russia as not just a military superpower, but also a prime supplier of arms has really, really suffered. It has taken a hit without a doubt. So I have personally heard such statements, for instance, from Indian diplomats who said that "yes, we know we have to sort of get rid of this equipment and get something better because of our own interest in having good arms". It is just not something you can do very quickly or very easily. But I think many other countries are in the same camp, they will say "okay, these systems are not nearly as good as we thought, and Russia is not nearly as good a partner as we thought". I think a lot of the countries in the global south, they may have also been tired of being lectured about democracy and human rights. This is also something where Russia and China both held an attraction to some of the countries by signalling that "we are not going to criticise you for authoritarian behaviour, we are not going to interfere with your "internal affairs" as it is called. However, now seeing the violent expression of such authoritarian behaviour and the suffering it brings to neighbouring countries may also lead to reconsiderations of this rejection of human rights and so-called "Western values". So that is what I expect to see, a really big damage to Russia's reputation.

I think China actually also is now trying to shield itself a little bit from the fallout of this disastrous war against Ukraine, you can see that a lot of Chinese are uneasy about this alignment with Russia. So I have heard interesting statements from Chinese interlocutors who said "that there is really only one fan of Russia left in China right now. Unfortunately, he's very powerful". That is what one of them said. I am not sure, that may be an exaggeration of course, but we know that the Vice Premier in charge of Russia Affairs has been fired from that job and transferred to a totally different occupation in the broadcasting system. He was considered one of the people who was behind this, Russia-China partnership, and Xi Jinping does not seem to have been very satisfied with the Russia advice he got, at some point during the war. So, when the war began to turn bad for Russia, in the summer, for instance, or when the counter-offensive started

SO: Day four you mean!

SK: Day four already was probably a shock. I mean, when the when the Ukrainians really began to go onto the offensive, and really, it looks like Russia may now actually be losing the war, something that many people did not expect to happen. So this is a point where Xi Jinping needs to consider the damage to his own reputation, to his own judgement, in terms of throwing his lot in with a loser, basically, looking bad from this association.

SO: On that note, and just to finish things off, it looks like there are not that many people potentially in China, who are fans of this relationship, this alliance, whatever. Do you think because of the war in Ukraine, and the way that has gone for Russia, is there scope for the West to interfere in this Russia-China relationship and to perhaps peel one side off from the other? Or do you think they have made their bed and they are going to lie in them whatever happens?

SK: Well, I think as long as Xi Jinping and Putin both remain in power, it is going to be very hard to pry one way from the other because of this close alignment of their personal worldviews and personal interests. And it is not going to be easy. However, seeing the Chinese hesitation in throwing its lot fully behind Russia right now, because no doubt of the failures of the Russian strategy, this is maybe an opportunity to signal to China, there is a way forward for you that is different than what Putin has chosen for his country. So do not go down the same road. So one could use the warning of these, strategic miscalculations that Putin conducted to put out incentives towards Xi Jinping, and try and get China back on track being a good citizen of the world. I think this is actually what the German Chancellor Olaf Scholtz has been trying to do in his talks with Chinese counterparts, trying to tell them "do not think that you would be treated differently than Putin if you were going after Taiwan for instance". So this is one of the things that Western countries can right now do, signalling to China the dangers of taking violence to a level, like Putin. But I think for a true, you know, prying away both countries from each other, we need to wait really for a situation where there is different leadership in either one or both of these countries, when other constituencies within these countries come to power, and maybe begin to seriously reconsider their interests and national interests, long-term, and coexisting with the rest of the world. I do not see that happening, frankly, as long as we have the current two leaders in power.

SO: Well, on that depressing note, thank you so much for your time, Sarah. The book, "Russia-China relations: emerging Alliance or eternal rivals?" is now out. I thoroughly recommend it to anyone that is interested in in what Russia and China are doing with each other. Sarah, thank you so much, and Stewart and I will be back next week for more What China Wants.

SK: Thank you so much, Sam and Stewart for this fantastic opportunity. Thank you.

SP: Thank you, Sarah.

For anyone who has spent time in China, or amongst Chinese people wherever they are, Chinese New Year is by far the biggest celebration.

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As we move from the year of the tiger to the year of the rabbit, we are joined by friend of the show Professor Jinghan Zeng of Lancaster University to explain a bit more about CNY. We delve into the cultural realities of celebrating it, and hear what the event was like for him growing up in China.

Here is a summary of our discussion:

• On the folkloric origins of Chinese New Year

• Why small oranges or clementines are useful

• How normal families in China spend the holiday

• Discussing the largest human migration on Earth (at least, pre-COVID)

You can also listen to the podcast on Apple, Amazon, or Spotify.

As always please do share, comment, and subscribe. We’ll be back soon with more What China Wants.

Many thanks for listening.

(In the meantime, if you would like more information about the Evenstar Institute and our research, then please email me sam.olsen@evenstarglobal.com)

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Here is the transcript:

Sam Olsen: Hello, and welcome back to What China Wants with me, Sam Olsen and Stewart Paterson of course. Today we are going to be talking about Chinese New Year. Now, despite it being perhaps the largest ceremony or festival in the world, it is really not very well known in the West, or the intricacies and the practices and the folklore, which is really interesting.

And so we thought that it would be fantastic to get back on the show someone that you would have last heard, speaking to What China Wants in October, when we were discussing the 20th National Congress of the Communist Party of China. And that is Professor Zeng from Lancaster University. He is the Chair in China and International Studies, and the Academic Director of China Engagement there, and, of course, someone that knows a lot about Chinese New Year. Welcome back JH, and thank you very much for being with us.

Jinghan Zeng: Thanks for having me.

SO: So, to get things started, why is Chinese New Year so important to Chinese people? And what is the cultural context and historical significance of it?

JZ: Well, Chinese New Year is the most important festival for China. I think the most important part is family reunion, that is the time that people gather together, and try to remove the bad and the old, and welcome the new and the good. So it is very important in the Chinese culture and country back to 3,500 years ago. There is a long historical origin about it, different kinds of history, different kinds of historical stories about the Chinese New Year, and one of the most popular versions of it, we refer back then to the beast of Xi who used to eat livestock, crops, or even people on the eve of a new year.

To prevent this beast from attacking people and create distractions, people will put the food at their doors to prevent the destruction. And then, back then there is a wise man in different versions of the story. Some stories mention this is a young boy and in some versions this is an old man, who has figured out a way to scare this beast away, which is a by loud noise, which can be created by firecrackers and the colour of red. Starting then, people will start to put red lanterns and red scrolls on their windows and doors to stop the beast Xi from coming inside. And they also used cracked bamboo, later replaced by the firecrackers to scare Xi away. The story ends that the monster never showed up again after you do that. And a similar story in another version, in which the beast is called Nian, but it's a similar story. If you go back to that history, that is why people like red colours, because they believe that the red colour will scare that beast away, as will the red lantern and firecracker; all of that were designed, and can be traced back to your stories.

Stewart Paterson: That is really interesting. One of the sort of iconographies of Chinese view that I am reasonably familiar with is the clementines or small oranges. You often see those around as a sort of Chinese New Year decorations. Is there any great significance to that, or do they just happen to be in season at the time, and therefore they have come to be a part of the festivities?

JZ: Right. Okay, so when I was young, I liked that a lot. Where I am from, in the southwest part of China, the small orange, if you cut it well, it can be used and be made into a lamp and you put a small little candle inside of it, then a small orange can be made into a little lamp, and that is something that kids like very much. When I was young, I always asked my parents to buy a lot of oranges, not because I liked to eat it, I just liked to cut it - and you know, you are going to have a lot of failures before you can make a successful one. So you will end up with a lot of uneaten oranges with lots of failed products. So yes, and also the colour as well, if you put a candle in, it looks very nice actually.

SP: So obviously, the timing of Chinese New Year, because it is a Lunar New Year, in terms of our own calendar, a Western calendar, it is at a slightly different time each year, from late January to early February depending how it falls. But, in everyday life in China, how significant is the lunar calendar vis-a-vis a sort of Western calendar? Or is that, in fact, in China, not even a Western calendar, it is just an alternative calendar that is separate from the lunar calendar? Does the lunar year as it were, penetrate into other areas of life other than the timing of holidays?

JZ: Well, I think there is a generational gap there. So in my generation, for example, at least all the people I work with, most of them probably, we do not rely on the lunar calendar that much. But in my parents' generation and my grandparents' generation, they rely on it very much and there is a special calendar which will be displayed at home, and they will check in on that calendar. And obviously, the reason for the generational gap, if you go back to where it all come from, in ancient times, I think it is not only China, I think in Asia, generally-speaking, they pay a lot of attention to this lunar calendar because of this cultural society phenomena back then.

The calendar was used to guide the agriculture affairs and farming activities, because it is able to divide the year into 24 solar terms. Those terms can reflect the change of season, and, in a very good way they are very accurate in predicting the change of temperature, the light times, and harvest times of crops or even insect activities. So because of that, I think that was a tradition of why it gradually evolved to today. And in some rural areas, I think there will be a lot more people paying attention to this lunar calendar than those in urban areas, because that is relevant.

Also there is this generational gap. So in my generation, for example, we rarely use it. But in my parents' generation, they use it a lot. And in China, they sell that special calendar which you can take home, and it will tell you what day it is today in the lunar calendar, and they will often go with something like 'what you should do', or 'what is better to do today', or 'what not to do today'. So I think the generational gaps matters a lot here.

SP: And just one more follow up question on that which springs to mind obviously, is in terms of year numberings. We refer to next year as being '2023', that sort of 'AD'. How have the Chinese traditionally numbered their years, in reference to what, as is it were? Has it usually been in terms of the reign of a monarch or an emperor or how else have years historically been numbered?

JZ: Historically, I think there will be an emperor there, for example, Qianlong 'however many years' or Shunzhi 'what year', and when you got a new emperor coming in, or the new emperor wants to change that they will do it. Even in Taiwan nowadays, I think when the Republic of China was created, that's become 'Republican year' in Taiwan, nowadays, they will say it's 'Minguo' 'how many years' so they still use it.

But in mainland China, I do not think we use it that much. And every year we call we just refer to 'this year is 2022, next year is 2023'. But sometimes people will use the animal year, for example, next year is the year of Rabbit, but we no longer use it in a traditional way that we call it starting with Emperor and then the date, and it is also a different way we are using it now from Taiwan.

SO: So talking of rabbits, for those people that might not know, the Chinese New Year every year is a different animal as per the Chinese zodiac. So, JH, do you want to just tell the listeners a little bit about what the Chinese zodiac is? And as we are going into the year of the rabbit, what that means and the historical, perhaps or mythological origin of all that?

JZ: Yes, well there are 12 animals actually, in Zodiac years, and there is also an order to it, starting from number one, Rat, it goes Ox, Tiger, Rabbit, Dragon, Snake, Horse, Goat, Monkey, Rooster, Dog, and Pig. So, rabbit is the fourth one, and usually, the Rabbit stands for mercy, elegance and beauty. It was believed that people born in a year of the Rabbit, are calm and peaceful. They tend to avoid fighting and arguing at all times, but had an artistic or good taste in life. Well, that is what is supposed to be, I was born in the Year of Rabbit so I am not sure whether that fits exactly.

SO: Are you more on the elegant side, or which is the characteristic that suits you best?

JZ: I am not sure whether I can fit in that category. But I think that's genuinely the label, people will say "okay, if you are from the year Rabbit, that is you, and if you were born in the Year of Tiger, that's it". Obviously, there is a long historical story about Rabbit and Ox's race and telling you that back then when 12 different animals started to run, and how each one of them gets their roles from numbers one, two, three, four, etc. There was also a story that the Cat wanted to join in with this group of animals, but failed to get into it. So you cannot go to a Cat then in that 12 year cycle. So there was a long historical context of it...

SO: And we were talking earlier about Nian and something that people might know is that the animal she is, she is the Chinese word for year. Chinese New Year is full of imagery and language, which is very much reflected in the broader Chinese culture. You have mentioned it being sort of the biggest festival of the Chinese people. But it always seems to me as an outsider that the Chinese New Year is one of those things that really does bring different peoples and the different ethnic groups and everyone across China together.

Would you say that Chinese New Year has got a unifying purpose, a unifying mission for the people of China? And if so, how has it changed its relationship with the authorities over the period of time from when China was an empire, to the period of time as that sort of 'normal Republic' or 'split Republic', and then into the into the Communist period, has Chinese New Year's relationship with the people in the view of authorities changed? Or has it always been that unifying presence?

JZ: First of all, Chinese New Year is not only celebrated in China, it has been celebrated in other countries like Korea, like Vietnam as well. At the same time when you have a large Chinese population, they will celebrate the Chinese New Year as well; for example, in Singapore, Cambodia, Malaysia, Indonesia, Thailand, Myanmar, the Philippines, even in some parts of Canada, they will celebrate it where they have a large Chinese population. Because of that, in some places, for example, there is a view that it should not be called Chinese New Year. For example, a lot of people in Korea believe it should not be called Chinese New Year, it should be called Lunar New Year because they celebrate it as well.

I think there is a cultural context of that, obviously, but if you go back to the history, you will find that Korea was a tributary state of China, in which they identify themselves in many ways in the Chinese hierarchy of the global order. So, there is a long history of it. But I would not say there is one single unified way or understanding of the Chinese New Year, even in different parts of China, I think people celebrate Chinese New Year very differently. And the concept and understanding of China, where China comes from and what China stands for is also different at different times as well. So the power relation, I think it has always been less about national state, but more about civilisation, it is about people's culture, people's language and those things are also a dynamic as well.

SP: One of the things that people will be wondering about this particular Chinese New Year is actually how widely it will be celebrated in the mainland? And will people travel in the numbers that they have historically travelled? Obviously, the COVID years were an aberration in terms of that, because it's the sort of largest migration on Earth, isn't it when, you know, urban workers go back to the countryside to meet up with their families? How do you see that panning out this year in the light of the sort of abandonment of zero-COVID restrictions and the consequent spread of the disease? Do you have any thoughts on that?

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JZ: Well, I think it is going to be very complicated. In the past, if you go back, I think you are right to say this probably is the biggest human migration before the pandemic. For example, in 2019, there was recording that in the Chinese New Year celebration, 15 days, it involves 3 billion trips in transportation, including 400 million trips by railway. So that is really something significant in terms of scale. That is a moment when people return home to meet their families. This is why a lot of people, for example, working in Beijing working in Shanghai were returning to their homes, and to meet their family, this is significant.

In the past two years or so, even in 2020 I think the lockdown happened after the human migration. I think it is going to be a very different kind of Chinese New Year for the Chinese people. The estimates are that the peak time of COVID spread in China is going to come in a few months' time, and it is estimated that this human migration in Chinese we call 'Chūnyùn', transportation during Chinese New Year, is going to significantly escalate the spread of virus in China.

So I think for the Chinese people, what has been happening now in terms COVID has been putting a big shadow on the Chinese New Year. We usually want to get rid of the old, the bad, and we welcome the new and the good. I think it is putting everything in the shadow because we all know that it is not going to get away so easily. And when we gather, we are gathering to celebrate, and you know, be in a very positive mood, but I think this Chinese New Year is going to be different because of that COVID situation.

A lot of my friends back in China have recently got COVID. This is something quite significant that they have never heard of, and the hospital is in serious problems as well. So basically, it is back in 2020 time of the United Kingdom, the first wave of COVID, and that is something very serious. And I recall that at that time, the first Christmas, there was a big debate in the UK about "who dares to steal our Christmas?" And "how can you do this kind of thing?" It is the same thing in China as well, because Chinese New Year is so important. And now with all the things I think it is going to produce very complicated feelings about it.

SO: Okay, so let us just assume for a second that we are in a pre-COVID year, and you have arrived back home. And you said you are from the southwest of China. So obviously, there are regional variations, as you just mentioned, but you arrive back home, and you are seeing your family, tell us what you do. How do you celebrate the actual event? What food do you have? Do you give each other presents? How do you go about enjoying the time?

JZ: So I just want to emphasise that different parts of China have different ways of celebrating it. I am from the southwest, a city called Chongqing. So, the memory of that is different, I think. So usually what we do is we have dinner together as a family. Usually we start with lunch, and some family activity, and then dinner. And that is where you meet your relatives and all those other relatives in the family. In my city where I am from, what we like to do is I wouldn't call it a gambling activity, but it is something we call the mah-jong which you have got four of us and we just play together. So that is very popular in the place where I am from and people in Sichuan, we always play that. That is our opportunity that you play with a family so adults will be doing it, and younger kids will either be watching TV or playing outside. We would have firecrackers, but it is different now, because of the environmental pollution, I think it has been changing the way people perceive Chinese New Year.

When I was young, we would do the firecrackers everywhere, and you would buy a lot of that and play it. And you will put the new clothes on and you would eat a lot of good things. But in my generation, I think the understanding of that is different because in my generation China has already had - I think since the older generation, the economic growth has become very rapid and people's material, people have enough. Living standards were different in my parents' generation, and the Chinese New Year matters a lot more probably than for my generation because back then you do not really have enough / good food to eat, you do not always have new clothes that you can buy at any time. So back then the Chinese New Year is once a year's time that you will be able to get new clothes, you will be able to eat whatever you want to eat, and they do not usually have that luxury in the rest of the year.

That is different from my generation because in my generation ever since China's reform and opening up, I think that significantly really provided a large amount of material goods and people's living standards are very different now. People started to buy computers, clothes and cars and bigger houses. So new clothes is no longer something you will save up only for the festival, you can just buy it. If you want to eat something, just go to a restaurant. It is no longer like in my parents' generation you will just save up this money or save other good things to wait for a special occasion to do it. So that perception of Chinese New Year is different

In the past one of the most popular activities is we will be sitting together to watch the CCTV gala which is a Chinese television gala show. Back then, I think there was not much entertainment activities, not like today where you have got computers, you can watch a movie or you can go on your iPhone and you can watch on your Tiktok, you have so many programmes you watch too. Back then you only have one single programme in a TV and probably not everybody has a TV in a rural area. So the entire village, people will be gathering together to who has a TV and sit there from 6pm to 12 o'clock, watch the entire programme, the TV gala, and at the same time chatting with each other. It is like, I think, in the UK, people gather together in a bar or in the pub and watch the World Cup, it seems like that.

But back then you do not have much choice. It is like you can watch this programme or that programme - no, you only have one single programme. So back then that was a lot more important, but now, I think it is very different. I think the older I grew up, the less people like the TV gala, but back then it was a big thing because now we have so many programmes, different Chinese television have their own TV gala, or Chinese New Year, you have so many options. So ,the options have become a lot more diversified in the way you celebrate Chinese New Year.

SO: Stewart, I am sure you were in a similar boat to me, but one of the things I remember about it, especially living in Hong Kong, was the terror associated with the presents having to be given at Chinese New Year which in Hong Kong are 'Lai See', but obviously in the rest of China are 'hóngbāo', the red packets of cash, and never knowing how much you are meant to give, or who you are meant to give it to. So how do you get it right?

SP: I am sure with children it is the quantity that matters, but the notes are meant to be brand new, I think that is an important part of it?

SO: And they always ran out of brand new notes just before, so you had to go in like months before to make sure you got the brand new notes, it was just always the faux pas thing.

SP: I think it is all electronic now. With Alibaba, you can have electronic Lai See notes where you do not have to worry too much about the age of the notes.

JZ: Yes, yes, I think that is one thing I forgot, probably made me most excited when I was a child. So I think there are different rules, but in my family, the rule is that as long as you have not got a job yet, as long as you do not get job, you are entitled to the rights of that red envelope. So that would mean that I can still get it when I was, for example, doing a PhD, which I didn't, but theoretically-speaking, I was entitled you. But I did not because I was in the UK not able to fly back to China to do that.

But yes, that is something very exciting that children can get some money, but most of it, you cannot keep it because you are not capable of doing it. Now I recall that when I was five or six, people gave me some money, and in an hour or so I forgot where did it go. So, at least my parents, I think a lot probably will be the same as well, they would say "We will keep it for you. We will just keep it for you."

SO: That old chestnut!

JZ: Yes, you do not have it and a few years later, we will have forgotten anything. But you can use some part of it to buy some new toys, which are nice and I like it. Regarding how much, okay, I think it depends, and also depends on the quantity as well. It is also about the exchange. For example, my parents will give a few envelopes to other kids and their parents will give it to me as well. So ultimately, theoretically-speaking, the game is supposed to be breaking even. So how much money you get out and how much money comes in supposed to break even. And the idea of that is to give an envelope, which is a red envelope, which will bring luck to the children; the children get it and will get some luck and they will grow healthy.

So ultimately, it is less about quantity, it is about breaking even for the parents. Practically it is always impossible to break even, but the big numbers was always roughly the same because you know how much they will give you and how much you will be giving them. And also, where I grew up, in the city of Chongqing, we always have one child. So that leaves the complexion of someone having two or three children and give us two or three red envelopes but they will give you one back. What this means is that all that is less of a problem at least as far as I know. I think the rising living standards and inflation, the expectation will go up as well. So, the expectation will always go up, so some of it is adjustable.

SO: Well, I know my kids, the one thing they miss about Chinese New Year being in the UK, is the fact that no one gives them any red packets anymore. Maybe that is something that we should change here.

SP: JH thank you so much for joining us and helping our audience understand Chinese New Year a bit better so that they can enjoy the Chinese New Year celebrations themselves with an understanding of what it all means. So thank you very much, and we look forward to having you back on the show in the near future.

JZ: Thank you for having me.

SO: Great. Happy Chinese New Year, bye.

JH: Bye. Thank you, thank you all.

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Here is a summary of our discussion:

• 2022 was in many ways difficult for China. Its economy spluttered, there were protests against zero-COVID and Xi Jinping himself, and Beijing was demonised by many for its tacit support of the invasion of Ukraine.

• Relations with the West declined further too, with the US passing more legislation to contain China, and spats with Eastern Europe.

• It was also the year that Xi Jinping cemented his rule as the most authoritative leader since Mao.

• 2023 will likely be the year that China re-emerges into the world, although how successful their re-engagement will be (especially with the Global South) depends on what countries think of their tacit support for Russia in Ukraine and the state of the Chinese economy. Some countries, like Zimbabwe, have brought in legislation that can be seen as restricting China’s influence.

• In terms of the economy, 2023 will be a year of adjustment post-zero-COVID and will reveal if there is any long-term damage to the economy.

You can also listen to the podcast on Apple, Amazon, or Spotify.

As always please do share, comment, and subscribe. We’ll be back soon with more What China Wants.

Many thanks for listening.

(In the meantime, if you would like more information about the Evenstar Institute and our research, then please email me sam.olsen@evenstarglobal.com)

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Here is the transcript:

Stewart Paterson: Hello, and welcome back to What China Wants with me, Stewart Paterson, and Sam Olsen. Today we are going to review 2022 as a year in China, and look forward a bit to what we might expect in 2023. Clearly, it has been a very eventful year in 2022, with multiple contenders for the most impactful events. Sam, from a political point of view in China, what do you think the most important events of 2022 were? And how are they likely to carry forward into the coming year?

Sam Olsen: Hello Stewart. Yes, as you say, there are a great deal of news stories that came out in last year, which could make the top three, top five or top 20 in terms of important announcements or activities. But I think that if you could split it into the most important in the short term, and then perhaps most important in the long term, short term definitely was the zero COVID abandonment, and the fact that China is now opening up to the world again.

It is hard to remember before three or four years ago when COVID struck, China was really opening up more and more to the world. As you know, I am sure you can talk about this at some point, China was doing more to attract Wall Street and the city, and there were lots of people who were thinking more in terms of Chinese investment in the UK and elsewhere. But in the last few years, most things have gone on to heavily reverse, and what we have now is a situation where China is basically cut off from the rest of the world and keeping its people very much locked down, all of which is changing now.

So first of all, I think that we might see a lot of pent-up demand from Chinese tourists and Chinese outward-bound businessmen and women, that would probably be quite a thing in 2023. But also China is going to start actively re-engaging with the world diplomatically, politically, militarily, much more than it has done in the last few years. I think that new areas of competition or dispute will arise between China and the West as China does assert itself more on the global stage after COVID.

SP: Sam, just on the opening up again, and the Chinese tourism, China might want to open up its borders to let its citizens travel again, and let those returnees who want to come back to visit family or what have you travel. But the rest of world seems to be pushing back a bit against that, isn't it? I mean, the idea that this is a unilateral decision which the Chinese seem to assume, is quite telling, isn't it?

SO: Yes, but I think that the issue that people are seeing about Chinese people coming over around COVID, that is not something that is going to last for more than a few months, I do not think, unless things go really badly wrong with the healthcare system in China. But I think that outside of Western Europe and North America and Australia, perhaps Japan and Korea, the Western alliance as we like to call it, there is an awful lot of appetite for Chinese visitors to come back, because bear in mind that that means that they will bring money with them in the form of tourism, they will bring investment with them in form of businessmen and women. There are a lot of countries in the world who want to actually engage with China and feel that they have been cut off from China in the last few years. So, I think we will see a resurgence in Chinese political, diplomatic activity and business activity over the next 12 months.

But in terms of the economic side, maybe this is a chance for me to ask you Stewart before we go back to the longer term political stuff that I would like to talk about. In the short term, economically, how is China doing? Are we looking at a thriving economy and is 2023 going to be even better?

SP: Well, 2022 has been a disaster really economically for China. If we look at some of the numbers, corporate profits in nominal terms are down about 4% through to November, but that hides the fact that obviously it was a boom year for energy and some mining companies because of commodity prices. So manufacturing profits in nominal terms are down about 13%. The state-owned enterprises (SOEs) actually saw their profits flat, slightly up so it was the private sector and foreign companies that were looking at sort of 8% or so falls in their profits in aggregate including the booming sectors. So that was not great. Retail sales were about flat for the whole year, but going into the tail end, they were shrinking rapidly, about -6% in November, we do not know the December number yet. Obviously real estate has been a massive drag. You have got land sales that have more or less halved by value and area. You have got the sale of new residential properties down about 26% for the year as a whole. But the recent data towards the end of the year is suggesting much larger numbers than that, so  minus 40% or so.

Within the investment side outside of real estate, again, obviously the official numbers are saying up 5% for the year, but that is very much dominated by SOEs, up 10%, with the private sector flat, and investment by foreign-invested companies shrinking. The industrial production numbers are flattish, but that was helped largely by autos in the early part of the year, and auto sales in the latter part of the year have started to fall very dramatically. And then you have got the trade side. Obviously, the trade side is a function of two things that the weakening global environment which China faces and the weak domestic economy from a point of view of retained imports. And so we have seen growth and trade tailing off towards the end of the year. So we are going into next year, leaving aside the sort of paradigm shift, if you like, in COVID policy, it has been a bad year, and it has been getting worse, and we're going into the new year with heavy negative momentum.

Recovery in China's economy might or might not be forthcoming as a result of the change in COVID policy, depending on how the health situation impacts the economy. However you look at it, until the base effects start to get very easy towards the middle of the year, I would not get too excited about China's growth. And then, of course, the secular trend in China's growth has been down pre-COVID that is. In my view, and we have talked about this before, the sort of narrative that China's economy is now 12%-14% on official data in real terms than it was pre-COVID, I think that that conflicts quite heavily with the lived experience of Chinese people, which does call into question, obviously, the veracity of the economic data. Even leaving that aside, it is hard to see that COVID or the three years of this hiatus, have done anything to structurally improve China's growth prospects. Therefore, a resumption of that downward trend in growth, post perhaps a COVID-induced rebound or the base effects from that rebound, it is hard to think that China's growth situation is going to improve structurally as a consequence of the pandemic.

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SO: So it is interesting you say that, because I think one of the things that we need to discuss is the political stability of China. In effect, I think we have basically got Year Zero in terms of Xi's new rule now. He is unassailable as leader for at least the next five years, and zero-COVID has gone out the window and they are re-engaging with the world. I think politically, this is going to be him reinventing himself, reinventing China, looking to change the way that China does things. There is not going to be more of the same as usual. I think a big part of that is the fact that they know that the economy is spluttering, and they know that they have reached an inflection point. We spoke about this before, but they cannot keep building high speed rail between minor cities to get them out of an investment hole. And they cannot keep assuming that the rural population, 600-700 million or so people, who we spent many hours talking about is, is functionally illiterate, has got huge problems with unemployment and so on. They cannot assume that that is a problem that is just going to stay hidden.

And so, they do know lots of things need to change. And with Xi's new five-year term starting, I think we will probably see a broom sweeping through a number of issues internally, or at least trying to sweep through them, whether that actually works or not, is to be seen. But that will reflect on China's influence abroad as well, because remember, they have made it very clear through dual circulation, that it is not just about what happens internally to China, and what happens externally, and never the twain shall meet. They are both part of the same coin now. That is why I think we are going to see China, Xi Jinping and the Communist Party acting out a number of reforms internally and externally. And the question is (a) will the work internally? and (b) will they work externally? And what will the rest of the world think of this new approach that we think China is going to take?

SP: I suppose Sam there were lots of competing events for the top spot in terms of political change, but Xi's third term and his sort of assumption of power beyond the former limits that used to constrain an individual's political career, has coincided with what appears to be a complete U-turn in his flagship policies. So zero-COVID is one, obviously. But in the economic sense, the Working Party did not mention common prosperity at all. So, in fact, the irony here seems to be that Xi's assumption of absolute power, which is how it is being portrayed by some people, seems to have coincided with a complete U-turn on the policies that he stood for. Now, obviously, the reality might be a little bit more nuanced than that, but some commentators are sort of pointing to the idea of a soft coup, in the sense that the man's the same, but all the policies are different, and that there is an element of pragmatism and reality coming back and ideology is being downplayed.

SO: Potentially, but this is to be seen, and I am not sure that ideology is going to play second fiddle this coming year. I think the question we have to ask ourselves is, is ideology and the political side more important than economic pragmatism? And I would suggest that there is little evidence that President Xi and the upper echelons of the CCP are going to turn their back on the move that they have made, in recent months, perhaps years, towards greater political control over the country, and away from that economic pragmatism that was so much in evidence in the last few decades. The fact that Wang Huning is still there is important. He is a senior adviser to Xi Jinping and has been there for the last three administrations, and we believe is behind the 'red reset', that reassertion of political control over the country. The fact that he is still there, that he is still at the forefront of things, makes me and other commentators think that it is very unlikely that they will change their political stance. Plus the fact that Xi Jinping is not as secure as many think he is, we are convinced that because of various things that we've spoken about before on this podcast. If that is true, then him releasing the political reins at this point and relaxing things would be a gamble. And I do not think he is the kind of man to gamble, especially when it comes to his own rule.

But that brings us on to another element, which I think we need to talk about, which is how that political control relates to relations abroad, because the more political control that is asserted by Xi, and the CCP, for example, in cracking down on human rights, and I say that candidly, because, obviously, in China it is not considered quite the same thing, across the population as a whole. But also, all the elements of internal control, gives succour to those people in the West, who believe that China needs to be called out for these actions. I think that if we do have more political control from Xi, and we do see a tightening of that control, then this is going to be more problematic for Western-Chinese relations. Do you think that you agree with that, Stewart? Or do you think that actually, in the West, people are beginning to give up on worrying about what happens internally to China?

SP: Well, let's go back a year to the start of 2022 and look at China's standing in the world then versus now, what our perceptions of it might be. I would have thought that China's support for Russia in Ukraine has been reasonably damaging to its reputation. I am not talking about the western democracies here, because clearly, the reputation was damaged there already. But in the Global South, to see your major trading partner support effectively the extinction of a nation state by an authoritarian giant neighbour, must have rung alarm bells with political leadership of those countries. Furthermore, I would have thought the military performance of the Russians and their equipment has been damaging to the reputation of Russia, as well. And so, for the arc of authoritarianism, I think it has been a bad year, 2022. And China's attempt to re-engage with the rest of the world, if that is the right way of looking at it, I think is going to be fraught with problems.

I agree that there are a number of countries for whom Chinese tourism is very important, they will welcome the resumption of that flow. But I think that China's going to find it harder going than it was pre-pandemic, in terms of bringing people into its economic orbit and exerting influence over them, not least because I think that people are well aware of the fact that there is an increasing element of smoke and mirrors in the economic power of China, and the opportunity that it presents for its potential trading partners. That narrative of "your economic future is intrinsically linked to ours" is starting to break down. I think that it is more nuanced than perhaps some would believe in terms of, "China's back, and therefore it is business as normal in terms of economics."

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Sam Olsen: Yes, I see what you are saying, and I think there is a lot of truth to that. I suppose the caveat I would have is that one of the key levers that China has and asserted its influence globally has been through elite capture. That is something that I think is going to continue, and is continuing. Plus the fact that they are using digital infrastructure and rolling out high technology products, which just are not available or are too expensive for many countries being sourced from the West. I think that all the foundations for China's influence globally that we have spoken about, that we have written about through the Evenstar Institute, all those elements are still there.

The fact that China has enormous economic resources that it can deploy abroad means that politically, and especially using elite capture, there will still be many friends for China on the world stage. I think there will be challenges, for example, about "why are you supporting Russia?" But there is still a lot that China can give the third of the world that is non-aligned, and outside of the Western bloc and the China-Russia bloc. I would be very surprised indeed if China did not make further inroads. And that is especially because still the West, despite so many warnings, despite so much effort by some people within Western governments to point out that the West is really not engaging as much as it should do with the rest of the world, compared to China, the Western governments are just still giving talk and no action.

SP: Well, is that right? I think the West is engaging with the developing world in the Global South. You are seeing G7 offering to finance alternative energy sources to help the likes of Vietnam wean themselves off coal. Clearly, the irony there is that China dominated the new energy sectors that are the alternative to coal, up to a point at least. I think that the West is engaging, and I would also slightly push back on the 'China's friends' point. To my mind, the Global South does not necessarily want to be friends with China or enemies with China, it is just pragmatically looking at what China has to offer, which I think was the point you were trying to make. And what China does have to offer is capital, and they have in the past been very willing to splurge capital in return for resources or influence and what have you.

But you know, we are going into a year of global recession, probably, or at least a stressful year for the global economy. And this is going to be the first cycle in which the Chinese have had substantial amounts of capital at risk around the world. Watching how they react to that, and how the recipients of their largesse react to the deterioration in their ability to service it, I think is going to be very interesting. I saw the other day, for example, that Zimbabwe have banned lithium exports, so the processing will have to take place within the country, which is not dissimilar to what we are seeing or have seen in Indonesia and the Philippines with regards to nickel. And so, I think maybe there is going to be a trend of the Global South pushing back not just against Europe and the United States in terms of the terms in which investment comes in, but also against China and trying to capture more value. I think the playing field has become more competitive, and the resource rich countries that China sort of depends upon in many ways, are becoming much more aware of the economic and strategic value of the resources that they have.

SO: Yes, I would agree with that, and it is certain that the smarter countries in the developing world and that non-aligned sector will take advantage of increasing Chinese-Western animus to get a better deal for themselves, as Indonesia did with nickel and as you said about Zimbabwe. But there are many other things that these countries can do to play one side off against the other for the betterment of themselves.

SP: So Sam, in terms of US policy towards China, and China's response to it, clearly, one of the major events of the year was the imposition of export controls on high grade chips and high grade semiconductor manufacturing equipment from the United States. Do you think that this marks a sort of shift in American policy towards China, away from just rivalry towards containment? And if so, do you think it will be followed up in 2023 with more measures aimed at containment?

SO: In November last year, Xi Jinping and President Biden met, and they came away from that with not much to say for themselves other than the Chinese press reporting that Biden had agreed Five No's, one of which was 'No' to abandoning the One China policy regarding Taiwan. Another No, which I think was more important potentially, was that Biden had apparently agreed not to contain China. That was funny because in October, so just before, America had announced a ban on the export of advanced chips and associated technologies to China, especially those around artificial intelligence, robotics, etc, all those needed for the advanced technologies of the future. Without a doubt, this was aimed at containing China, because there is a widespread fear in American military that China is catching up, and after all, China's got a bigger fleet now. But also, in terms of commercial opportunities, American companies feel they're perhaps losing ground to Chinese ones. And so, stopping China from able to develop very, very advanced chips is something that fits nicely with American policy.

Obviously for China, this is a big issue, because they have put many eggs into the basket of high technology growth, and being a world leader in high tech. And if they cannot get the chips, and they cannot get machines to make those chips, that that causes a problem. So, I think it is fair to say that America is trying to contain China and we have had a raft of legislation this last year from the US and in associated areas, which I think can be and are looked at by China as being an effort to contain them. I expect to see much more of this in 2023 as American hawks get the bit between their teeth. And the interesting thing is, is that China so far has not pushed back on this chip ban. It has not also pushed back on attempts to stymie Huawei, which is a national champion. But I think that in 2023, with renewed assertiveness at home and higher demand on the nationalistic elements of Chinese policy, I would be very surprised if we did not see some kind of pushback against American attempts to contain them. What that would look like, I do not know, and I think no one knows. But we should be aware that something is probably going to happen in that regard. And that, in turn, will probably lead to prospect by America, which of course will drop relations even further.

SP: Sam, finally, on the politics and the international side, we have not really mentioned Europe yet and the EU and Chinese relations there. How do you see 2023 panning out? I think, obviously 2022 has been dominated by Ukraine, and China's implicit support for the Russians has, I think, alienated public opinion in the EU, but maybe not the elites quite as much as the general public. What do you think we could look forward to in 2023, in terms of European-Sino relations?

SO: So the Ukraine war, I think, was a massive watershed in not only relations between Europe and Russia, but also relations between Europe and China. The fact that China has not done anything really to undermine Russia has really gone down badly with many people in Europe, and that was highlighted by two things. First of all, in Eastern Europe, the Baltic states basically pulled out of the 17 Plus One arrangement with China, which was meant to showcase Chinese-Eastern European relations, and that has gone very badly wrong for China, partly because of the Ukraine war, but also because of China's bullying of Lithuania when it decided to do some outreach to Taiwan. And so, Eastern European relations with China are not going very well, with the exception of Serbia. The Serbian President has repeatedly called Xi a brother and a friend and rolled out the red carpet for Chinese investment there. But that aside, I think that Eastern Europe has really gone quite cold on China.

Western Europe, has also been quite sniffy about China. The fact that Scholz, the German Chancellor, went over to China recently, and that went down so badly in Western Europe, I think the reaction there does show how people have begun to turn against closer relations with China. In the UK, now, we have seen the UK establishment really get a bit cross with China, and that came to the fore with a ban on Huawei, but it is becoming more and more prevalent. The fact that Rishi Sunak said that that China was a systematic threat to British interests and values a few months ago. I think that was incredibly important in terms of laying the groundwork for a more hardline approach to China really taking hold.

So I would be very surprised if 2023 saw anything like the good relations that we have seen between Europe and China in the past. And in fact, I would be confident in saying that things are going to get a lot frostier. That said, China will make every effort to try and bring Europe more on board because after all, if they have got problems with America, then it is better to try and at least get some Western allies. Whether they are successful and how they actually go about doing that first place, I am not sure, but 2023 will be an interesting year for European-Chinese relations. So that is the politics taken care of, what do you think the highlights, from an economic point of view, will be for 2023?

SP: So I think, Sam, the key issues are this. Firstly, how dramatic is the knock-on impact from the real estate market, because what we have seen in 2022, has been obviously, under zero-COVID conditions, the property market continuing to deteriorate. And we are now in the second year of this, so it is not just base effect, the market is continuing to look really soggy, and developers are under a lot of financial pressure. And remember, developer liabilities, both to the banking system and the shadow banking system are around 70% of GDP. So it is a systemic issue that could pose a threat to Chinese financial system. And it remains a threat, we are just further into it. I think the second issue is how does the Chinese consumer respond to the COVID policy reversal? Is there a blip in consumption as people splurge some savings? But then does that actually manifest itself in a recovery of domestic production, and what have you and generate momentum? Or is it a one off, which then sort of leaves the end of 2023 looking really rather soggy again?

I think the third issue is what happens to investment in China? Do we see the private sector and the foreign-invested companies coming back to China showing confidence in the regime, confidence in the long-term outlook for growth in China, or again, is it just a sort of base effect, relief effect, that leads to a sort of one-off recovery in economic activity followed by a rollover again. And so actually, in a funny way, I think what we are going to be looking at in 2023, is really what is going to be happening in 2024. 2023 is clearly going to be a very confusing year in China, economically-wise from the data perspective, because of all the dynamics with regards to the opening up of the economy again, and the impact of COVID. So in very much the same way as in the G7 economies, the Western economies, because 2020 was so bad 2021 was always going to be good. But what really was interesting was the lack of follow-through into the second half of 2022. We are now going to go through the same experiment in China, and 2024 will show us what the long-term damage of China's economic and COVID policies have been, and I think that will be the interesting phenomena.

SO: Great well, a lot for our audience to unpack there. And let's see if any of the things that we have spoken about for 2023 actually come true. So I look forward to discussing this again in January 2024. In the meantime, thanks everyone, for all your support. What China Wants continues to flourish, and we have got so many new listeners from all over the world, and we really appreciate your support. Thank you so much, and Stewart and I will be back next week for more analysis on China. Goodbye.

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We are joined by Michelin-starred chef, anthropologist and cultural observer Andrew Wong. Andrew is the head chef of Chinese restaurant A. Wong in London, and incredibly knowledgeable about the deeper side to China’s cuisine.

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Here is a summary of our discussion:

• Chinese food in the UK and Europe is developing almost into its own style, and has its own regional variations, especially in London.

• Like other cultural aspects like movies and clothes, Chinese food is benefiting from an increase in public appreciation, partly driven by second and third generation Chinese living in the West.

• A key cultural part of Chinese food is way it is eaten in a shared way, with plates on the table all at once. “The balance of flavour, the balance of texture, the balance of spice is not achieved through a single dish, but through a collection.”

• We also discuss some of Andrew’s most popular dishes, and ask him what his last meal on Earth would be…

(In case you’re wondering why there are quite a few references to Christmas, we were meant to put this out a few days after Christmas Day, but our whole team was wiped out by the flu - hence it being a bit late. But better late than never.)

You can also listen to the podcast on Apple, Amazon, or Spotify.

As always please do share, comment, and subscribe. We’ll be back soon with more What China Wants.

Many thanks for listening.

(In the meantime, if you would like more information about the Evenstar Institute and our research, then please email me sam.olsen@evenstarglobal.com)

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Here is the transcript:

Sam Olsen: Hello, and welcome back to What China Wants with me Sam Olsen. Sadly Stewart cannot be with us today because he is on family duty, but he is going to be missing out on a fantastic talk we have got lined up with Andrew Wong. This is part of our new cultural series that we are doing in conjunction to the politics and economics we have been spending the last year on. Andrew, it is incredibly nice to have you on to talk about Chinese cuisine. Welcome along.

Andrew Wong: Hi there, pleasure to be here. Always good to escape from the kitchen.

SO: Thank you. We are just recording this in the week running up to Christmas, which, in retrospect, is quite a busy time for Andrew to take time out of his schedule, so thank you very much for agreeing to be part of this. But if we could just go on to your bio, you are a third generation chef, and you own restaurant A Wong in Pimlico, London. And I think you spent six months travelling around China preparing for that, if I am right?

AW: Yes, I grew up between London and Hong Kong to start with, and obviously a lot of my family are in the industry, and a lot of my distant relatives are also in hospitality in Hong Kong. But yes, the trip primarily was really because I never really planned to be a chef. And so, one thing led to another, and it came to a point where it was very much "well, if you are going to open a Chinese restaurant, you should really go and spend some time with some friends that you have all over China and see what is going on there". So I packed my bags, I was meant to go with someone who pulled out last minute. It was a bit annoying, but it ended up being a blessing actually, because, travelling by yourself, you become really self-reliant, everything becomes very internal and individual as an experience. It was very much about me learning and trying to relate it to what we could possibly do in London, if we were to open a restaurant.

That was six months, but it felt like a lot longer, actually, because while we were out there, I was also building the restaurant while I was there, which made it doubly interesting. So, by the architects, the designers, I was getting sent something like 50 samples of wallpaper each day, 50 samples of possible chairs, at the same time while I was working in these hotels in China. Luckily, because of the time difference, it actually worked out quite well. You know, there is a break in the middle of the day, that is the perfect time for when London starts up again, to check all the emails during that break, then you go back after work. And so, it ended up being this cycle of basically building a restaurant and trying to learn and work in in hotels or restaurants for several months.

SO: Is that the restaurant that you now run in Pimlico that you were building?

AW: Yes. The restaurant that we have in Pimlico, originally, it was my father's restaurant. And then while I was at university, he passed away so we left it for a while, as I was deciding what I wanted to do and worked around London. He died in 2004. It was only in about 2010 did we really think okay, this is what we want to do. Let's try to put a plan together of how to make it happen.

SO: And so your father was also a restauranteur. Was it your grandfather as well?

AW: Yes, my grandfather had a restaurant in Chinatown.

SO: Right, when did he come over to the UK?

AW: So he came over to the UK in the 1970s. So he first had a restaurant in a town in the Midlands called Nuneaton, I do not know if it is familiar to anyone..?

SO: I grew up in in Leicestershire, so I used to go to Nuneaton because my granny lived nearby. So yes, that is not an ideal place to have a Chinese restaurant.

AW: Well, you know, but it's interesting, I mean for me to go back. And when we do, it is quite interesting because you really get to see how something such as 'Chinese cuisine', how it gets expressed in different ways according to different demographics, even within the UK. I do a lot of these interviews, and sometimes we talk about Chinese food across Europe. We talk about the fact that, in Paris, there is a very big Vietnamese community. So therefore, the Chinese food is kind of Vietnamese-slanted in some way. If you go to Holland, there are a lot of people from Suriname and Indonesia who look after the Chinese restaurants, so there is a reinterpretation of the cuisine there. But actually, even within the UK, Chinese food is expressed very, very differently between different regions within the UK.

SO: Yes, so I see it through coming back to live in the UK after a long time living in Asia and spending so much time in China. I was quite interested to go to the local Chinese where I now live for dinner to see what it was like. It was very different. It was Cantonese, theoretically, but very different Cantonese to anything I have ever had in Hong Kong. And then going back up north to see sort of relatives, going to another Chinese restaurant, the dishes were almost entirely different. That was the first time I had realised how different it is, it is almost as if it is evolving into its own food culture.

AW: It is, I think people - I mean, you are an anthropologist so you will probably understand exactly where I am coming from - I think people latch on to definitions and little bit too much, or they like to spend way too much time trying to pigeonhole everything, just for the sake of convenience or mental space. But actually, I always put it like this; the job of a chef primarily, regardless of where they are in the world, is to use their skill, to cook with the ingredients that are available to them, and to cook for the people who are around them. I think if you use that as the kind of the staple definition of what a chef is meant to do, actually authenticity is a very fluid kind of term, dependent on time, dependent on location, and depending on demographic of clientele. And sometimes, people when they experience things such as yourself and go, "Oh, I came back from Hong Kong and the food was so different." I think sometimes they automatically assume the other to be bad and the one in Hong Kong to be good, but I think that is sometimes the wrong way to look at things.

SO: Yes, because obviously, if you have travelled around China a lot, not all the food in China is great. You can have just as dodgy food in Xi'an as you can have great food in Xi'an.

AW: Exactly, and I remember when I when I was travelling, I carried around notebooks and was scribbling down everything that I thought was interesting, things that I saw for inspiration, bits that I had eaten, snacks like soft drinks, even gummy sweets that had very distinct textures, right. And I always say, out of every 50-60 things that I wrote in my notebook, I would probably only ever consider putting one, even possibly on the menu. Because I think we cook for such a different demographic in London, and I think as a restaurant, we are a very particular type of Chinese restaurant. And some of those dishes, they are great when you are in that experience, but that does not mean that they are automatically suitable for a London clientele in 2023.

SO: So, one of the things that I noticed about the Substack you do with Mukta Das (called XO Souced - everyone should check it out) was your discussion on the appropriation of different types of cuisines from around the world. Maybe people would be interested to know where you think that Chinese cooking in the UK is now. Is it much more regionalised in terms of taking inspiration from different parts of China, rather than just the Cantonese food that perhaps we mainly grew up with considering the amount of Hong Kong people that were here? Or do you think it is still kind of stuck in its Cantonese origin?

AW: No, no, I think Chinese food has evolved so much in London. I cannot answer for the whole of the UK because besides London and Nuneaton, I do not eat too much Chinese food in the UK because I do not really get out of London too much these days. But we are very lucky in in London, and I think we are our own worst enemy in London. I think a lot of people are too quick to kind of go "Oh, well this is not right. That is not right." Actually, we are very lucky; if you compare us to North America, you compare us to the whole of Europe, we have an incredible regionality that exists for Chinese food in London.

There are restaurants, as I said, there is Xi'an restaurants, Xinjiang restaurants, Sichuanese hotpot has become like a staple for Chinese food as Cantonese food was in the 1980's, Sichuanese food is now becoming a well-known cuisine within Chinese cuisine. And in talking professionally, never in my career have I had so much interest from peers with regards to Chinese technique, Chinese ingredients, and Chinese gastronomy in general.  I think that really goes to show the way that Chinese food has become so widely appreciated within the UK, and I think that is very special, and very unique in comparison to, as I said, the rest of Europe and even North America.

SO: Yes, that is interesting, and I think there will be quite a few people surprised to hear that. We have had a lot of good Chinese food in London, and after many years of living and working in China it is good that the variety exists here. But in terms of the wider side, how do you think that British people are evolving their tastes for Chinese food, and Asian food more generally? Because you just awarded a second Michelin star I think, is that right?

AW: Two years ago.

SO: Two years ago, and the first Chinese restaurant to achieve that outside of Asia?

AW: Yes.

SO: Very well done. But, do you think that would have happened 5 or 10 years ago? Do you think that the attitude to Chinese food in Europe, and in the UK more specifically, was different then and actually you are kind of riding a crest of a wave of interest in Chinese food, not just with your friendly chefs, but the public as a whole?

AW: Oh, absolutely. I mean, I wish it was the fact that, you know, I am such an amazing chef with so much talent that it is just shining through and Michelin have to... It is really not the case, it is very circumstantial, and we are in a very privileged position, at a very privileged moment in time, where, you know, I think the Chinese community are really making waves within the UK. Everyone, regardless whether it is gastronomy, or it is fine art, or it is acting, or it is politics, there is this big movement and a moment of second generation, and third Chinese generations really - what is that anthropological... ‘heritagisation,’ I think, is the term - really embracing their pasts, and trying to influence their futures using it. I think this is a very modern time, with the ability and the kind of cultural situation that we are in where it is able to flourish. We are very lucky to be in this moment in time and, and I am merely just one of the participants who are using gastronomy as the way of expressing my past to a 2023 curious diner.

SO: So one of the things that you have talked about on your on your Substack and your podcast is the anthropology of food. And I suppose something that sprung to my mind in terms of Chinese food is that when I first properly experienced if it felt a very different experience eating, much more focused on a shared dining experience. Is that something you think that has managed to make its way into Chinese food consumption over in the UK, and in the West? Or do you think that you will never really be able to replicate that traditional Chinese sharing culture outside of a proper Chinese family?

AW: I think that is a really good question. I think it is such an important definition of how people eat. I think the way people eat is sometimes even more important than actually what is on the plate sometimes. And you know, Michelin are a great example of this, because in a Michelin Guide that rewards restaurants, according to what they perceive to be great, or good, whatever it is. But as a guide, they are used to judging French cuisine, which is based around the fact that you get three courses, and each course you judge them, accordingly, as a course. So when you talk about whether a dish is good, or whether it is bad, you are talking about a balance of flavours within a single dish.

I think when you talk about Chinese cuisine, if you then throw into the pot the fact that actually that is not how you eat Chinese food. You eat Chinese food by having a collection of dishes, so that the balance of flavour, the balance of texture, the balance of spice is not achieved through a single dish, necessarily, but it is achieved through a collection. And I think that is a conundrum for guys like Michelin, which I think they are dealing with very well, but one they are dealing with on a daily basis in trying to adapt to this reconstruction of what is a meal.

I think people in the UK for example, they need to understand that the idea of having a three course Chinese meal is a cultural construct that was created in the 1970s. It is completely foreign to anyone in China to have a Chinese in a three course meal. It does not make sense, it has no relevance. And when you go to a banquet or something and they say it is a 11 course banquet, or 12 course banquet, they are not talking about 12 courses coming one by one like this Western construct of what a tasting menu is. When they say 12 courses, normally they are talking about collections, so they might come in fours, they might come in fives, you get a big soup in the middle, you get some big steamed fish.

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But it is not the idea that you are getting one dish at a time, it is just all bang in the middle. And then if you are talking about the Han-Manchu banquets in the Qing Dynasty, you are talking about hundreds of dishes all at the same time. Some of them are pickled, some of them are cold, some of them are hot, some of them are cured. That is traditionally, culturally how we eat in China, and I think, when you transpose that onto a Western culture, I think there needs to be a bridge for people to navigate that difference in order to really appreciate the cuisine.

SO: Yes, and you are completely right, but I think it is important to note that the way that we eat in the West now is itself a relatively recent construct. I mean, the evolution of food in the 1600s, 1700s, and 1800s was very rapid. For example, in the 1600s in England, you would often eat big slabs of meat, but with meat puddings next to it, and a meat pudding was actually like a sausage. You could have different types of meat but in a skin, and you would have lots of things plonked on the table at once. It was not until the 1700s and 1800s that vegetables started making an appearance, and that was actually a French construct as well. So over the 1700s, especially in the 1800s, we did see this sort of Frenchification (or whatever the word is) of food in England.

That has evolved to what we see today. But for anyone just say that this is the way we have always eaten is mistaken. I am sure that it is the same with Chinese food as well. Even though you have got this same concept around traditional sharing, the types of food would have changed. Because at the end of the day, Chinese food - like any food - is rooted in China's history, right? You must be able to see a lot of the historical stuff that has happened to China through its food.

AW: Well, yes, it would have made it a lot easier if the revolutionists did not burn down the Forbidden City and every bit of archive in there related to the journals of what the Emperors were eating. But from what we have recollected, and what we have managed to dig back up, there was a very, very rich history of Chinese food. Actually, if anything, it is probably more related to traditional Chinese medicine more so than just history. I think when you talk about the historical aspect, you are really talking about availability of ingredients from what I see. But as a gastronomy it is 3,000 years old. When it comes to technique, there are very few techniques that have not been explored within Chinese gastronomy, even purely through trial and error. So yes there is a very deep history of Chinese food that, for me anyway, relates more to TCM and Buddhist origins more than anything.

SO: TCM being 'Traditional Chinese Medicine'?

AW: Yes.

SO: Yes, that is a very good point. And I think that it is also important to know that Chinese food is always evolving, right? I mean, look at you, you are the embodiment of the evolution of Chinese food. You are serving things that would not have been served in China 20 or 30 years ago, and may not be served widely in China today. But how do you think that Chinese chefs like yourself,  are you making an impact on Chinese food back in China do you think? Or is it just a one way street?

AW: You know, I think with the world that we live in now, there is no such thing as a 'one way street' purely because of things like social media. I see many chefs who just for the sake of convenience, they put themselves under headings as being 'modern French' chefs or 'modern British' chefs. But actually, if you look at their cuisines, it is very much world cuisine. Purely for myself, I think our cuisine, you know, we call it Chinese, but that really is just for the sense of convenience. I think more so what we do is that we are trying to celebrate particular parts of Chinese gastronomy, which in turn, celebrate Chinese culture.

So, whether it be celebrating the fact that China borders 14 other countries, and the fact that obviously, with that will come massively diverse gastronomy. Or we are talking about the art of dim sum, and we try to make comparisons between European pastry chefs and dim sum chefs. I am beginning to show the incredible overlay and things that they have in common with two seemingly very different arts when people look at it. Or we are talking about, as you said, the sharing aspect, so effectively in a really horrible kind of way, we are forcing our guests to eat in this collection way by basically removing a la carte menu, and ensuring that all our guests have to embrace this experience when they eat with us. Now, these are all things which I think somewhere along the line have the possibility to basically get people to recalibrate their preconceptions, and their own histories of the way that they have interacted with Chinese food.

SO: Okay so, time to tickle the tastebuds a little bit. Tell us about some of your favourite dishes that we could expect at A. Wong.

AW: So there is a few, I am very proud of certain dishes. Some of them might be very traditional dishes. There are things like the Shanghai dumpling, which is traditionally a soup dumpling where you bite into it, and you basically get a big flood of soup in your mouth. So we slightly modify it, we do something very special with the dough so we laminate the dough about 50 times before we make this dumpling to make it super watertight. And then we increase the amount of soup into it so it has got a real, strong, rich broth inside. And then traditionally, the way that you eat it in the streets of Shanghai is that you get a dip of ginger-infused vinegar to dip your dumplings into. And I remember it used to always annoy me that people used to put way too much vinegar, to the point that you are ruining the chef's work. We changed that slightly, we use a hypodermic needle and we inject the vinegar into the dumpling before we serve it. So when the guests eats it, it is a single explosion in a mouth with the vinegar mixing with the pork broth. And we serve it with a tiny bit of pickled tapioca and some candied ginger on top.

The dish in itself is very, very traditional. But all I can do is basically find ways that I think complement the dish and really get people to go, "Oh, I have never had it like this, I am going to go back and I am going to go and try more Shanghai dumplings from other restaurants and see how I like them and how they are different." And you know, no one Shanghai dumpling is the best or the worst, right? They are just different interpretations of the same dish. And it is very much about, just like wine, the more you try, the more you build up this kind of memory or database of food memories. And then you get to make your own decisions of what you think is a good one, or what you think is a not so good one.

SO: And anyone that has been to Shanghai and has had those dumplings on the back streets and experienced lots of different types, the range is phenomenal. I have had a couple of bad ones, but generally, they are completely amazing and wonderful experiences, especially when you are with local people and they are taking pleasure in showing you their favourite restaurants as well. It is a great experience.

AW: Sure, I always say like, in Shanghai, after a night out or halfway through even, sometimes in the winter, it is pretty cold. You go to some of these the street stores, and the Shanghai dumpling, obviously the dough is quite thick. It is not because the chef does not have the skill to make a thinner dough, they absolutely do. It is the fact that they are catering to that market. You know, when you have had three or four beers or maybe more, you want to have something a little bit more substantial, you want to have more dough along with the soup and a little bit more meat, so that you can really keep going for the rest of the night. It is very much not the fact that Shanghai dumplings have to have really, really thin doughs. It is our choice and my choice as a chef to try to do that. But that is only because it is a culinary choice on my part.

SO: So it is about to be Christmas, and we actually just recorded another podcast about China and Christmas. One of the things we were talking about is the adoption of certain cultural references into China from Western Christmas tradition, but also the fact that many were not. Turkey obviously is not widely used or had on Christmas Day in China, do you do anything in your restaurant to sort of bring the two traditions together, Christmas and China?

AW: Simplest way, no. I think if anything, I like to think that the Christmas spirit that we that we try to bring is very much through interaction and a kind of warmth, and that kind of spirit that the staff can bring when they are serving the food. I am not a big fan of changing a menu according to festivities, because I think some people do not remember, a lot of the dishes that we develop, sometimes they can take years to develop. So it is not the case that we can just go "oh, well, we will just replace that with turkey, or we will just put some brussel sprouts on that or we will put some parsnips on that". They have taken a long time to develop. Any one of our menus in the evening is made up of 18 or 19 courses each time.

If anything is more about celebrating the beauty of commensality, of eating together around a dinner table. And that really is what all these festivities are always about, regardless of whether it is Chinese New Year, it is Mid-Autumn Festival, if it is you know, unfortunately, the festivals of the dead, or it is Christmas or Easter. Ultimately, regardless of culture, they always come back to the fact that normally, you are sitting around a table with your loved ones trying to share experiences together.

SO: I think actually, that is quite good way to end the podcast. Because one of the things that we have tried to do over a number of years we have been doing this now is to is to show that China is different, yes, but actually, there is a huge amount of commonality in everything from politics and economics, to culture and food. And actually, it is far better to look at the ways that we have got in common, rather than trying to look at the differences. And the food I suppose, is one of those things where we can learn from each other, but also really enjoy the different experiences, ingredients and dishes, and so on. And I think the world would be a very poorer place if we did not have that ability to tap into those different traditions.

But on that note, my final question is, you obviously were born and raised in the UK, you spent a lot of time in China, you run a fantastically successful Chinese restaurant. If you have got one last meal on earth, what would it be? Would it be a Chinese meal? Would it be a cheeky pizza?

AW: It would definitely be Chinese food. No matter how many cuisines I eat around the world, there always comes a finite time where I go, "You know what, I would just like to have some really homely Chinese food." Normally something very simple like a steamed sea bass with some white rice with a really beautiful soy dressing. Nothing complicated. I am a massive noodle fan, so I will eat noodles in any capacity whatsoever. Any chef will tell you, the food that we enjoy to eat in private is normally rooted in kind of homely flavours and things that are really heart-warming and hugging.

SO: Brilliant, well thank you so much. So just for everyone, what is the address of your restaurant in Pimlico?

AW: So, we are in a very non-trendy part of Pimlico. It is in between Pimlico and Victoria, it is on Wilton road, about two minutes away from the station.

SO: Great, that is easy for travellers and your Substack is XO Soused, and I wish you a very happy Christmas and a fantastic 2023 Andrew and thank you so much for spending your time. I know you have got to go back into the kitchen now, but it has been really good to talk to you and I look forward to hearing more Michelin stars landing your way.

AW: Thank you, and Merry Christmas to everyone.

SO: Take care, bye!

AW: Take care!

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We are joined by friend of the show Andrew Methven, the author of the incredibly interesting substack Slow Chinese, who will guide us through the linguistic and cultural aspects of Christmas in China.

Here is a summary of our discussion:

• Christmas is not a national holiday, but it is celebrated. It has been compared to St Patrick’s Day in the West, a carnival-like festival.

• The Western Christmas food tradition hasn’t really established itself in China outside of the major international hotels.

• Christmas Eve is known as “Silent Night”, a reference to the German carol of the same name.

• Father Christmas/Santa fits nicely into Chinese culture because he is old, wise, and dressed in lucky red. But the elves not so much, because in China they are thought of as supernatural beings.

• Santa is regularly portrayed as being helped by his sisters, and carrying a saxophone. Andrew explains the reasons behind those interesting cultural motifs.

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You can also listen to the podcast on Apple, Amazon, or Spotify.

As always please do share, comment, and subscribe. We’ll be back soon with more What China Wants.

Many thanks for listening, and have a very Happy Christmas.

(In the meantime, if you would like more information about the Evenstar Institute and our research, then please email me sam.olsen@evenstarglobal.com)

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Here is the transcript:

Sam Olsen: Hello, and welcome back to What China Wants with me, Sam Olsen, and sadly no Stewart today who is off doing something he cannot get out of. But I am very excited to have someone back, a friend of the show, to talk some more about cultural aspects of China. Andrew Methven, for those of you who remember is the author of Slow Chinese, that newsletter on Substack which is doing rather well. It is designed to help learners of Chinese to maintain and improve their language, and also to showcase some of the latest language trends in China. I thoroughly recommend it if you want an amusing insight into the Chinese language every week. Welcome back, Andrew.

Andrew Methven: Sam, thanks for having me back. And yes, it is really great to be back and discuss this interesting and confusing topic of Christmas in China.

SO: Yes, Christmas in China. It is something that I - well, both of us - have had quite a lot of experience in over the years and being in and out of China around that time. It is a great time to be in China because it is so different, and that is what we want to do this podcast. Because if you did a thing about Christmas in Norway (where my dad is from), for example, there are quite a few differences with a British Christmas, but it is not quite alien enough to be of interest for a half an hour podcast. Whereas with China - I think we are going to be able to wring quite a lot of differences out in this particular episode, compared to what everyone thinks in the West.

I suppose to kick things off, Andrew, obviously, even though there are 100 million or so Christians in China now, no one is quite sure the figures. But, out of 1.4 billion, it is not that large, and also Christianity is not anywhere near a state religion in China. It is not a religious holiday, but it is celebrated to some extent. So, the question is for our listeners, Andrew, how do the Chinese celebrate Christmas? What are the main traditions that they have, compared to what we would find familiar?

AM: Okay, well, I think first of all, as you were saying, Sam, it is really different. But I think one of the confusing things is that it looks kind of similar on the surface. So around Christmas time - maybe not this year, because of the lockdown and COVID and what have you - but generally by this time in China, in the big cities, in shopping malls you can see enormous Christmas trees, there are probably armies of Father Christmases around doing stuff, even organised dances and things like that. In offices, especially those that have an international connection, you will have Christmas trees and things like that. So it looks similar to begin with, but maybe a lot more neon, and you might say 'Christmas on steroids'.

But actually, beneath that there are some really interesting differences. In terms of how it is celebrated in China, as you said, it is not a religious holiday first. It is not an official holiday either, so it is not a day off, but it is recognised and celebrated, but in quite a different way. So generally, it is more celebrated or recognised by younger people, so people I would say under the age of 40. I would say it is very commercial, it looks and feels very commercial. So, it is not really a shopping festival now, but I think before Double 11 Shopping Festival, there was definitely a very-

SO: Hang on Andrew, we spoke about Double 11 In our last podcast with you, but our listenership has tripled since then. So a lot of people perhaps will not be familiar with Double 11. Do you want to just quickly say what that is?

AM: Yes, sure. So that is a festival, it happens on the 11th November every year. Well, it is actually a three or four week campaign up to the 11th of November. It is called Singles Day, and it is a shopping festival. I think it was conceived by Alibaba, and it has turned into a huge commercial extravaganza, mostly online, but generally across China around November. It is a huge shopping festival, and I think maybe that has taken a little bit away from how Christmas had been commercialised before. Nonetheless, Christmas is still very much visible in China, particularly among younger people. I have read about it being compared to Valentine's Day or St. Patrick's Day where it is a single day where people go out, have fun, maybe go and eat out or just be out and about. So it is definitely not a family thing, it is not a religious thing. It is really for young people having it as an excuse or as a reason to either go shopping or to go out and socialise.

SO: Got it, and actually we have got a podcast coming up very soon about Chinese food and the relationship, including Christmas, and festivals and should be great fun. But in this specific context, have you ever heard of a Chinese restaurant is doing mass Turkey, or anything Western for Christmas lunch?

AM: I have not been in China during Christmas for years, and also I would caveat that I have not been to China at all for more than three years now. Maybe things have changed over recent years, but normally, in the big cities, you will have the international hotels doing Christmas dinner.

There are some interesting changes to the meal. There is a dish in Chinese called 'eight treasure duck', bābǎoyā. That is a little bit like it, it is a stuffed duck, and it is stuffed with different types of meats, and also sweet fruits as well. That seems to be something that has replaced the turkey. And so, if I were a 30-something Chinese person wanting to go out with my friends on Christmas evening, then I might find myself ordering an 'eight treasure duck' instead of a turkey. So, there is a kind of an equivalent dish, but apart from that, I have not seen any other kind of particular foods that you will eat around Christmas, in China.

SO: What else has been co-opted into making Christmas more Chinese? Are there any other traditions which are which we would not recognise but which are considered nonetheless to be part of Christmas in China?

AM: Yes, so I think and again, interestingly, it is a lot to do with how the language works; the Chinese language works around Christmas, and then how that has influenced how some of the traditions around Christmas have been Sinofied, or China-fied. The first thing is the word for 'Christmas Eve', in Chinese is not really what it should be. So, the translation for 'eve', the word 'eve' is 'qiánxī', meaning the night before. For example, Chinese New Year that's the word qiánxī. But on Christmas, Christmas Eve is 'píngān yè', which translates directly as 'silent' or 'peaceful night'. The reason why it is called that is because of the translation of the Christmas song, Silent Night, Holy Night. So that song is translated as píngān yè.

SO: That is good, that is very interesting.

AM: Yes, and so for some reason... and of course, don't forget Silent Night, Holy Night is originally a German song that was written in the 19th century. Obviously, that has come into the English language Christmas tradition, and then it has been translated into Chinese and become part of the Chinese tradition, but in a different way. So Christmas Eve is 'píngān yè', 'peaceful night' or 'peaceful evening'. And because of that, there is a homophone in Chinese, so píng is also the word for apple, 'píngguǒ'. 'Píngān' is 'peace', 'píngguǒ' is 'apple'. So on Christmas Eve, a gift that you would give someone is an apple, or a píngguǒ.

SO: Like a peace apple?

AM: Peace Apple, or píngānguǒ, is one tradition that is very Chinese, and you would not get as part of Christmas elsewhere. So generally, a great gift to give in China at any time is an apple because of the symbolism. And actually, I only recently realised that I think, a píngānguǒ actually has come from the Chinese version of Christmas. But now you can use it more widely, not just as part of Christmas. I think that is one of the big differences. It is interesting because it is purely because of the language and how it was translated in the first place that has then impacted on how you give a gift during Christmas in China. But then you still got the gift giving part of it, it is just quite different. So that that is definitely one of the main differences.

SO: What else is not included in Christmas in China in terms of the language?

AM: What else is not included? Well, first of all, the way you say Happy Christmas in Chinese is a very straightforward translation 'Shèngdàn kuàilè'. 'Shèng' is 'Saint' or kind of 'God', 'dàn' is 'to be born'. 'Shèngdàn jié' is Christmas, so 'saint-born Festival', and then 'Shèngdàn kuàilè'' is how you say 'Happy Christmas'. And that is pretty much a straightforward translation. As I said, the 'píngān yè', the 'peaceful night', Christmas Eve, I think is probably the main difference in terms of language. But then also, it's quite interesting in terms of what is the same. Father Christmas is definitely the main character in Christmas in China 'Shèngdàn lǎorén'. And I think that is because an older person in Chinese culture is generally seen as very respected and wise. So, an elderly white-haired man, you can see that kind of fits culturally, so that has been absorbed.

The colours also work, so red and white. There is a phrase In Chinese, which is 'hóng bái xǐshí', so 'red, white, happy times'. Red is the colour you wear at a wedding in China, white is the colour you wear in a funeral. And so generally, the phrase for everything to do with festivals and important events is described as 'in the colours of red and white'. Father Christmas wears red and white, so you can see how that culturally fits. Father, Christmas is definitely in there, because he fits culturally, both in terms of respect for the older generation, and also the colours that he wears. I think generally, he is just seen on his own, reindeers feature a little bit, as well, Christmas trees are also part of the symbolism. But other than that, I think everything else is quite different, both in terms of as we were saying, who celebrates it, how they celebrate it, that is all very different. Then of course, there are these really confusing parts of it around Father Christmas is sometimes seen with a saxophone...

SO: Now, I was going to ask you about that because that is definitely something which most Westerners would think was slightly incongruous, because Father Christmas and a saxophone is not a usual combination. Is that actually a thing? Or is it just sort of a bit of a joke?

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AM: I think it is a thing. I have not really thought about it until I was reading into it more ahead of our discussion, but yes, you will often see not a human Father Christmas, I have not seen many of them (with one), but a statuette of a Father Christmas, you will often see them holding a saxophone, a kind of life size figure. There is no good explanation as to why this is. There are a couple of theories, the main one being that generally during Chinese festivals, there is some kind of musical instrument associated with it. For example, around Chinese New Year, you have got drums or gongs or Chinese instruments.

Therefore, the main character of Christmas in China being Father Christmas, it is not unusual for him to be holding a musical instrument. The saxophone is seen as very much a Western invention, which it is. So, the best theory I have come up with is that, because it is a festival, the main guy involved in the festival needs a musical instrument in China, because that is just how it goes. And because it is a Western import, therefore, he should be holding a Western instrument, and a saxophone seems to be the one that people have decided - maybe because it is more portable than many other instruments. So that is the best theory I've found on why Father Christmas is often seen holding a saxophone in China.

SO: Okay, so that kind of works. There would have been many, many instruments you could have chosen instead, like a guitar or whatever, but saxophone so be it. But here is the question. Why is he also seen with sisters rather than elves? You very, very rarely see or even hear people talking about elves in China, which obviously, Will Ferrell must be a bit annoyed about for his film marketing?

AM: Yes. Again, Sam, this is one of those really annoying questions. Normally when you are researching something on the Chinese internet, Baidu has the answers to everything. But this is one of those questions that there is no good answer for. And so again, I am just coming up with my own theory on this, but I think it could be something to do with language, actually. So the idea of an elf, I think that is a really alien concept in China, and the word for 'elf' in Chinese, which is 'jīnglíng'. It does kind of work in translation but I think it may be it is just too much of an alien concept, to be part of what is absorbed into Christmas in China. And also, you know, a 'jīnglíng', 'an elf' in Chinese, well an elf is a supernatural, not necessarily a ghost, but something that is supernatural. And then within the imagery of Christmas in China, you have got a wise old man who is dressed in red and white. In the Chinese context, you can see that this kind of supernatural being does not really fit with it.

SO: Which is kind of ironic when the whole point is that Father Christmas is a supernatural being in the West, someone that can miraculously go through chimneys and fly through the sky.

AM: Yes, I mean, it is true. So again, this is just my theory, but I think because Father Christmas looks like a kind of wise old man, I think you can kind of get that. And of course, a lot of how China sees Christmas now is very much influenced by the more modern commercialised version of Christmas that we get in the western world as well, and so that is also part of it. But I think the fact that elves are not part of it, and instead Father Christmas apparently has sisters, maybe that is partly to do with how you see, perhaps more in the US, in terms of Santa's helpers often being women dressed in Christmas kind of clothing. Maybe it is just that the elf is a step too far to be absorbed into Chinese Christmas, and actually, they just want to stick with Father Christmas holding a saxophone.

SO: Fair enough, elves are not everyone's cup of tea anyway. So what about, you mentioned about shopping... now, one of the things I remember about being in and around China for Christmas was the sheer excitement about how much could be bought. Also, considering a lot of the people I would have been talking to are businessmen and women selling tat, wondering how much money they could make over the Christmas period. But you said that it has slightly been eclipsed by this new Alibaba phenomenon Double 11. But is Christmas still considered to be a big shopping bonanza? Or is it coalescing into something slightly different from that now you have got the competition with Double 11?

AM: Yes, so I think certainly the shopping festivals in China have definitely, I mean, they have just become so big. I think that is a response to what seems to be this need for people to consume, particularly younger generations, just the level of wanting to buy and shop and stuff. This is definitely a phenomenon of modern China. I think Christmas, I think it's still seen very much as a time to consume, whether that be shopping or going out and having fun, eating out. The word that I have most seen Christmas described as in Chinese is 'kuánghuān', which is a kind of festival or carnival type atmosphere. And actually, I just think there are so many festivals of various sorts in China, I think, generally, culturally, the idea of a festival a 'jiérì', it is just part of the Chinese calendar.

But the way these festivals have manifested in modern China can be quite different. So for example, the two main holidays in China to do with the country, i.e. National Day holiday in October, and the Dragon Boat festival. They are to do with China and the kind of nation, but people look at that now as time to go on holiday, or to go overseas and take a 7-10 day holiday. And so again, that is probably quite different to how people would have celebrated that holiday, 50 or 60 years ago. So I think consumption is just part of modern China, and the shopping festivals that have come about over the last 10 years have definitely overtaken Christmas as being a shopping-type festival in China. But I think there is still a lot of consumerism around it, much as there is here in the UK and elsewhere.

SO: Yes exactly. Consumerism is now a huge part, if not the dominant part, of Christmas in large parts of the West. So, I am not surprised it has gone that way in China. But I suppose just to finish off, what would you say the difference is between Christmas and Chinese New Year are? Obviously, there is a consumerism aspect in both, but what are the similarities and differences?

AM: I think, actually, I would say, in terms of how Christmas is celebrated in the West, there are lots of equivalents of how Chinese New Year is celebrated in China. It is about family coming together. Christmas holiday here, in the UK for me, that week is pretty much every single day, you have got another family home or you are doing something and seeing family and eating, giving gifts, and Chinese New Year is very much like that. Generally, people will try and travel home, when they go to their hometown, maybe they have not been back for a year. So, there is lots of seeing, obviously, parents, but then other relatives. There is a set calendar of the first day in the New Year, you see the grandparents on one side, and the next day, you see the grandparents on the other side. So, it is all about visiting family.

I think actually, for the younger generation in China, it can often be quite stressful, because they will be asked about, are they married yet? How much money are they making? What does the future hold? So actually, Christmas, therefore, can be seen as a bit of a release in China, because it is not about family. It is just about having fun, going out and either having a meal or going shopping. So, I think there are parallels between how Christmas is celebrated in the West and how Chinese New Year is celebrated in China. But then, of course, you have high levels of consumerism in China around Chinese New Year, as you do around Christmas in the West. So, I would say actually, those two they are quite similar in many ways, but just the version of Christmas in China is very different to Chinese New Year.

SO: Good. Well, on that note, I suppose it is best to say 'shèngdàn kuàilè' and to wish all our listeners a very happy Christmas and thanks again for coming on. It is always good to look at Chinese culture through language, and I hope people have learned a fair bit about the differences and a few of the similarities as well.

AM: Thanks so much for having me, Sam, it is great to be here. And yes, Happy Christmas. I look forward to seeing in the new year

SO: And check out Slow Chinese if you have not already. We will be in touch with you next year. Thanks so much, Andrew, all the best.

AM: Alright, thanks Sam.

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In today’s episode Stewart and Sam speak to one of the leading thinkers on technology policy, Rob Atkinson from the Information Technology and Innovation Foundation (ITIF). An old friend of the show, Rob joins us to talk through the realities of what British Prime Minister calls for a “Nato for tech” to counter Chinese influence.

Here is a summary of our discussion:

• Rishi Sunak has called for a Nato of technology to protect Western interests against China.

• We discuss how an arrangement would work, for example would there be shared collective responsibility, and a minimum level of investment? What would happen if there was an issue and some of the members didn’t respond?

• Rob argues that Europe has been on the sidelines while the US has been taking China to task on problematic trade policies.

• US policies like the cutting off of advanced microchips to China, and the Chip 4 alliance, are evidence that Washington is now using trade as a weapon against Beijing. The question is, will Europe help with this?

You can also listen to the podcast on Apple, Amazon, or Spotify.

As always please do share, comment, and subscribe. We’ll be back soon with more What China Wants.

Many thanks for listening. In the meantime, if you would like more information about the Evenstar Institute and our research, then please email me sam.olsen@evenstarglobal.com

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Here is the transcript:

Sam Olsen: Hello, and welcome back to What China Wants with me, Sam Olsen, and Stewart Paterson as always. Today, we are going to be joined by someone who has been on the newsletter before, actually a few times, and someone that I have very much enjoyed reading about over the years. It is Rob Atkinson, who is, as you probably remember, the Founder and President of the Information Technology and Innovation Foundation, ITIF, which many consider to be the world's leading think tank on Science and Technology policy. Welcome back, Rob.

Rob Atkinson: Thanks a lot for having me, Sam and Stewart.

SO: So we are very keen to have a chat today because, as you know, we have got a new, well the latest in a long line of new Prime Ministers, in the United Kingdom, Rishi Sunak. He has spoken about something which I know is close to your heart, and which perhaps, is considered more and more by people in your country, in our country, and in fact, all the West to be of paramount importance, and that is securing the technology supply chain against what is perceived to be nefarious Chinese influence. You and I did an interview maybe a year or two ago about this very thing, so it is fascinating to see Rishi Sunak talk about it in his hustings to become the new leader of the Conservative Party and Prime Minister.

But maybe we can just start from the beginning, for those who did not read those previous newsletters, can you just explain to our listeners, what it is that you actually have called for in the past regarding a NATO of trade, a NATO of technology, and why think it is important?

RA: Sure. So, there are two related concepts: a NATO for trade and a NATO for technology. We proposed in a Washington Post op-ed a NATO for trade, right around the time that when wolf warrior diplomacy was maybe at its apex, they might have toned it down a bit since, because the Chinese eventually figure these things out. But when you threaten other diplomats with a shotgun, and when you just cut off trade because you do not like what some country has done in a diplomatic way, which is what China does, it is basically bullying, and it is finding the weakest players in the link and bullying them basically to kowtow to China.

What we proposed was, look, this is ridiculous; allied, free, democratic nations need to stand with one another so that an attack on one is an attack on all. So, if China says to Australia, "hey, we didn't like what you say about the Wuhan flu, we are going to cut off all Chinese students to there, or we are going to cut off your imports of this or that", that is just utterly ridiculous. And the rest of us should say, "Yes, go ahead and do that, and we are going to have consequences for you too China". Basically, to let China know that it just cannot bully its way around the global environment that way.

Now, a NATO for technology is somewhat related, but the idea there is a little different. And what it really is, is saying, we are in a world where no longer does the West, or the free countries, have the dominant lead in technology. China is really an amazing place for that now, and they are going to use that. They have shown that, and they will continue to do that. They will use that as a weapon, particularly if we go to war over Taiwan. So, the idea there is that, given their massive scale, and the massive amount of money the Chinese government puts behind this, as allied nations, we need to work very tightly and very collaboratively on a whole set of key technologies, in joining our R&D, letting our companies work together with government-related programmes. We do not do that now really. The good news is that we are all talking about it, and the new Prime Minister is talking about it, which is great, but we do not do it yet.

Stewart Paterson: So really, I suppose there are two elements to what you are saying here. The first is a coordinated response to any Chinese economic coercion, so an attack on Lithuania or an attack on Australia immediately induces a response from everyone else. I suppose that the biggest issue with that is in the military sort of NATO, we at least have the supposed formula for burden sharing where everyone pays 2% of their GDP as a minimum into preparing militarily for the eventuality of a military attack. In the sphere of geoeconomics, clearly the costs to different countries will vary substantially as a result of an escalation in this kind of geoeconomic warfare, if you like. Those costs will no be spread evenly through the Alliance members. So do you have in mind a kind of a mechanism by which any retaliation to Chinese economic coercion attempts for redistributing those costs? And do you think it is actually feasible at this moment in time to put together such a mechanism and people to agree it?

RA: Well, I think it would be great to have a mechanism because then we would be getting a boatload of money here in the US. And I say that because to me, one of the things that I think the US has done a poor job on explaining is, we were the ones that went to battle, we were the ones that fought back against the Chinese. Europe stood by the sidelines and enjoyed the fight and reaped the rewards. So when Trump pushed back against China, it was us that paid the cost. The Chinese were happy to cut us off and go buy from Japan or go buy from Germany, or wherever.

But anyway, the more serious point or response is that I think the way this would work would be that let's just say you get 15 countries agree on this, and there is an attack on one of them. If 13 of the rest of them do something in response, and the other two do not, then the other two get kicked out essentially. In other words, you are not in this anymore, and next time you get attacked, good luck, we will be praying for you. So I do not know, in a sense I think the cost actually would differ by issue. In the case of Australia, cutting off minerals, that's one cost; in the case of Lithuania, maybe cutting off students or something that is a different cost. So I think the costs probably are not going to be.. I do not know, it is hard, and it is a good question. I do not think the costs will be sort of differential all the time. I think for some it'll be more than in other cases, where it will be less. I think we just have to wait and see.

SP: So just coming back to the tech point and also your point about freeloading, effectively. It was interesting, with these Biden administration export controls pertaining to the semiconductor industry, and particularly this advanced semiconductor manufacturing equipment, the story seems to be that the Americans tried quite hard to corral support in Western Europe for these export controls, but to little avail. Is that your understanding of the situation?

RA: It is. I was listening to a progressive UK group that was doing a big conference in Berlin recently, and I was listening to Frans Timmermans, a high-level EU official, and he was saying, "In the EU, we have values. We should really only engage with other countries that share our values." This was pretty much the same week, if not, you know, sooner or later that Chancellor Scholz is going to China. So the EU talks a good game, but they really are talking out of both sides of their mouth. On the one hand, they talk about these values and the importance of European values. And at the same time, they do very little to push back against China because they want the money, and they want a free ride off of us. The UK does not do that by and large, but the EU largely does. Japan does not do that anywhere near as much, the EU is really the outlier here, and they need to stop.

SP: I think there is a growing consensus amongst those people who watch the EU that the EU is very divided on this, and that Germany is becoming increasingly an outlier, in terms of the country's willingness to continue to nurture a relationship with China, above the desired level by other member states. But just coming back then to the tech NATO, and the implications for that in terms of decoupling, in effect, this would sort of lead to a complete decoupling of the technology industries. And let's face it, I mean, semiconductors go into basically everything now, don't they? So would this lead in your view to pretty much a complete decoupling of trade linkages with China or certainly manufacturing supply chain linkages, simply because the two semiconductor industries - the one in the tech NATO and the one outside it - would probably evolve very differently?

RA: Well, I think you have to differentiate a couple of things. One is, we must understand who started this trade war. Again, I hate to pick on Europe, but they are easy targets. You hear this in Europe all the time, that America - Trump - started the trade war. That is totally wrong. China started the trade war, essentially in 2006, with the National Medium- and Long-Term Program for Science and Technology Development, and then they jacked it up with the Made in China 2025. It is China that has been trying to get autarky in technology. China is the one that is trying to get global dominance in technology. And I do not say that lightly, I really mean that.

Global dominance, they want to become globally dominant in semiconductors. They certainly were trying to do that in 5G equipment, you name it, high speed rail. That is their goal in genomics and biotechnology. That is what they want to do, and we simply in the West cannot allow that to happen for two main reasons. Obviously we need these industries for competitiveness and jobs and all of that, but  more importantly, we cannot be dependent upon China. If you look at how Russia is dependent upon the West, I mean, we have a lot of good weapons against Russia. Eventually, the pain will become so great, we hope, that they will stop this attack on Ukraine. We certainly cannot let that happen with China.

So the question is, are we going to fully decouple or partially decouple? I do not think we are going to fully decouple, nor should we fully decouple. I am happy to have furniture from China and textiles from China and McDonald Happy Meal toys from China. But I think in advanced industries, particularly advanced industries where it is clear that China is not playing by the rules we should decouple. I will give you an example, and that's Comac, the Chinese state-owned aerospace company where they have the C 919, it is now in the market. I would never ever let a Comac plane, if I was the tsar here, if I was King, I would never let a Comac plane come into the US market. And I would hope Europe would not do the same because it is an illegitimate company. It would never exist without massive, massive government subsidies. So do I want to decouple the aviation market? Absolutely. China is going to decouple the aviation market, we already know that they guarantee they will not buy an Airbus single aisle or Boeing single aisle in 10 years, or whenever the C 919 works its way out. They are just not going to buy our planes. So why would we buy their plane?

I think a lot of this partly depends upon where China goes. If Xi Jinping leaves, and there is somebody else who is more reasonable and ramps all this nonsense down, then I think it is a different story. But I do not think we should fully decouple, and particularly one last point is that there is a lot of folks in the US that are 'hardcore anti Chinese'. It might sound like I am hardcore anti Chinese, but I am not as hardcore as some folks are. Some of those folks are saying we should not even sell chips or other things to China, and Google should not be in China. I fundamentally disagree with that, because the more we can sell to China - I am not talking about military sensitive goods - but the more we sell them chips, as opposed to equipment, the fewer chips they make, and the more revenue we get to continue our dominance. I think we have to be really smart about how we do this and not cut off our nose to spite our face.

SO: It is interesting you say that Rob, because obviously, there has been a fair amount of talk, perhaps not as much as I thought there would be, around the export controls on chips made a few weeks ago by President Biden. There has been talk that this is a very important move geopolitically. And in fact, some people have said that it is as important as the 1940 decision by America to cut off oil from the Japanese, which obviously led 18 months or so later to Pearl Harbour. We have been discussing this in the light of the use of the term, 'the NATO of technology', and so have two questions. First of all, to what degree do you think that we are in danger of militarising trade and technology, and obviously with the resulting risks? And secondly, to what degree is that militarisation, or the increase in pressure from the American side, less to do with defensiveness as to more to do with offensiveness? I read one report, which said that it seemed like America now just wants to 'cut China's legs off' in terms of its technological development. Where do you sit on those two questions?

RA: Yes, so just a little aside on the oil embargo back in World War Two. There is some very interesting evidence that two of the top advisors for FDR - and this has been proven - were actually working for the Soviets. Harry Dexter White in the Treasury Department and Lauchlin Currie, and they were both the key advocates for cutting off oil. The reason they were advocates for cutting off oil is they knew this would lead Japan to attack us, and Russia wanted Japan to go south, not north. So, it is a very interesting historical component.

I do not think that is what is going on here, I just don't think it is anywhere near relevant to this, because China is going to do what it is going to do on Taiwan. We can make it more painful for China by helping Taiwan weaponise, but this will not encourage, in my view, China, to go invade Taiwan. If China invades Taiwan, they will be in a much worse situation because there will be much broader support for export controls to China, they will be much worse off, I just do not believe in terms of this is causing the military. The second thing is what we did there, again, if you look at the Chinese semiconductor industry, much of it is illegitimate. What I mean by that is much of it is based upon giant government subsidies, it just would not exist if it was normal market-based development. Now is that the reason why the Biden administration is doing it? Partly, part of it is that. The other part is they want to limit their ability of for defence. In this case, not offence, but offence for weapons. Can you repeat your other question?

SO: So the other question was around the militarisation of trade, looking at the NATO side?

RA: Okay, so there are two things going on with US policy towards China right now. One is simply standing up for the integrity of the global trading system and saying, "hey, you know what, you guys are not playing by the rules". I watch a lot of basketball, I used to play basketball, and in basketball, there is this notion of somebody who is a dirty player. What does that mean? That means they undercut you when you are going for a rebound, they try to injure you, all these things. China is a dirty player; they cheat, they do not play by the rules. And that just cannot continue. We cannot allow China to continue to gain from this kind of behaviour.

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RA: And so a lot of what the US government is trying to do now is to respond to that and to limit the ability of China to benefit from essentially WTO illegal, unfair, mercantilist, predatory actions. Now, on top of that, there is a side of that that is related to national security. China's defence spending is going up, ours is not going up in inflation-adjusted terms, and the US military sees that eventually, there is a high likelihood of a conflict, and they do not want China to be more technologically advanced than they should be. So I think a lot of that is related to military-related technology. You do not see the same thing, for example, in biotech, where it is not a militarised technology, although the Chinese could use it that way, I suppose, if they wanted.

So I do not think military is the sole reason by any stretch of the imagination. The reason why I think that is important is because if we frame this as a military debate, Europe can just sit by the sidelines and say, "Oh, well, you know, we are a peace-loving region, we do not have to engage in that. We will let the militaristic Americans, with all these Texans, do that kind of stuff and we will sit by the side. First, you should be worried about that because if China gains militarily in the Pacific region, it is a completely different world for Europe. But secondly, the main reason, as I said, that the US is doing that, is to prevent China from being able to engage in this kind of predation. If we succeed, it is going to help Europe. And that is why I think it is so frustrating to see Europe sit on the sidelines and try to gain short term advantage.

SP: Maybe that is a good entree into talking about the Chip 4 Alliance. For the benefit of our listeners who are unaware of this, about a year ago, Japan, South Korea, Taiwan and the United States began a discussion under the aegis of the United States, as to how to improve resilience in semiconductor supply chains, and to internalise the technology and the manufacturing processes to essentially isolate the chip industry from potential weaponisation by China. And so Rob I was wondering how that is progressing, if there is any sort of formal action on that, or whether, at the company level maybe there is more going on, that does not make the headlines? And secondly, whether you envisaged European participation in this at some point. Obviously, the European semiconductor industry is not that important on a global scale, but there are pockets of excellence, particularly the Dutch semiconductor production equipment manufacturers. How is the Chip 4 Alliance? What is the shape of that?

RA: Yes. Also, when you say you have European pockets, you do, and the UK is in the process of selling them all to the Chinese!

SO: Not yet. It has not been pushed through yet!

RA: Hopefully not, I pray that it will not. Hopefully the new government will put a stop to that nonsense. So, I think I am not super close to that but my understanding is it is proceeding apace, but it has not quite gotten to fruition. In part I think that is because a lot of that was contingent upon the passage of the Chips Act in the US, which I think your listeners all know about passed in July or August -0 a boatload of money, USD 48 billion for fabs in the US, 30% tax credit for equipment put in the US and another, I believe 12-14 billion for advanced R&D. I think that pot of money is probably where a lot of that will end up being played out. There is an enormous amount of interest in all four of those countries you talked about, including the US, on doing more collaborative, cooperative work in that. For example, one of the areas will be I believe, to think about a joint semiconductor roadmap for where we go from here, and then how to get all the players together to work on implementing or making that roadmap a reality.

But I will say this, I just spoke to a high level European official yesterday and they are very interested in this. I do not think we should write Europe out of this. There is a big chips consortium in Brussels - I'm blanking on their name right now - a group that works internationally with companies. The Europeans are putting money into this. So I think it is certainly possible that Europe could and should play a key role in this alliance, not just the four.

The other thing that is important to understand on this, it is not just about logic or processing or even memory. There are other components that are important that we have to think through on the supply chain. One is called Test and Evaluation, which is a little bit more routinised. But a lot of it is in China, and at the end of the day if you cannot get the whole thing done and finished, but some of it has to be in China, that is a choke point. Another is circuit boards, a lot of that has moved to Asia. And there's some really interesting technology and R&D being done, and that potentially can be done to think about, could we re-shore circuit boards, but do it in a much more automated and lower cost way? So it is really that whole combination. Stewart, you mentioned ASML and I think it is really important to differentiate between capital equipment to make chips and then the actual making of chips. So ASML obviously is a key player, but Europe also has companies like Infineon, which is a German chip maker. They tend to make chips for industrial and automotive applications, and they are an important player. So Europe does have some things that they can they can contribute.

I think the big contest really, ultimately, will be it is easier to cut off equipment to the Chinese, that is the real chokehold and ASML I'm sure is not happy with that being the chokehold because it costs them sales, at least in the short run. In the long run, though I do not think it does cost them sales unless the Chinese can substitute for them which at some point, that is what they want to do. But in the short run, they cannot.

SO: In summary, would it actually be better to frame this rather than as a native technology, maybe, say, a new Manhattan Project of Western and Western alliance technology? Because it sounds like actually, what we are trying to do is create less of a defensive posture, but actually more of a positive thing, if you can call creating an atom bomb a positive thing. But you know what I mean, you get the gist around coming together for a positive ending, which would be to create a block of advanced technology that makes the Western alliance self-secure in that. Would you think that is perhaps a better way of looking at it than looking at it from a defensive point of view, which I think do the word NATO does imply?

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RA: Well, I think we need both, I think we need a policy of beefing us up, and by us, I mean, democratic allied nations. One of the problems, by the way, with using the NATO conception is it is a European-Atlanticist Alliance, and obviously, this alliance has to be broader than that. But I do think we have to also speed us up and we have to slow them down, we have to throw sand in their gears. Again, I would feel less adamant about that if the Chinese were not stealing intellectual property and espionage and forced tech transfer and closed markets. They allocate a little bit of their market to European and American companies just so that they can look open, but those are not open markets. You look at the heavy equipment industry in China, for example. Massive amounts of spending on construction. It is all allocated, with the exception of maybe 5% or 10%, to three Chinese largely state-owned construction equipment companies. So, we have to figure out ways to slow them down.

SO: Maybe we need a new Manhattan project but for chips?

RA: I agree. I think we should be thinking about it. Manhattan was really about developing new technology, so maybe we need a Manhattan for quantum because that is a new technology, it is not perfected yet. Maybe we need something on genomics and things like that. I think for chips, it is not quite the right analogy, but I get your point, the notion of us all working together. The one thing I would want to avoid, though, would be British spies. We do not want another Klaus Fuchs in the works here. Not to say that we did not have our spies too, but we did have Klaus Fuch you know, so...

SO: Ah yes, played a very minor role. So, okay, looking at the time I have one question I have been dying to ask you based on some of the things that you have been saying along this podcast so far, but it relates very much to throwing sand in the tracks of the development of the Chinese. Going back to a few minutes ago, we talked about the fact that some people are making the comparison between the Japanese oil embargo in 1940 and the recent restrictions on chip exports, what do you think is coming next for America? Is there the chance that the more America does this, the more it backs China into a corner, and the more China feels in a corner, and it cannot develop its technology in a way it would like to, the more risk there is of conflict breaking out?

RA: Yes, so I do not think that is the case, because China will get less technology. Look, if they invade Taiwan, you have to imagine that even Europe would say that is too much, and they would say, "okay, we are not going to just wag our finger and make some speeches, we are actually going to have to do something". So I think the last thing you can say about Chinese CCP officials is that they are dumb. They are not, they are super smart, and they are super articulate. I am just not worried about that. I do not think that is what is in the cards, I think what is in the cards is they are just going to double down and triple down on self-sufficiency in these technologies. So this will be a lot of pain, but they are just going to keep going on this. I think you saw that recently with what Xi said, President Xi.

I think in terms of what is next in the US, it is hard for me to see any other big thing from the Biden Administration, because I think the core area of concern is really chips, and semiconductors. There may be some other things at the margin. There certainly could be a ramping up of things against Chinese spies in the US. But I think there are two possible areas that are related. One is it is certainly possible that there will be an expansion of what's called CFIUS, the Committee on Foreign investment in the US, which monitors and potentially rejects foreign investment in the US, particularly from China and Russia, and adversaries. There is certainly a discussion in Congress now about expanding that to American investments in technology or joint ventures are other kinds of sharing in China. That was on the table back in the last administration, but the tech industry has fought it enough that it did not get through. But it is now back.

The second thing is an idea, a proposal that we will be making to expand a very interesting powerful weapon that we have. It is largely not used, and it is called Section 337 of the 1930 Trade Act. Well, what does that mean? It gives the US International Trade Commission the power to block imports, if those imports are based upon either intellectual property theft or 'unfair trade practices'. It has not really been used in a very serious way, the law needs some reform, and ITIF is laying out a big proposal for that. We are releasing it in the Senate with a couple of senators. That could be an interesting tool. The Europeans have done a similar thing not quite as far but their foreign investment review package. If you are a Chinese company and you have unfairly been subsidised, you have a harder time getting into the European market, particularly for procurement and other things like that. So, it does seem to be a move in that direction where we could say let's just cut off - if you are a Chinese construction equipment exporter, and you have been massively subsidised and benefitted from a closed market, do not bother selling into the US or Europe, because it is unfair.

So I think we are going to see more of that. Anybody who thinks that somehow this China trade war was the Trump thing only is not understanding what is going on in the US. This is a minimum 20 year initiative, this is not going to go away, it is kind of like the Cold War with the Soviet Union. Now, a lot of people in the foreign policy establishment, they hate that term, and say "it is not like the Cold War". No, it is like the Cold War. It is just different in the sense that China is also an economic adversary and has capabilities. But I think this is going to last a long, long time.

SO: Well, on that enlightening but depressing note, I suppose we will leave it there. Rob, thank you so much for joining us. Again, as always, it was very interesting to hear your remarks, and we look forward to hopefully having you on again to talk about some more of your initiatives. Obviously, the digital frontier is the frontier of where a lot of international relations is at the moment. Thanks very much, and we will be in touch again soon. Goodbye

RA: Thank you

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Earlier this week we announced the launch of our new think tank, the Evenstar Institute. Dedicated to measuring and understanding evolving national influence, our current programmes are the China Influence Index and Macro Supply Chain Risk.

In today’s episode Stewart and Sam speak to the Evenstar Institute’s Director of Research, former LSE academic Dr William Matthews, about the paper that Evenstar just published. “An Overlooked Risk: China’s Indirect Influence Over the United Kingdom’s National Security Supply Chain” shows how the UK’s national security supply chain is heavily exposed to China in three separate ways: directly, indirectly (through third party countries that may be heavily influenced by Beijing), and through China’s strong position in the global logistics network.

Here is the Executive Summary of the report, which we discuss below:

• The United Kingdom’s national security supply chain is exposed to China in three ways: directly, indirectly (through third countries), and through China’s strong position in the global logistics chain.

• Beijing has repeatedly used its influence in trade and its control over certain raw materials to achieve its own strategic and political aims, for example through cutting off supply to countries which it disagrees with.

• There is every reason to suspect that Beijing would employ similar tactics to achieve its strategic aims if relations with the UK were to significantly deteriorate.

• Although effort has gone into de-risking the UK’s direct exposure to China, more work is needed to reduce the indirect and logistics risks.

• Using Southeast Asia – a key source of goods and materials for the UK – as a regional case study, we show how the UK’s national security could be readily compromised by China in the event of a downturn in relations.

You can also listen to the podcast on Apple, Amazon, or Spotify.

As always please do share, comment, and subscribe. We’ll be back soon with more What China Wants.

Many thanks for listening. In the meantime, if you would like more information about the Evenstar Institute and our research, then please email me sam.olsen@evenstarglobal.com

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Here is the transcript:

Sam Olsen: Hello, and welcome back to What China Wants with me, Sam Olsen, and as always, Stewart Paterson. Today we have got some very exciting news. For a number of years now, we have been running What China Wants as a newsletter, and in podcast form. We are now launching today a mothership What China Wants, which is called the Evenstar Institute, a non-partisan, not-for-profit think tank focused on measuring and understanding the evolving nature of national influence in the 21st century.

What does that mean? Well, the first thing we are looking at, and the relevance to What China Wants is we are looking at Chinese influence across the world. To do so we have developed a very detailed methodology, using quantitative and qualitative data; using tens of thousands of quantitative data points and looking at interviews with people from around the world to help us to put the qualitative side in as well. Stewart and I have been working hard on this for a while now, along with the rest of the team from Evenstar. Today, we are going to be talking about the first piece of research that The Evenstar Institute is launching. To do so, Stewart is going to be interviewing myself and our colleague, William Matthews, who is our Director of Research, about exactly what is in this new paper. So, Stewart, back to you,

Stewart Paterson: Thank you, Sam, and welcome, William. William is a fluent Mandarin speaker and a specialist in Chinese Comparative Social Science and International Relations. He has 10 years’ experience researching and teaching on China, drawing on a range of disciplines including political science, history and anthropology. Before joining the Evenstar Institute, William was an academic at the London School of Economics, and he received his PhD from University College London.

So William, well, congratulations on this new piece of research. It is entitled 'An overlooked risk: China's indirect influence on the UK's national security supply chain'. So, William, for those who perhaps do not follow issues of national security closely, perhaps we could just kick off by asking you how exactly do you define the national security supply chain? And in layman's terms, what does that actually mean to people?

William Matthews: We have taken a broad approach to national security, and we have gone into this through the lens that national security is not just about bombs and bullets, it is about much more than just purely defensive capacity in the defence supply chains. Our approach is to understand national security, fundamentally in terms of a country's ability to act autonomously, without having to align itself with the influence of other actors.

We look at this not only in terms of defensive capacity, but also aspects like human security. So, the ability of a country to provide for its people in terms of food, health, environment, and so on, of economic prosperity, and of government function. In our view, compromising a country's autonomy over any of these areas would constitute a threat to national security. So that is the lens with which we have then gone on to look at what we are calling the 'national security supply chain' in this research. So we do not just mean the defence supply chain here, we are looking at anywhere in the global supply chain feeding into UK national security, that could represent a vulnerability to any of those core areas.

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SP: That is fascinating, William, and in the report, you talk a little bit about the various domains or 'sectors' as you call them, in which China can create influence, and you also have the 'enablers' of influence. Could you just briefly explain what you mean by that, and talk us through the sort of process by which the influence is built?

WM: Sure. So, we have looked at this using a model which is designed to trace the kind of causal chain of influence building. We do this across different sectors, all of which constitute, if you like 'a domain of' a country's key activities. These are things like defence and security, politics and governance, economics and finance and so on. And essentially, we look at influence, so for example, the influence of China in another country would be the degree to which China is able to dominate one of those sectors in a way that constitutes some kind of constraint on the autonomy of that country to act.

When we are looking at 'enablers' of influence, this is the specific means by which that influence is built up. So that could be, for example, through things like diplomatic means, it could be through ownership of key companies or stakes in key companies. In the case of China, it could also be through things like the activity of the United Front Work Group, as a means of building up influence on the ground. Then we look at these, again, through that ultimate lens of national security as a potential target.

SP: Brilliant William. Well, I am sure we could probably do a podcast on each and every one of the enablers, and each and every one of the domains, but not now. So, I would just like to move on, and ask you Sam, why do you say China is a risk to our national security supply chain?

SO: Well, Stewart if you go back to the early days of What China Wants, we have always been very centrist in our approach. We are all Sinophiles, but we also recognise that China i.e. the Communist Party does want to change the world order, and that might not be to the benefit of the UK and its Western allies. This is always the lens through which we look at things, and I think that with regard to the UK's national supply chain, there are vulnerabilities. For a start, 30% or so of the world's manufacturing is in China, and not just directly impactful for the UK, but so many of the components, raw materials, etc, that we get from third countries comes originally from China.

One of the examples we give is looking at British military uniforms, where many of them were made in Cambodia, and we show that two thirds of the inputs into Cambodia's garment industry come from China itself. So China could literally turn off Cambodia's exports of garments in one day, and that would be a problem for us if we were waiting for uniforms.

SP: Presumably, that is not the most serious of the threats is it?

SO: No, it is not. But it is an indication of how one can imagine threats materialising from China putting pressure not only directly on withholding things from the UK, but also indirectly from the UK, as well. And the thing is, is that China does have a lot of form in using trade and its control of aspects of the supply chain as a weapon to achieve its strategic goals. There are so many examples, whether it is imports of salmon being cut off from Norway, because they were angry about the award of the Nobel Prize to Liu Xiaobo, or whether it was banning bananas from the Philippines over an argument about the South China Sea, or rare earth materials being exported to Japan in 2010, because they did not like what Japan had done about a fishing incident. There are many, many examples of where China has used that, and I think that it is incumbent upon us to prepare for a situation where China does want to achieve strategic goals with the UK, where it uses that demand to force Britain to acquiesce on things by withholding, either directly or forcing other people to indirectly withhold things from the UK national supply chain.

A really good potential example is something we talk about in the paper, which is that there are 800,000 people in the UK who have jobs related to the motor industry. If China decided to cut off parts, many of which are made in China, let alone all the semiconductors that are made in Taiwan that could be cut off by Chinese action against Taiwan, then the impact on the UK would be very severe indeed, not only economically because of slow production, but also socially, because so many of those people would potentially lose their jobs or at least see a downturn in their working week, which would have an impact on their families. So, as William says, the lens of national security has to be looked at much broader than just bombs and bullets. To that degree, we have created this paper where we look at the potential risk, directly and indirectly from China.

SP: Yes, so it is interesting, you mentioned rare earths because, of course, we have just had the Section 232 report in the United States into their dependency on permanent magnets, which is a crucial part of the defence supply chain, and I am quite sure that we are at least as dependent, if not more so, than the United States on China for those. But I suppose, William, a lot of the report is about the indirect risks from China. Perhaps some of the more direct risks and routes of influence such as Confucius Institutes, for example, and the threat that Huawei posed potentially, and Hikvision with their surveillance equipment, these are sort of relatively direct risks in the realms of technology and media, but can you elaborate a bit more on the indirect risks, perhaps stemming from the enormous influence that China has created in third countries?

WM: Sure, so one of the key points of this research is precisely that, that indirect risk or indirect exposure to China is as significant an issue as those kinds of direct exposure that you mentioned. Now, indirect risk can take a few different forms. It could be the knock-on effects into a country further along the supply chain, so something like the example Sam mentioned about uniform manufacturers in Cambodia relying on Chinese inputs. But it can also be the result of China executing influence over intermediary countries, or suppliers where it has established influence. Again, we have precedent for China doing this. For example, in 2021, after Lithuania opened a Taiwan Representative Office, China attempted to use direct targeting against Lithuania, which had little effect. But what China then did was target firms which themselves source products from Lithuania, an example being Continental, a German automotive manufacturer. Their products were prevented from clearing customs in China, and this kind of action ultimately led to increased political pressure on Lithuania from Germany. What we have got there as an example of China using its influence over a third country to pressure another country.

Now, what we have found looking at our regional case study of Southeast Asia is that in this region - this is a region crucial to the UK supply chains - it is also a region where China has a very high degree of influence. We find that there is a particular risk in terms of countries from which the UK imports high volumes of goods and components and so on, Vietnam and Thailand are good examples. Now, these have relatively a moderate degree of Chinese influence compared to a country like Cambodia, but nonetheless, that moderate influence combined with that volume of imports to the UK, constitutes a high level of indirect exposure to Chinese influence. This is a level of influence which has increased significantly over the last 10 years. We should, I think, expect, as China has shown willingness to use indirect methods to impact supply chains, we should be prepared in the event of any kind of downturn in relations with China or something like this, to see similar targeting of UK supply chains going through regions with high levels of Chinese influence like Southeast Asia.

SP: So, Sam, a lot of our listeners will have heard of and be familiar with the Belt and Road Initiative. We have recently had this situation where there has been a healthy, rigorous debate in Germany about the Chinese acquisition of a stake in the port of Hamburg. Some years ago now, the Chinese took over the port of Piraeus, which is obviously a fairly iconic Greek economic asset, as it were. China is the biggest trading nation in the world, it spends a lot of money on logistics, on shipping, it has huge capacity in shipbuilding. How important do you think the global footprint of China's logistics companies is as a vehicle, a channel of influence? And would you worry that this enables them to disrupt global supply chains in a in a significant fashion?

SO: First of all, it is important to note that there is very strong historical precedent for a country dominating trade, dominating logistics to have a cutting and winning edge in war, the UK being a prime example of that. In the First and Second World Wars the UK dominated the world’s maritime fleets, and its ability to shift products, food, etc. munitions around the world was such that the Germans and the Japanese simply could not match it. For normal peacetime, there is absolutely no problem with China being able to have a dominance over global trade and to be able to have that strong position in the logistics industry. But, if and when we get to conflict with China in whatever guise, whether it is kinetic or merely economic sanctions, then we can expect China to do what we did and what other countries in the past have done with their logistics control, and to use that to their advantage.

There are a few things you mentioned there about China and the ports. Well, they now own 93 ports in 40-50 countries and have one of the world's largest shipping container companies COSCO, but perhaps more importantly, they are increasingly using their control of ports and their exposure to the global logistics industry to put their own digital infrastructure in. The most prominent of that is a system called LOGINK, which is actually a really good idea in many ways, because it brings together lots and lots of different aspects of logistics software into one closed system, which makes things far more effective, far more efficient, and you can ship something from A to Z through different ports, different lines, and make it much easier to track where it is going.

The problem is that, for the West, that system LOGINK is owned and run by the Chinese, which means that the Chinese not only have access to understand where all supplies for the West are going - whether that is uniforms or whether it is bombs, bullets, or whether it is much more prosaic things like for example, batteries, which are also needed for the UK's and Western supply chains - it can see where they are going, but also, if it is feeling mischievous, can actually divert those shipments, and it gives China huge amount of control over what can and is shipped around the world. So I think that is an important aspect to look at with regard to the Chinese control over the UK national supply chain and one that really has not been spoken about much.

SP: Okay, so William, clearly yes, logistics are a threat, and our supply chains are intertwined with China. So what is the solution? Onshoring and friend-shoring, are the sort of buzzwords of the moment in terms of building supply chain resilience. Perhaps it is ironic to be talking about friend-shoring when at the moment, I think the UK are waiting for a delivery of a particular type of press that we require at Aldermaston from Belgium and the export has been blocked by the Green Party in Belgium, although presumably that is a surmountable problem. Are onshoring and friend-shoring the answer, because clearly autarky would be very expensive, and a lot of these components that we depend upon in the UK, we simply do not have the scale of demand to do everything ourselves?

WM: So onshoring and friend-shoring are solutions, but they are solutions with significant challenges, simply because of the degree of exposure of supply chains to China directly and indirectly. A good example of this would be Apple, a major company that produces 90% of its products in China, it has estimated it would need at least eight years to move just 10% of that capacity out of China. And it's not only under direct exposure through that manufacturing, but also, if we look at its suppliers 150 out of 180 of its suppliers continue to have operations in China. So there is also that huge degree of indirect exposure. So, in thinking about onshoring, and friend-shoring, the UK Government and companies need to be thinking about indirect exposure as a major concern. Where do alternative suppliers source their raw materials? Where are these located? What is China's influence like in those alternative locations?

As part of this report, at Evenstar we researched this in relation to technology and manufacturing companies, and we drew two main conclusions from this. The first one is that a key challenge is that there are relatively few alternatives to Chinese suppliers in Western or Western-friendly countries for a lot of advanced components. The second challenge is that when those alternatives do exist, their production capacity is far lower than that of Chinese competitors, typically. So, this presents significant issues as companies are attempting to shift their supply chains. For instance, one company we looked at had seen a huge upsurge in demand as a result of these processes. While it is able to procure 97% of its components, there is 3% that are in short supply because of supply chain issues. But those 3% are actually essential, so it creates a bottleneck on production output. So, a lot of this is also about what are the particular chains and links in those supply chains? How can these be mapped, and that step of getting that thorough knowledge of direct and indirect exposure at all stages is crucial to making onshoring and friend-shoring a successful solution.

SP: So Sam, maybe I can just come back to you finally, with I suppose two questions. What are your ultimate conclusions from this report? And secondly, where can our listeners expect this research to go in the future, and what capabilities does the Evenstar Institute have that might be of use to them?

SO: Okay, so the most important conclusion is that, like it or not, Rishi Sunak, the British Prime Minister, announced in that speech he gave recently that the 'Golden Era' with China is over, and actually we need to be more pragmatic and understanding and dealing with a strategic competitor like China. That means that we have to be more cognizant of the risks that China poses to our supply chain. And that is not just about a narrow focus on the specifics around warfighting ability, but on much broader national security definition that we have described. That is not just about stopping exposure, but as William pointed out, it is about building up the capacity for the UK to bring the production abilities back onshore, not only to our shores, but also to friend-shores, and to make sure that we have a much more robust supply chain. So I suppose the purpose of this paper is to really kickstart the discussion at government and private sector levels to say, what can we all do together to make the UK national security supply chain more resilient and more fit for purpose, considering the changing relationship with China?

I think in terms of more research, well, our plans are very simple to focus on the China Influence Index, that's one programme and Macro Supply Chain Risk is the second programme. Obviously, this paper brings those two things together, but the next paper will be around China's influence in Southeast Asia, which we hopefully will be launching around Chinese New Year’s time. That obviously brings together some of the issues we just mentioned about supply chains, considering how important that is dangerous to the UK, for a variety of different reasons. We are very excited to see what we can do with the Evenstar Institute. We are looking at influence in the 21st century, and it's not just about China. To be clear, we are looking at other countries as well, and more of that to be released soon.

SP: Sam and William, thank you very much indeed, and we look forward to hearing from you again on What China Wants in due course. Thank you.

SO: Thanks. Goodbye.

WM; Thank you.

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Stewart and Sam are joined today by Meyrick Chapman, a 40 year veteran of macro-investing and formerly of Elliott Management. Meyrick’s research of monetary policy has shown up an interesting and potentially vital impact on China’s relationship with the world. Basically, US monetary policy is driving the bifurcation of the world economy, and actually giving China the opportunity to increase its economic influence. Assuming this is true, then the structural impact of this on political international relations will be significant.

Some highlights from our discussion:

• Even though the US Federal Reserve has raised US interest rates at the fastest rates for a long time (400 basis points), the impact on the US economy has been slight, according to US Federal Reserve Governor Christopher Waller.

• However, the US Federal Reserve serves to promote the US economy, not the world economy. And the UN thinks that US monetary tightening is causing negative economic consequences around the world.

• One major consequence is that China is decreasing its dollar balance sheets, partly because of US monetary policy, but also because of political decisions.

• Most Chinese loans have been made in dollars, so as their hold on dollars decreases, China is swapping debt for equity in many projects around the world. This gives China more control over these assets.

• Thus, US monetary policy is pushing decoupling from China, and at the same time strengthening Beijing’s international influence.

You can also listen to the podcast on Apple, Amazon, or Spotify.

As always please do share, comment, and subscribe. We’ll be back soon with more What China Wants.

Many thanks for listening.

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Here is the transcript:

Sam Olsen: Hello, and welcome back to What China Wants with me, Sam Olsen, and, as always, Stewart Paterson. Amidst the current financial turmoil, it is easy to think that the only country affected is the one that you yourself live in. That, however, would be wrong. The financial world seems to be in a state of flux not known for quite some time, wherever you are.

To discuss this, Stewart and I are fortunate to be joined today by someone who was described to me as "one of the smartest guys in the market", Meyrick Chapman. Meyrick, formerly of Elliott Management, is now the principal at Hedge Analytics, and an investment industry professional with 40 years of experience of macro-investing. Welcome.

Meyrick Chapman: Thank you. Thank you, Sam and Stewart, it is great to be here.

SO: And so today, the specific title of the podcast is "Is the current monetary cycle accelerating bifurcation between China and the West?" I suppose, to kick things off, it would be great if you could give our listeners a quick overview of the extent of that current economic turmoil in the world and some of the factors that are causing it?

MC: Yes, I will have a go. The Fed has raised interest rates at an amazing rate, almost 400 basis points in seven months, which, I think it is fair to say in my lifetime, is unprecedented at that speed, especially coming from effectively zero interest rates, and also a huge monetary stimulus in the form of QE. So there has been a monetary shock, which is reflected in stock markets down a lot, bond markets down a lot, presumably housing markets down a lot, and the dollar is up a lot. But it really depends on who you speak to as to whether this is turmoil or not.

Certainly, if you are holding crypto, it feels like turmoil. But the Fed itself does not describe it that way, and certainly it does not look like they are finished tightening yet. So, Fed Governor Christopher Waller this week said "I've been just amazed to watch rates go up for the seven or eight months, and the markets haven't collapsed. We don't have a financial crisis or anything along those lines, we've got to have a good level of rates." I assume he means "we have got it there fast, and we did not break anything. We are certainly not breaking anything in the labour markets, in terms of unemployment, households are in good shape and household balance sheets are in very good shape." So he sounds like everything is fine.

But I think if you look elsewhere, outside America, and do not forget that the Fed, as it says in their mandate, works to promote the health of the US economy. They are not there to promote the health of the world economy, and that is kind of what we're seeing. UNCTAD, a division of the United Nations, recently got very worried in its 2022 report that the Fed tightening in particular was going to lead to a slowdown, a global recession, and a vicious economic cycle in the developing world. So it depends where you stand really.

Stewart Paterson: Meyrick, that's brilliant analysis, and we will talk about the rest of the world shortly, because of course, a lot of our listeners will remember the early 1980s cycle and the impact that had on Latin America, the subsequent need for Brady bonds, and the criticism that the US monetary authorities came under then from what we now call the Global South. But can we just firstly turn to the United States itself. In simple terms for non-economists, can you explain to us how quantitative easing, the size of the Fed's balance sheet, and the behaviour of the commercial banks in the United States, how those factors interacted with each other, when quantitative easing was a thing? And how now that monetary policy has reversed and is tightening, what we can expect and what might be the ramifications for the United States of that?

MC: Sure. So quantitative easing is the purchase by the Central Bank of assets, and particularly government bonds, but not only government bonds. So the effect of that according to Bernanke – that’s Ben Bernanke, the Fed Chair in days gone by – was to depress the yield curve, so to keep rates low. Not only did the Federal Reserve reduce short term interest rates - the federal funds rate - but quantitative easing was designed to force down yields across the whole yield curve. In terms of the effect, it succeeded to a large degree and interest rates went down for a very long time. It should be said it is not just quantitative easing that did this. It was also forward guidance with a central bank that basically promised that they were not going to raise interest rates for a very long time; that also helped yields down.

But the actual accumulation of assets had a couple of other effects. First of all, it forced through what is known as the portfolio effect. It forced natural investors in Treasury bonds and mortgage-backed securities out of those, because the Fed was buying them, large amounts of them. And so they had to be bought from somewhere, and those people who held them had to go and find somewhere else to park their money. So that was the portfolio effects. But the other effect it had was on the liability side, and we should not forget that the liabilities of central banks are, to most definitions, that is how you define the currency. So, the liabilities side of the balance sheet grew to match their asset side, obviously, because it is a balance sheet, and those liabilities were reserves. Reserves are used only by the financial system, only by the banks to interact with the Fed, and more recently, in some degree, the money market funds in the US, but not the general public.

So what has happened through QE has been an intensification of the financialization of the US economy. It is very much an insider's system now, and the Fed has played a large role in that. Those are a couple of the big effects. I should say also that the reserves are the primary settlement medium for financial markets nowadays. It used to be different before the global financial crisis, but it has changed a lot since then, and now reserves in the system - central bank reserves - are the major medium by which banks settle between themselves securities transactions. So that is not just bank transactions, that is anybody's transactions that require a transfer between banks. In a sense, the increase in reserves has also increased the liquidity in the settlement system, which in itself, helps transactions in securities markets. So there has been a number of effects from QE, all of which have helped get and keep yields down, and equities up, and that is now reversing.

SP: So now this is all reversing, what should we expect, or what are you seeing in US commercial banks, that gives you either cause for hope that there will be a soft landing despite these interest rate rises, or worries you that there won't be?

MC: Well, I think it is not completely clear either way. But certainly, in the case of the domestic US economy, there are some mitigating circumstances. First of all, they are all dollar-based, everybody in the US is dollar-based. And so they are not directly affected by the rise in the dollar that has been created by this change in Fed policy towards tightening. The other thing which is very evident is that as the Fed expanded its balance sheet, the other side of that, well, the commercial banks balance sheets. And as the commercial banks balance sheets, were forced by QE to take on more central bank reserves, that actually displaced loans from their balance sheet. So they swapped one set of assets, namely loans, the traditional asset of commercial banks, were forced out by the creation of reserves, which are used by the central bank to pay for QE. That is now reversing. So to some extent, the increase in loans is a mitigant for the public, because interest rates are going up, but actually so are loans.

SP: Is this not the ultimate irony that most people would think that rising interest rates dampen the demand for loans and supply of loans, and that is actually how monetary policy is meant to work? Whereas what you are describing here is the fact that actually, as commercial banks' reserves at the Central Bank fall through QT, they are actually expanding loans, which is not necessarily what the Fed wants, is it, or is it?

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MC: Well, the Fed does not make loans directly itself to end users, so it is up to the banks to decide how they apportion their balance sheets. So yes, loans are going up. However, the actual size of commercial banks' balance sheets is shrinking, only for the last month and a half, two months, but that is a factor that the Fed has influenced, they are causing the shrinkage of balance sheets. But within those balance sheets, there is a compositional change and the compositional change has switched away from reserve assets and securities, towards loans, so yes.

I should say also that the higher interest rates means these loans are more expensive than they used to be, and in some cases, it might be the case that consumers and companies may be forced to take the loans simply to consume, or to stay afloat. So it is not necessarily totally joyful. This is not a total offset, but it is a mitigant for the Fed, tightening for domestic US borrowers, that is not generally available for non-US borrowers.

SP: So maybe that is a good opportunity to move on and talk a little bit about the rest of the world, and what this monetary cycle might mean for the relative standing of the United States and China around the world. Maybe as a starting point, we could just discuss briefly what (a) the strong dollar and (b) high US interest rates mean, for many countries in the Global South, who, during the period of easy US monetary policy - which let's face it has been most of the time, frankly, since the global financial crisis - have borrowed dollars. Do you see significant duress there? And what might this mean for their use of the dollar in financial transactions going forward and potentially even trade?

MC: Yes, I think that is a really, absolutely central question. What you are raising here is truly both absolutely fascinating, and also really consequential. The dollar carry trade was massive. You can see it in numerous statistics, but a good one to look at is the BIS international debt securities issued in dollars, which is non-US issuance of dollar debt, what is often called euro bonds, so issued by non-US residents. That has gone from roughly 8% of global GDP, around the time of the GFC, (the global financial crisis) to a peak of about 14% of global GDP towards the end of 2020. And it is now down to 12%. But that is 12% of GDP, and a very large amount of that has gone to what you termed the Global South.

But a significant subset of that, in Asia in particular, has been intermediated by Chinese banks. And what we are seeing now is Chinese banks aggressively reducing their dollar balances on both sides of the balance sheet. At the same time, this deleveraging globally, is both helping the dollar rise, it has been caused by $1 rise, but effectively, this is a close of $1 short. You can think of the dollar carry trade as $1 short. Well, now that short everywhere has been closed. So that in itself is forcing the dollar higher. You can see it quite clearly that as the dollar balances in Chinese banks have gone down, effectively they really started in about February this year, coinciding with the invasion of Ukraine. Those dollar balances have gone down at the same time as the renminbi has also gone down against the dollar very sharply. Not only the renminbi but other currencies have also fallen. This factor has pervaded what you termed the Dollar South, and I can term it that as well. But it includes China as a sort of intermediary as well as a victim of this.

SO: Can I just ask from my position as someone more interested in the politics side? Just to be clear, do we see now, especially in 2022, countries, either getting more exposed to the dollar or countries getting less exposed to the dollar as a matter of political choice? Or is this just a normal function of economic cycles?

MC: I think it can be both. It is certainly part of the cycle, as interest rates in the US go up from effectively zero. This is partly an unwind from an extraordinarily low level of interest rates, which is what the carry trade was predicated on. So, it is certainly cyclical. It could also be structural, in the sense that there is a geopolitical tension. It is very clear that China does not want to be so reliant on the US, and it is very clear equally, that the US does not want to be so reliant on China. So, in a sense, there is a geopolitical imperative to split the globe or bifurcate the globe, and to some extent that is working hand in hand with what is happening monetarily, where the Fed policy is forcing holders of dollar shorts, namely debt, out of those holdings. I think those two things can go together, but it can also be it can be both cyclical and structural.

SP: I guess Meyrick, this is the first sort of US tightening cycle that we have seen in which China has been a major creditor to third countries, to the Global South in terms of its lending. The shape of its international assets has changed very dramatically from being almost exclusively in foreign exchange reserves, where it was a credit of the US government, to now a much more diversified set of assets, including a large amount of loans, largely intermediated by the big state-owned commercial banks and the development banks.

And so, China has not really had an any experience of an international lending cycle gone wrong. How do you think they will cope? And what do you think their reaction will be? Do you think that this will make them question their engagement with the Global South of which Belt and Road is a part, but it has largely been debt financed? Or do you think that they will look to capitalise on the financial straits, if you like, of some of their debtors to put more money onto them, but maybe on different terms and to accumulate equity? And sort of it will accelerate the engagement but make it more assertive? I mean, it could go either way perhaps, I do not know.

MC: Yes, so I think it is early days, I do not think we are yet finished with the Fed tightening cycle. And by the way, China, is monetarily easing, they are going in the opposite direction at the moment, so we have a real tension in monetary policy between the two, but a few salient points. I think, if you look at the balance sheets of the Chinese banking system, you look at the overseas loans, about 80% of them (of the loans made overseas) were made in dollars. And it is really clear that since February, if you translate those loans holdings into renminbi, the level actually has not changed much, what has changed a lot is the dollar denomination. So they are maintaining their level in renminbi terms at pretty much the same level, which to my mind this raises the question, "Well, is there some authority in China or some regulation, which is saying, 'Well, you must not lend more than X amount of your renminbi-based balance sheet overseas?' So I think that is an open question but we are definitely seeing disengagement from the dollar lending which was, for overseas loans, the dominant way in which China made its loans.

But there are a couple of interesting other wrinkles to this, which are relevant to your question about how this is going to unfold in terms of the relationship with the destination of these loans. At the same time as lending is going down, and the actual part of the balance sheet, which is called 'portfolio investment', who knows what is in there, but basically, we can call it as 'equity' - that is equity stakes in in securities and other holdings - that is going up. And in dollar terms, that is going up as well. So even though their dollar balances in general are going down, their holdings of portfolio investment in dollar terms is going up. Now, I cannot tell from looking at the data, what is going on there. But one thing that does strike me is that perhaps we can ask the question of whether the loans are being foreclosed, and in return, the equity that is behind, that those loans supported, is perhaps been accumulated by these Chinese banks.

So there could be some form of debt-for-equity swap. That would make sense to me, we all know that some of the Belt and Road lending was particularly opaque, that some of the conditions could have been onerous, and that in some cases, already Chinese banks and Chinese entities, not just the banks, have laid claim to assets in foreign countries. So there is evidence to support that. Whether it is actually what is happening or not, is open for discussion, but certainly that is what the data may suggest. There is a relationship, which is definitely changing, I think.

SO: To be clear, just to make sure that I understand what you are saying, US monetary policy is tightening, and China is easing its monetary policy. A consequence of both those things is that China is disengaging from the dollar, but at the same time is changing its debtor relationship with other countries, because a lot of the debts were originally produced in dollar and therefore, what we are seeing - the ultimate consequence is that if this debt for equity move is correct, China is strengthening its hold in terms of influence over countries that it has done debt deals with in the past. Is that correct?

MC: Yes, it is, and that kind of makes sense. It fits what you think would be happening. There is just one thing, one point I would make, is that when you do a debt-for-equity swap, you do not normally make the debtor happy, you make the debtor unhappy. This may not be a an improved relationship that we are beginning to see between China and the rest of the Global South. It may, in fact, be the beginning of quite a difficult relationship, which we referred to earlier in terms of previous debt cycles in South America where the Yankee comes in and ask for his dollar back, well, now perhaps something similar is happening between Chinese banks and their recipient debtor countries outside China.

SP: Perhaps we can just finish with a slight diversion, but I think it is very relevant. That is to talk just a little bit about China's central bank digital currency, which obviously has been trialled. Initially, if we had this conversation prior to COVID, people would have said, "well, the most likely way that the central bank digital currency is going to spread internationally, at least initially, is through outbound Chinese tourism in destinations in Thailand, or Cambodia, where lots of Chinese tourists go. They will use telephone, wallet, smartphone wallets, to spread the currency into these countries." Obviously, COVID has disrupted that route of internationalisation because there are not any outbound tourists anymore. But do you see the central bank digital currency as being a serious threat to dollar hegemony in at least Southeast Asia if not the world?

MC: I think I would bracket it along with whether foreigners willingly want to hold renminbi either as reserves or as any other store of value. My impression is that the answer is no, they do not. They can be coerced into holding renminbi because the Chinese state says we will not trade with you unless you do. But most international countries, traders, banks would be much happier, accepting recompense or payment in dollars, because dollars are readily transferable and although political interference is not completely absent from US dollar, it is a lot more absent than it is with renminbi, whether that is now or in the future. And I think underpinning the dollar, something which does not get enough airplay, is the legal institutional framework behind the dollar. So, if you have a dispute in dollars, usually you can appeal to some court, which you generally think is going to give you a fair hearing. I do not think that is the case in renminbi, and I put the digital currency in the same bracket.

SP: Yes I could not agree more in the sense that the one thing you know about the US dollar is that the price you pay for it has been derived by market conditions, and everyone who has a US dollar has been free to sell it at any point in the last well, at least the last 40 years anyway. Whereas with the RMB, almost everyone who holds it is not allowed to sell it. Therefore, you actually have no idea what a market clearing price for the RMB would be. Meyrick, thank you very much indeed for joining us. We must have you back on when we get to the other side of the hump in the US interest rate cycle to assess how the global bifurcation has, indeed either accelerated or not as a result of the interest rate cycle.

MC: Well, thank you very much. On that basis. I shall probably be speaking to you in about nine months' time.

SP: Now there is a controversial call.

MC: I look forward to it.

SO: Thank you so much.

MC: Thank you.

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Stewart and Sam are joined by Dr Naoise McDonagh from the University of Adelaide, who has a particular focus on economic coercion and sanctions.

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Some highlights from our discussion:

• Until recently China andAustralia had a good relationship, including a 2014 visit by Xi Jinping to Canberra that was warmly received. A free trade agreement was signed, and China went on to account for more than a third of Australian exports.

• But things began to worsen in 2018 or so, as Australia became worried about increased Chinese posturing, for example over the South China Sea. Canberra was the first country to ban Huawei on security grounds.

• When the Australian’s called for a Covid enquiry in 2020 this took the relationship down even further, and China brought in large scale punitive import tariffs and bans.

• But Australian losses weren’t that great as they found other markets, on the whole.

• A consequence of this icing-over of the relationship is that Australia is increasing its security relationship with China’s rivals, including the US, the UK, and Japan.

• Despite the tension, the chance of a massive economic decoupling between China and Australia without war is slim because of the depth of need for each other. But the relationship is changing.

You can also listen to the podcast on Apple, Amazon, or Spotify.

As always please do share, comment, and subscribe. We’ll be back soon with more What China Wants.

Many thanks for listening.

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Here is the transcript:

Stewart Paterson: Hello, and welcome back to What China Wants with me, Stewart Paterson, and I am joined as always by Sam Olsen. Good morning, Sam.

Sam Olsen: Good morning, Stewart.

SP: So we have talked a lot about the economic relationship between the West and China, and the rising use of geo-economic policies to try and influence the behaviour of nation states. We have tended to look at it through the prism of China's influence attempts on European and American nations. But today, we are joined by Dr. Naoise McDonagh, from the University of Adelaide and the School of Economics and Public Policy. Naoise is an expert in China's geo-economic policy, particularly obviously, towards Australia, with a core interest in studying economic coercion, sanctions and security-driven investment screening. Welcome, Naoise.

Naoise McDonagh: Thank you very much, Stewart, pleasure to be here.

SP: So Naoise, our audience, they might not be quite so up to date with China-Australia economic relations. So I wondered if I could just kick off by asking you to set the scene somewhat, by describing to us the sort of depth and nature of China-Australia economic relations as they stood a couple of years ago?

NM: Yes, so Stewart, their relationship is built on very deep complementarities. If we go back a decade, in 2009, so China had been in the WTO for nearly a decade, it was on its precipitous growth path. And in 2009, China surpassed Japan as Australia's largest export market. So total exports in 2009, were AUD 42 billion, this is quite substantial. And so, we see China is already changing relationships in the region by this time. The relationship just gets stronger and stronger from that period, so the political relationship is actually quite good. In 2014 Xi Jinping visits the Australian Federal Parliament, he gets a great welcome, he delivers a speech in the parliament. They signed a memorandum in 2014 for free trade agreements. So that's China-Australia FTA, ChAFTA as we call it down here, that entered into force in 2015.

From there, the relationship continues to go from strength to strength, the resource boom in Australia takes off with iron ore and coal. China is just hungrier and hungrier for these building block resources, and Australia is able to provide them at a very high rate of productivity. And so by 2020, total goods and services to China are hitting AUD 159 billion, this is 35% of all of Australia's exports in 2020. If you compare this with Japan which is sitting at 12% in second place, the Republic of South Korea is at 5.8%. If we take total two-way trade in 2020, it is AUD 245 billion. This is one third of all of Australia's trade with the whole planet. The US is a distant second at AUD 280 billion, and Japan comes in at AUD 66 billion. So you really see the scale of this relationship, how it's developed from 2009. All the way along, it is the resources that have underpinned this, they are the main component of all this, they are a massive component of Australian national wealth.

So, so far, so good, this is all great you think. But there are problems that are starting to brew from around 2018. China has kind of risen at this point, it is becoming geopolitically more belligerent, it is trying to set its own path in the region as a hegemon. Australia is alert to this. It is the first country in the world to ban Huawei - this is in 2018, for the 5G security risks. Already, this starts to deteriorate the political relationship. By 2020, the relationship is breaking down further, the issues in the South China seas are problematic. Australia's alliance with the US on a security relationship is becoming more problematic for Beijing. And then of course, there is a call for an independent COVID inquiry in Australia. So, this is the breaching point, the kind of asymmetry between booming trade relationships and a steady and consistent breakdown in the political relationship.

SO: So Naoise, just in terms of the politics you were just mentioning there, what people might be interested to know is where was this sort of change in politics been driven from? You mentioned the breakdown in the relationship there, but who was doing more of the running? Was it the Australians who were trying to change things on a political level and being pushed back on by China? Or do you think the Australians were reacting to what China was trying to do? The reason I ask about that is, do you think that this is a political relationship, which is, in effect, broken by what has happened in the last few years? Or do you think that actually it is more posturing from either side that can actually be repaired?

NM: It is definitely a reaction on the Australian side and within the region. Everyone is reacting to a more geopolitically self-assured China. This changed around 2017-2018. The diplomatic stance within China changed, there was a shift in the political narrative that it was time to be more geopolitically active, to move away from this kind of Deng Xiaoping terminology of 'bide your time and hide your might' which was the dominant discourse in China during its WTO early period of growth and development. Then China started to build up the resources and become more active, standing up as a geopolitical great power in essence, which is what China's self-image is of. It feeds off of its past as the Middle Kingdom and a historically great power, and Beijing now feels that it is its time to actually become that again.

So it was in the South China Seas, it has been pushing back, it has its nine dash line. People may not know about this, but it pulled out a map it claimed, showed, historically, that China owned a big portion of the South China Seas, including parts of it that are otherwise given by the United Nations Law of the Sea to other littoral states, such as the Philippines, Vietnam, and so forth. So it basically claimed the whole South China Sea. This is very threatening, massive military buildup over the last 10-15 years. Of course, small states always get fearful when big states engage in large scale military build-ups and start claiming territory.

So it is definitely a reaction, and China is counter-reacting, because it doesn't like Australia making a point to push back on Huawei, to push back and say you need to obey the United Nations Law of the Sea for example. In China's view, and this is what we see in the analysis of its system, it had, in a way bestowed many gifts on Australia through its trade agreements, buying all these resources, and it kind of expected, I think, a more pliable Canberra. But Australia is looking out for its national interests and inter illegitimate.

SP: So Naoise, you have painted this great picture of, a deep economic engagement, then this this level of political pushback against sort of 'Chinese rejuvenation', for want of a better word. Can you just describe to us then what form did the attempts at economic coercion take that China tried to push on to Australia? And what was the public reaction to that? Could you in any way, shape or form say that these geo-economic policies have worked from a Chinese perspective?

NM: Stewart, so I think let's take the tools used, the sanctions applied in the first instance. China has a well-established playbook in this regard. It has been using what we would call informal sanctions for last decade, quite regularly against different countries, normally for political reasons - so they are economic measures for political reasons. And in the case of Australia, essentially what it did in 2020, it first indicated, and this is common publicly, the Chinese ambassador to Australia indicated that, and I quote, "maybe the Chinese people will no longer want to consume Australian wine or beef", big quantities of each being exported. This was the first indication when we heard about it, there might be a call for an independent inquiry.

This is a pattern I have seen elsewhere with China. It flags up these coercive tactics, then the call for the inquiry was made, so they followed through. Essentially what they did was they targeted eight key commodities, and they chose commodities that would do the least amount of damage to China's economy and impact maximum political damage to Australia's economy. In particular, they were looking at agricultural exports, because the coalition government at the time has a strong base outside of the major cities, and in the agricultural areas. It also avoided completely things like iron ore because it is completely dependent on Australia for iron ore. So things like coal, copper, wine, beef, barley, and some types of wood and rock lobster - that comes from South Australia where I am based.

They were targeted, and initially, export revenue fell by about AUD 5 billion from July 2020 to February 2021, compared with trade as usual. So, this is a pretty extensive amount of trade losses for Australia. We had a research paper here at the Institute for International Trade in the school for Economics and Public Policy. We extrapolated out that these annualised losses would be a notional AUD 23 billion. That's 1% or thereabouts of Australian GDP. So again, you think, "Wow, this is very big." Now for some individual sectors, this was initially a very devastating blow. But what we found out over time is that actually the notional losses were far bigger than the real losses. And so if you want, before we talk about the impact, I could perhaps go into that a little bit Stewart, what do you think?

SP: By all means, because we often hear about these policies but quantification of the impact, or accurate quantification of impact is actually quite hard to come by. I do think that our profession has not necessarily covered itself in glory, in terms of actually being able to explain to policymakers and the general public, what the economic welfare losses through sanctions, or a breakdown in trade relationships, generally actually amount to.

NM: Yes, so as I said, the notional losses are very big, but markets are actually very adaptive. Who would have thought that, right? So these are private sector firms involved, and so essentially, there is a very good paper on this by three Australian scholars titled "Market adjustments to import sanctions: lessons from Chinese restrictions on Australian Trade 2020-21". So they looked at this whole period, and essentially they asked, under what conditions do high levels of export concentration in a single market generate political vulnerability to economic coercion?

Now, this is a question that has relevance to the whole world, because China is the largest trade partner now for about 120 or 130 countries, for a majority of world countries. So how vulnerable was Australia, and what was the actual impact? So essentially, they are saying that there was three ways that the markets and Australian businesses adapted. There was trade reallocation, so sell products to alternative markets; trade deflection, so you get around sanctions by using intermediaries; and then just product transformation - there, you just have to alter your product enough so it is not covered by the sanctions.

That is simple enough in principle, but there are a few more criteria, which I will just go through. So reallocation, that will work if there are tight global markets in particular. So think about coal, there is X amount of global demand for coal, there is X amount of supply. So the minute China says, "we're not taking Australian coal anymore", that does not change the nature of the global market, and in fact, creates trade shuffling. Essentially, what happened is the price of coal went up in China because it does not have the same options for supply. Indonesian coal exporters started sending coal to the higher market, it created a gap in India and Australian coal sellers sold at a lower price but still sold their coal into India, so you get trade shuffling. This also happened with Australian copper, China started to draw on Chile for copper, which opened up gaps in the US, the EU, and Japan. It also happened with barely and all of a sudden there were gaps in the Middle East, so you get this trade shuffling effect.

SP: And Naoise, just for our American listeners, of who there are many, this would be fairly similar, I suspect as to what happened with the soybean sanctions during the Trump administration - although not necessarily sanctions, but the tariffs that China put on the farmers there. A global commodity, supply and demand conditions have not changed as a result of the geo-economic policy, so there is a clearing price, and it is just that different people are going to be buying produce produced from a different source of origin as it were.

But obviously, during the soybean crisis, what seemed to happen was a massive culling of the sort of hog stock in China at the same time, which meant that soybean prices collapsed, not because necessarily of the economic sanctions, but because of a dislocation in the market, and this could have led to some misinterpretation as to the impact of the actual Chinese policy there. So is Australia perhaps offering a bit of a counterbalance to the narrative that was put forward at the time, regarding American soybean prices?

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NM: No, that is absolutely right. And so, along with the trade reallocation, then you have the deflection. Rock lobster was a massive export from South Australia, but it had become a very non-substitutable demanded good in China because it has a quite unique taste. So, when that got sanctioned, imports from China went down to zero, exports to Hong Kong suddenly ramped up 200%. All of a sudden, there was a massive draw-in from Hong Kong, and this ended up being smuggled into China because the demand still existed. Now that also would rely on how well it can be enforced, and how well a border can secure itself from smuggling and so forth. In this instance, there was a good possibility, and so a lot of the rock lobster went into China anyway.

The other one that we have seen in the Australian case, Stewart, was the transformation. This, again, will work best if you can quickly and quite easily turn a particular product into an adjacent product category - I will give an example in a moment - without any massive kind of reorganisation of production or our major costs. So in this instance, logs, wood timber logs, were basically banned from Australia, and they could quickly and easily be turned into wood chippings, which were not banned. And so again, the was not such a big impact, and so the logs were actually able to be transformed.

Now, I will say that there was a particular product that was hit hard, and this is premium wine. The premium wine market got hit with anti-dumping tariffs. So this was not an informal sanction, this is actually technically WTO-allowed sanctions. So the Chinese claimed the Australian wine was being sold below market prices. Australia can challenge this in the WTO, it would take many years. So they put on 200% anti-dumping tariffs, and that killed off the premium wine trade very quickly. This was bottled wine, and China was a really good premium wine market for the Australians, they were getting top dollar prices they cannot get anywhere else in the world. They had opportunities to bulk sell it in 24,000 litre cartons, but there were issues there, then with quality and brand, as this could impact their brand so they did not really want to do that. So that has been a big hit for the winemakers, they will actually have to put in the hard yards and build markets globally to be quite frank.

SO: Wasn't the fallout of that a massive increase in premium wine sales from Australia into the UK? Didn't that help to deflect some of the impact from China?

NM: I did not hear that it was on the scale that they were getting in China, but I may not have the top figures on that one. I do not think it was replaceable at that scale.

SP: I think that is actually just Sam's bias there. I think he was doing his best to try and make up for the...

NM: ... a personal stockpile.

SP: Yes, exactly.

SO: I was trying to help, yes. On a more serious note, one of the things you mentioned there was about Hong Kong. And what Stewart and I have spoken about previously on this podcast is the potential for Hong Kong to act, to restore is traditional role as a gateway to the West from China, if things start to go a bit more pear-shaped in terms of Western-Chinese relations.

What I mean by that is that if there were big sanctions between America and the UK, and Europe etc. with China, and things got shut down in terms of normal trade between China and the West, would Hong Kong still be allowed to act as an entrepot? And one of the reasons we think that might be on the cards is the fact that they have not so far implemented the counter-sanction laws in Hong Kong. But just in terms of a dry run on things, when Australia was hit by these tariffs, did trade with Hong Kong remain unaffected? And can you see, therefore, that Hong Kong might continue to act as that bridge between China and Australia specifically?

NM: Yes, that is a good question Sam. Definitely, the sanctions did not apply, for example, in the rock lobster case, we could see they could import them at any number they wanted, and then they were being smuggled or re-exported as another type of product. Hong Kong is still in this grey zone kind of place. In many ways people say, look, it's just another province of China now, and I think that is true in terms of the political repression, but it still has its slightly different status in terms of the sanctions did not apply to Hong Kong, it still has that kind of semi-entrepot status. I do not think that is anything you can rely on, and I think if China wanted to, they could quickly turn that off in a particular instance, that autonomy, if they really wanted to turn the taps.

SP: So Naoise, if you are looking at this from a Chinese perspective, they implemented these economic policies, these geo-economic policies if you like, to try and influence Australia's stance towards China. Would you say that they have worked in terms of how has the political attitude, both amongst elites in Australia and amongst the populace as a whole, changed towards China? And can we attribute any of that sort of dynamic in political attitudes to the geo-economic policies that China implemented?

NM: Look I think we find in this case, as we often find in many historical cases, that sanctions tend to bring countries together, they make them more psychologically determined and resilient often. This has been the case in Australia, there has been an absolutely strong and resilient bipartisan agreement between the main political parties on the need to continue their strategic deterrence actions - that is building relationships with Japan, India, a resilient supply chain initiative, for example, with those two countries, their military alliances, their relationship with the US.

They are building actually quite a deepening military relationship with the Japanese as well. They have recently signed a reciprocal access agreement, the Chinese do not like that. Federal Defence Forces recently announced a type of commitments that really mimics the language used in Australia's ANZUS agreement, which is Australia, New Zealand and the United States, which is a self-defence type of agreement, and a commitment to engage when there are risks in the region. So they have continued with all of those.

When the New Labour government came in, in the very recent federal election, they have continued the same policies. They have changed her tone, they communicate differently - some say the last government was very poor at its communication strategy, and that needlessly created frictions - but the new government has kept the same policies in place. The order of the day, Stewart, has been what they're calling 'strategic patience'. We are not going to back down on any of the issues that China has raised when it sanctioned Australia, from Huawei through to its different alliances, and they have not backed down on anything.

Actually, I do not know if you have heard about this in the UK, but at a certain point, about a year ago, China released this infamous 10 point list of what Australia had to do to get back in the good books for the relationship, including clamping down on it media, clamping down on its independent politicians, controlling them, telling them what to say as if it was a single party, authoritarian political system. And this was completely just like, this is the wrong approach you would take with any democracy and least of all Australia. So they have maintained their policies, they are stricter on their foreign investment reviews with Chinese companies, and they are not backing down. In the end, actually, so the relationships has gone down, down, but it seems to have stabilised at this low point in recent weeks. And China has even said they are willing to talk now without preconditions. They have not lifted any of their sanctions, but they are willing to talk now.

SP: Just within the rest of the region, one of the observations that we have made on this programme before has been the reluctance of particularly ASEAN nations, but just generally in Asia, there is a strong and perhaps understandable reluctance to sacrifice economic welfare for the purpose of what some people see as a sort of futile resistance to China's hegemony within the region. Can you point to any evidence in the rest of the region that Australia's bold stance here where they have really gone on the front foot in terms of not capitulating on anything, has started to rub off on other countries in the Indo-Pacific region?

NM: I think the deepening relationship with Japan is a reflection of the fact that Australia is seen to be someone that you can rely on, that they will hold true to what they say. I think this is a very, very important relationship. It has been a long-time important trade relationship, but the political relationship has become very important in recent years. The India relationship is really blossoming, and they made a kind of limited trade type of agreement. It is not really a full free trade agreement, but they made some concessions economically to boost that relationship. The political relationship is very strong, and they are working towards a Free Trade Agreement, which is something very hard to do with India. So I think, again, India sees Australia as a reliable partner, someone you can work with in the region who can help you as a deterrent power-balancing scenario.

Because everyone in the region is afraid of China becoming too powerful. Now, a lot of the other countries they are all trying to walk that narrow strategic line. They are trying to be on friendly terms with China, but nobody wants to see China get all its own way in the region. I definitely think Australia sets a good example in that way, that you can take the coercion on the chin. In the end, it did not cost as much, but they did not know, we did not know that at the start. Those big losses, initially, is what we thought was going to happen. So I think being willing to ride it out, looking at the ways markets can adapt, I think the nations in the region are looking closely at that example, the politics of it and the economics, I think it is a really interesting case study.

SO: So do you think that if relations do continue to sour between China and the West, do you see a moment where the economic side the economic relations becomes untenable between Australia and China, and actually, there is a forced decoupling between the two? And if so, what would the impact on Australia be? I mean, surely they cannot find new trade partners to make up for what they would lose with China, right?

NM: Look, anything can happen, it is all about probabilities. What is the probability of something happening outside of war? I do not think there will be a full decoupling with any nation that has a large trade relationship with China. That is just my own thinking on it. Even with the Russia situation, that did not happen until it was a full-scale invasion of all of Ukraine, they were allowing Russia to take bits and pieces. In the China situation, that is not the issue unless they try to take Taiwan. So, I do not think that relationship will be full decoupling, neither with the US, neither with Australia. The economic interests are so deeply ingrained and tangled.

I think, what we will have ongoingly over the next decade, and hopefully the war scenario does not come true ever, strategic decoupling of high technology and critical minerals that are really strong geopolitical leverage - for example, lithium critical minerals needed for green technologies. So you have got to have reshoring and friendshoring to some extent. You will have that strategic decoupling, but you are going to have pragmatic realism. The Midwest in the US wants to export its agricultural products, China needs them. So they are going to continue. Same in Australia - iron ore, again, iron ore is the great story here, it is about half of the trade exports to China at any given moment from Australia, are iron ore, worth tens of billions, and this is a massive component of Australian wealth.

So I think pragmatic realism, I will just give you an example there, actually, Sam. So very recently, this is only a few days ago, it was announced as a joint venture between China's Changxing, lithium miner, and an Australian miner in Western Australia. They also have deals with a Chilean miner and with a US firm so Australia has got all those three big lithium players actually now in Western Australia.

And actually, the Chinese firm has a lot of valuable knowledge. They have been doing the lithium, the high-grade processing for the last decade, so China dominate that whole supply chain. So in this instance, the Australians will probably get the knowledge transfer from the Chinese side. I do not know exactly how that deal is structured, what the ownership ratios are yet, but that is pragmatic realism and I think we are going to see more of that. There was no big kick-off, of course, nobody was saying this is this is a major strategic or national security risk. It was just reported on it, and it's happening.

SP: So Naoise thanks very much indeed for these wonderful insights. But you know, as an Australian looking at what is going on in Western Europe and the United States, do you have a sense that we are behind Australia, both in terms of the degree to which we felt the sharp end of China's geo-economic toolkit, but also perhaps more importantly, in learning how to respond to attempt to economic coercion? And what do you think that our takeaway in Western Europe and America should be from Australia's experience?

NM: I think this depends a little bit on, for example, the scale of the relationship and the symmetry or asymmetry between the players. So for the US, I am not sure there is much they need to or could learn from the Australian relationship, because the US is the big partner and China is the junior partner, even if it is a closing gap, that is still the way it is in that relationship. So the US can and will do things and think differently, in how it deals with China than Australia would. And so I am not sure there would be too much that would carry there.

And then so the UK is bigger economically than Australia, but it does not have the same relationship anyway, in terms of export dependencies. So, I think you have to contextualise that somewhere to say, well, what can they learn from it? Because the whole idea was with Australia, in particular, the asymmetry, the export asymmetry is so big, they are going to have to buckle, they are going to have to give in, the coercion is going to work. And it didn't. So I guess if you were to say in countries that have a smaller asymmetry, there is definitely no excuse for them to cave in to economic coercion. So I guess I would contextualise it and say it that way. So the individual countries in the EU, and also the UK, they will have a different type of relationship to China. But I guess..

SP: Perhaps Germany might be the most apposite one here where you have a small number of companies like BASF and Volkswagen, which, if you like, the car industry and the chemical industry in Germany might be the equivalent of your coal and iron ore miners in terms of their dependency on China. And obviously, Germany has had a certain amount of success in exporting to China. Unlike your iron ore producers, though, obviously, Made in China 2025 is all about eating the Germans' lunch, in terms of cannibalising their industries, taking their intellectual property, and generating indigenous industries in China that can compete head on with the Germans and make them irrelevant to China. So they have a similar sort of dependency, it's not as extreme obviously, as Australia's. Yet we seem to be seeing significant reluctance in Germany to actually view China in the way that Australia now seems to be viewing China.

NM: Yes, I think that is right, Stewart, and absolutely, I agree. I think in Europe, everyone looks at Germany as being the one that is most vulnerable, most hooked into China, and least willing to make the cognitive shift from Merkelism - Mercantilism as many call it and I do not think that's unjustified - to make the cognitive shift to say, "we have to really strike out for our national interest in certain key strategic economic relationships". Australia was incredibly brave and forthright in banning Huawei, they knew there would be a massive backlash. I do not see anything like that happening in Germany, or that type of courage to say "these are our strategic relationships. We need to batten down the hatches here and here" and they just seem very overly concerned about China's response.

We have seen recently with the Hamburg port issue that was in the media. Six German ministries came out against it, it is phenomenal, and the Chancellor continued to push it through. It is almost obscene that that happened the way it did and so he's having his visit to China. We know that Olaf Scholz, the Chancellor, he could have kicked that back that decision and left until he came back. He did not want to spoil the visit. But I think there is a stronghold still in the German Merkel era, group and cohort who just don not want to update, I think, their geopolitical framework.

SP: Naoise McDonagh, thank you very much indeed for joining us on What China Wants. It is much appreciated, and we would love to have you back on again at some point in the future to take this discussion further, but thank you very much indeed for your time.

NM: Absolute pleasure, thanks very much for having me on.

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Stewart and Sam are joined by Chris Miller, the author of Chip War: The Fight for the World's Most Critical Technology, which was shortlisted by the FT as its business book of the year 2022.

Some highlights from our discussion:

• Microchips are central to both the world economy and modern militaries, and so both China and the US want to control them.

• Unfortunately for China, the US has more control over the semiconductor industry than they do, and so the ban on advanced chip exports that Washington just placed on Beijing is going to hurt the latter more.

• Given the source of the machinery and equipment needed to make the world’s most advanced chips (US, Netherlands, Japan), it’s basically impossible for China to make advanced chips if the US cuts it off. Which it has.

• There is a fear that the senior Chinese leadership aren’t fully aware that their country doesn’t have the autarkic capability of making advanced chips.

• China is going to struggle to achieve its high level technology goals without these chips, which will have an impact on the economy and the country’s comparative international tech prowess.

• Will China push back on the US over the ban? They didn’t when Huawei was targeted, so may not feel strong enough yet to do so.

• We note that 90% of chips are still available to China, so whilst advanced tech like AI will be more of a challenge, “standard” digital infrastructure projects will still be possible.

• Whoever controls the most advanced chips, and therefore the most advanced computing power, will have a major advantage in terms of converting that into military power.

You can also listen to the podcast on Apple, Amazon, or Spotify.

As always please do share, comment, and subscribe. We’ll be back soon with more What China Wants.

Many thanks for listening.

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Here is the transcript:

Sam Olsen: "Last year, the chip industry produced more transistors than the combined quantity of all goods produced by all other companies in all other industries in all of human history. Nothing else comes close." Hello, and welcome back to What China Wants with Sam Olsen and Stewart Paterson. Stewart that was a quote from an excellent new book called Chip War, which discusses how microchips have become so central to not only the world economy, but modern life as we know it. This of course means that the control of who produces them becomes incredibly important geopolitically and geoeconomically.

It is no wonder therefore, that chips have become a key point of contention between China and the West, and not just because Taiwan - that renegade province, 100 miles off China's coast - is home to the majority of worldwide chip production. Here to join Stewart and I today is the author of that book, Chris Miller. Now, Chris, you teach international history at Fletcher School at Tufts University, if I'm right?

Chris Miller: That is correct.

SO: And you have had a lot of accolades for your new book Chip War, including, I think a recommendation by the FT as one of the business books of the year, is that right?

CM: That's correct, yes.

SO: Okay, great. Well, it is quite an important subject, and welcome along to help us talk about it. You might have heard Stewart and I discuss microchips quite a lot in previous podcasts, but obviously, having an expert like you is a bit more fun for the listener rather than just hearing us to talk about things. But I suppose the most important thing for those who have not really listened to us talk about chips before is why are they so crucial? What is the importance of chips globally?

CM: Well, the typical person rarely sees a semiconductor but in fact, we're reliant on them for almost all aspects of daily life from your automobile, which might have dozens or hundreds of semiconductors inside, to your smartphone or PC, modern life cannot work without them. The production of chips is controlled by a small number of companies and a small number of countries, and increasingly, for the first time in several decades, the chip industry is being upended not only by the competition between companies for commercial advantage, but also by competition between countries for geopolitical advantage. At the centre of this competition is US-China rivalry for greater influence over the production of advanced semiconductors.

Stewart Paterson: So Chris, some of our listeners will have heard in recent weeks of the Biden administration's embargo on certain types of chips being exported to China. Some of them might have also seen that this does not just extend to chips that have been manufactured in the United States, but it extends to third countries who use American-derived technology, either in the manufacture of semiconductor manufacturing equipment, or in the chips themselves. So perhaps this would be a good opportunity for you to explain to our listeners, the differentiation between chips, because obviously they are not all fungible, and to tell us what the purpose of this embargo is.

CM: The goal of the recent export control moves is twofold. First, to prevent China from accessing the types of chips needed for high performance computing and AI applications in data centres, and second, to prevent China from producing some of the most advanced chips domestically. Today, China spends about as much money importing chips each year as it does importing oil. So, it is hugely dependent on the import of advanced chips from Taiwan, from Korea, from Japan, and from the United States. It has identified this is a major vulnerability that has been trying to address over the past decade with many billions of dollars of government subsidies.

But the leaders in chipmaking are Taiwan, South Korea and the United States, and today, it's basically impossible to produce not only the most advanced chips, but any sort of fairly cutting-edge shipped without using equipment from five companies across the world - three in California, one in the Netherlands, one in Japan - and it is impossible to design an advanced chip without using software from three companies, all of which are based in United States. So you need to access US as well as Japanese and Dutch technology to make an advanced semiconductor regardless of where you are in the world. That means that when the US cuts off China's ability to access this machinery as it's done with its export controls in October, China simply cannot produce anything close to cutting edge chips. Similarly, because Taiwanese producers or South Korean producers are equally reliant on many of the same tools they have to follow US export controls, as well. So the US has made clear that no one in the world can produce certain types of advanced chips and then transfer them to China.

SO: So in the book, you talk about the fact that China's not pursuing an all-domestic supply chain, or chip supply chain as that would be impossible. But where do you think China is going instead? If chips are vitally important to the Chinese economy and also to their exports, etc, surely then being cut off from American chip expertise and Western chip expertise more broadly means that they are incredibly vulnerable, so where do they go from here?

CM: I think the Chinese government has faced a bit of a dilemma created by its own policymaking process in the semiconductor space. If you talk to people in the Chinese semiconductor industry, they will readily admit that self-sufficiency or even a de-Americanized supply chain is a very, very long way away for China when it comes to advanced semiconductors. But it is not clear that that information has made it up all the way to the top of the Chinese government, or if it has, it has been pretty heavily discounted because the Chinese government has been pursuing an industrial policy at home in the chip space, as well as a foreign policy abroad, that has been in some ways perfectly calibrated to trigger exactly these types of export controls from the United States.

And so today, the Chinese chip industry finds itself in a really difficult situation, it is only really feasible to move up the technological production process and move up the value chain by importing technology from the US and allied countries, but it's getting more and more difficult to do that because of Chinese industrial policy at home and in foreign policy abroad. I think if you had to assess Chinese policy in this space for the past decade, you would not give it that high of a mark, because they put themselves in such a complicated and difficult situation.

SO: It's all very well noted about China's supply chain issues with the government and so on, but to what degree can China fulfil its economic goals - its quite ambitious technology goals such as wanting to be the leader in AI, in automotive vehicles, etc - without those microchips and without that Western microchip expertise? What would you suggest are China's options now in terms of fulfilling its five year technology goals?

CM: Well, I would say first off when it comes to AI, phrases, like 'leader in AI' are, are phrases that political leaders like but are hard to assess in practice. So I think we should we should treat all political goals in China or in other countries in that sphere with some amount of scepticism, just because it is not clear what they mean. But I think what is clear is that if you ask why, in any country, there is a lot more application of artificial intelligence today than 10 years ago, it's not primarily because we have smarter algorithms that no doubt, we've got better algorithms today than a decade ago. It's not primarily because we have more data available, though perhaps we do in certain situations. The key differentiating factor is that compared to 10 years ago, chips are many times more effective than they were a decade ago, and that's because for the past 50 years, Moore's Law has meant an exponential growth in processing power on chips and doubling in computing power.

Computer programmers' intelligence hasn't doubled in the last decade, but processing power provided by chips has, and that's why we are seeing AI applied to so many different parts of the economy today, relative to the past. What that means for China, is that if it's unable to access the most advanced chips for AI purposes and data centres, it is going to face real difficulties compared to every other country in the world in further advances in this sphere, because the cost of running AI and data centres, which is the number of chips you need multiplied by the energy consumption of those chips, is going to become much more expensive relative to in any other country.

SP: Chris, can I just ask here, and you mentioned a couple of times now, the word 'allies' when you were talking about the export controls. Clearly the chip industry spans across nations, although there are a select few that are at the leading edge. Is your sense that the Biden administration has been a little disappointed by the lack of sort of voluntary buy-in by the likes of the Dutch government with regard to ASML, and potentially even with the Taiwanese and the South Koreans, in terms of their slight reluctance and sort of push back against the export controls that they have tried to put in. Perhaps you could try and quantify for us how important that Chinese market is for these companies, because although we all know that China is a huge importer of semiconductors, presumably a lot of these are actually very low-end semiconductors that go into assembly for all the electronic goods that China then re-exports. so not actually for the Chinese domestic market, they are just a part of the sort of supply chain.

CM: Yes, that is right, and I think the key question for looking at the efficacy of export controls is the machine tools that are needed to produce semiconductors. These are the most precise and expensive machine tools humans have ever created, and their production is controlled by a really small oligopoly of companies, most of which have been in their market positions for decades, and in some cases, almost half a century. The two countries that matter besides the United States in the sphere are really Japan and the Netherlands. The Koreans and the Taiwanese produce a lot of chips, but they have produced chips using mostly imported machine tools from the Netherlands, Japan, and the United States.

When it comes to multi-lateralization of export controls, which is what the US wants, I think there are a couple of dynamics at play. The first is that every country besides the US has a very strong incentive to publicly demur about export controls, so they can tell the Chinese that they are being forced into it. That's a very rational strategy, I think the US government expected that to some extent. So if you look at how the Netherlands has approached export controls on EUV lithography machines, the most advanced equipment, they have created a situation in which the headlines in international media are 'US government forces Netherlands to impose export controls', whether that is a completely accurate description or there was more Dutch initiative than the headline suggests, I think there is room for debate and discussion. But if you're the Netherlands, that's a great headline to have, because then you can go to the Chinese and apologise about your overbearing American partners.

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I think the Japanese have a similar dynamic that's partly at play. Now, there's obviously in both of these countries debate between the policymaking process, the National Security bureaucracy, and the companies themselves. But I think when you zoom out and look at the debate in the Netherlands and the debate in Japan, about China and technology, what you will find is a pretty similar trajectory to the shift in the US view over the past decade. In Japan in particular, I think the median view is of anything more hawkish on Chinese tact than in the US government; less open, less public about many of these issues, but actually more hawkish in practice.

So the key question from the perspective of efficacy of export controls is not 'what's the media headline', or 'what's the formal policy', but it's 'what's actually happening on the ground?'. So I think we'll have to see over the next couple of years, is there meaningful leakage in the US export controls via allied countries or not? If to the extent that there is leakage, I think we should expect the US to turn the screws even tighter. But that might also be a reason to expect that those two governments might, on their own, take measures to make sure that leakage is controlled to a certain extent, and does not attract the attention of the US Congress or US regulators.

SO: If you look at the chip export ban, then you might think that China is going to suffer quite a lot. But at some point, surely, China is going to be saying, we need to push back on America - although that said, when America pushed the ban on Huawei China did not seem to do much. You say in your book, that Beijing was happy to let Huawei become a second rate tech player rather then push back on America. First of all, what happened to Huawei? And secondly, why didn't China push back? And I suppose after that is will that set the pattern for what China's going to do in the future?

CM: Yes, so with Huawei, the US prevented any company that uses US technology from producing certain types of advanced chips for Huawei, without a licence from the Commerce Department. That meant in practice that Huawei could not turn to TSMC, the biggest Taiwanese chip maker, and have that company produce chips that Huawei designs. That had a major impact on Huawei smartphones, on Huawei's telecoms equipment business, and Huawei's cloud computing business and has forced a huge set of changes for the company and major losses over the past couple of years. As you say Sam, China did basically nothing in response. It created a regulation by which it could punish foreign companies, but then put no foreign companies on that list, so has not retaliated. The reason is that retaliation, the Chinese leadership concluded, would be more costly than the not retaliating.

I think that has created an interesting precedent for the current export controls, we will have to see whether China responds. Certainly the recent round of controls are even harsher than the controls on Huawei. But if I had to guess right now, I would guess that that provides a pretty good template for understanding what China is likely to do in response to this round of controls as well, because the optimal response from China's perspective is to do something that hurts the US more than hurts China. The number of potential responses on that list is actually I think, quite low.

SO: Okay, so this is where I have got a slight problem, not with what you're saying, but with the logic that supports your argument. Again, you state it very well, but I think that there is a gap in the logic, which is that China is not going to do anything, even though we know that China has set in store its dominance, however you define that politically or economically, of certain industries, and it's telling its people that it will be a world leader and the technology of the future will be China's. So if that's what it's telling its people, but it's not going to be able to achieve that because America is putting export controls on, is the gap, therefore, something that China can bridge and, and perhaps, will bridge by doing something more conflict-y with America, either over Taiwan or directly with America or something like that? At the moment, I am struggling to see how they can square the circle of their stated tech ambitions with what America is doing?

CM: Well, I think there is uncertainty both in my analysis, but also in China's analysis as to what China's capabilities will be over the next decade. I think in my view, and I think there is a consensus in the chip industry, that China is going to face real difficulties in domesticating a lot of these machine tool technologies needed to produce semiconductors, but there is no certainty there. My guess is that Chinese leaders are getting rosier predictions than I'm giving you about China's capabilities. That makes sense, because when China's leaders go to domestic machine tool firms say, 'will you be capable of solving this national task over the next five or 10 years, if we give you vast sums of money?', it is easy to imagine CEOs of those companies saying, 'of course, we'll be able to achieve these national tasks', regardless of their actual level of confidence. So I suspect that actually Chinese leaders are more confident than I am in China's ability to reach these goals, which is why they might think it is in their interest to wait and see.

SP: Chris, if we look at the evolution of the geo-economic pushback from the United States against China, we started with the Trump tariffs, which seemed to arguably induce the phase one trade deal, which was highly transactional and obviously, the Chinese have not delivered on any of that. Then we had some export controls, didn't we, which drove ZTE (a Chinese tech firm) potentially into the ground, but then Trump seemed to actually just let them off the hook at the last minute. You would know more about that than I and correct me if I'm wrong.

But then these export controls, the way you are describing the impact, they seem to me to mark a profound shift in America's approach in the sense that they seem (a) very targeted, (b) aimed really at containment of China. This is the first policy we have seen, I think, that to the outside observer does seem to be aimed at pulling the rug from under China's feet, rather than what might be termed 'equilibrating pushback' to compensate for the asymmetry of trade relations and economics exchanged in the past. Would you interpret this as a new front with a new objective, and the beginnings of a much more succinct and targeted approach to China-US rivalry?

CM: So I think if you look at the past five or 10 years of US approaches in this issue, you have got to differentiate Trump and the tariffs, which were driven by the President from the much broader tech focus, which was driven by the bureaucracy, driven by the intelligence agencies driven by the defence department driven by the National Security Council from the late Obama administration, all the way up to the Biden administration. Those are, I think, really two separate tracks, I think you can find instances where President Trump got involved in issues and there was back and forth like the tariffs that you mentioned, but if you chart semiconductor regulations, you will find almost exclusive tightening over time, and you'll find that they are driven largely by the bureaucracy.

I think what we have seen over the past month in US regulations is the culmination of a lot of the prior steps, that has got bi-partisan backing and backing across the US government bureaucracy. So I think we should interpret these as staying in place for a long time. And I think you're right, Stewart, that they do signal a more zero-sum approach to tech competition than in the past. I think that is a recognition on the US side that there is a zero-sum approach to military power, pursued both by Beijing and by Washington, and that semiconductors are going to be crucial, well they already are but will increasingly be crucial to next generation military systems. And if the US is going to keep its military edge in the Taiwan Straits and the Western Pacific more generally, it has got to have a major edge in computing power so we can apply that computology to military systems.

This is not really, I don't think, about the same thing that Trump's tariffs were about, which was about economic issues and jobs and commercial success. This is very much about who has got the computing power to apply to cybersecurity, to intelligence collection and to military systems. That's something that the US has historically had a major advantage in. China has closed that gap, and as China has closed that gap, it has coincided with a vast expansion of China's military in the western Pacific. The US has more need than ever before, to have a big gap in computing power, because it is facing a big gap in quantitative terms, it has got fewer chips, fewer missiles, fewer drones, than the Chinese and will have even fewer in 10 years time. So it needs a lot more transistors, to put it very crudely, to make up for the fact that the Chinese are going to have a lot more military systems in the western Pacific.

SO: Okay, so what is all this going to do to Chinese influence, for example, through digital infrastructure building, which it has accrued lots of influence through? Do you think that the days of the Chinese using the Digital Silk Road to amass influence globally are beginning to wane? I cannot see how China's going to be able to do all the fancy-dancy systems, if it has not got access to the chips.

CM: I think that it will face growing difficulties. Now, it is still the case that the US has only cut off China's access to a very, very small portion of the chips that it currently buys. I haven't seen great estimates quantitatively, but a couple percentage points of the chips that China normally buys will be cut off, 90-something percent will still be available to China. This isn't a cliff edge in terms of China's technology. This is the US trying to say 'we're going to stop China's advances on high performance data centres going forward'. And so over time, if the US export controls work, there will be a growing gap in data centres between what is possible in China and what is possible the rest of the world. So that will have an impact on digital Silk Road efforts over time, but it is not going to be a dramatic deceleration over the course of a year or two.

SO: This has been really interesting for our listeners I think to hear a bit more about the specifics of the chip industry. But your title is 'Chip War', do you think that this is actually stimulating a war over chips as in a kinetic war? Do you think this is going to be something which is kept to the economic arena moving forward?

CM: Well, I certainly hope that this does not stimulate a war, but I think we should be highly cognizant of the fact that in all major powers, semiconductors are thought of, largely due to their importance in defence systems. The first chips emerged for missile guidance computers in the early Cold War. And today, if you think of what it takes to fly an advanced drone, you need a tonne of processing power, lots of chips to manage all the sensors, radar, infrared, LiDAR, etc. All that requires immense digital signals processing, it is all about semiconductors.

So you cannot understand the semiconductor space today, or the role that governments are playing trying to reshape semiconductor supply chains, unless you understand their importance for military systems. In that sense, I think 'chip war' is the right way to look at it, not that it is going to cause a war, but that it will be crucial to the future of warfare, and whoever controls the most advanced computing power will have a major advantage in terms of converting that into military power.

SO: Okay, so last question, does that mean that if China takes over Taiwan, that means that we in the West get cut off from Taiwanese chips, we are basically unable to compete against the Chinese military?

CM: Well, I think there are a number of big jumps there. First of all, if China takes over Taiwan with a war, it is unlikely that Taiwanese facilities will survive a war. So that is step one. If China manages somehow to assert control over Taiwan without a war, that will be a very different and more dangerous situation. There is then a process of applying semiconductors to military systems, which is something that takes a fair amount of time to do. But yes, I think we should be concerned that if China succeeds in domesticating, more advanced chip technology or acquiring from elsewhere, that will feed into the military systems over time, and we have got plenty of evidence for how that already has fed into Chinese military systems over the past decade or two. We have got great open-source evidence of China using US chip technology and military systems, and so I think it's understandable that the Pentagon is saying 'we're facing more pressure than ever to defend our allies and partners in the Indo-Pacific region, from chips that are powering Chinese military systems. We've got to find a way to change this.'

SO: Great, thanks very much Chris Miller. Chip War is out now, go and buy it and learn a bit more about what could be the precipice we are about to fall into. Thank you very much.

CM: Thanks for having me.

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Today Stewart and Sam are joined by Eric Olander, the founder of The China Global South Project (which used to be the China Africa Project).

We have known Eric for a while and he is an absolute authority on China’s relationship with the continent of Africa. He is also happy to have a robust conversation, which this certainly is.

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Some highlights from our discussion:

• There is not one “Africa” but a collection of countries, and these all have different relationships with China.

• Economically, although there are some issues with elite capture and opaque debt, the issues cannot be placed entirely on China’s shoulders – African countries have agency in this.

• A major problem for Western influence in Africa is that the West doesn’t invest there, and so many African nations go to China as the country with the development cash.

• Politically, African countries are important to China mainly because they provide votes at multilateral organisations like the UN. This protects Chinese interests.

• Militarily, China uses African countries as a place for it to get some military experience, for example by providing large amounts of peace keepers.

• In the event of a major breakdown between China and the West, and if asked to choose sides, then Africa en masse would probably hedge their bets.

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Here is the transcript:

Sam Olsen: Hello, and welcome back to What China Wants with Sam Olsen and Stewart Paterson, as always. Today we are examining China's influence in Africa, and to do so, Stewart, I am going to start with a few quotes about the relationship:

"Africa has chosen China, it is our choice, and we stick to that" said, Burkina Faso's former President Kabore.

"China has helped Africa to get out of the blackmail of some of the Western countries, which wanted to treat African countries as if they were slave countries", said Uganda's President Museveni.

And finally, "I am a true believer that the success of the world and development and peace depends on Africa's success, and China's cooperation with Africa is fundamental for Africa's success", said the UN Secretary General Antonio Guterres.

So Stewart, the question we are asking this episode is whether or not China is actually good for Africa. To do so, we are joined by Eric Olander, the co-founder of the China-Global South project. If you have not read Eric's work before, he is a journalist with more than 30 years of experience supporting, producing and managing newsrooms for some of the world's leading editorial organisations, including CNN, France 24 and, of course, the old BBC. He founded what was then the China-Africa project back in 2010 I think, Eric, was that right?

Eric Olander: That is right, 2010.

SO: And then he went live properly in 2019, rather than just being a little hobby, it is now your main work, right?

EO: That's it, that's right, it puts food on the table these days.

Stewart Paterson: Well, that's brilliant Eric, welcome to the podcast.

EO: Great to be here guys.

SP: So look, let's set the scene a little bit, because on What China Wants, we have not actually really talked about Chinese influence in Africa before. Obviously, we have got 50 plus countries in Africa, perhaps you could just set the scene a little bit for us. Where is China's influence greatest in Africa, or is it spread fairly evenly across the continent?

EO: Well, this is a very complex, multifaceted relationship that oftentimes to the West, and even to the Chinese, is boiled down to very simplistic terms that masks the nuance that's needed to understand this. What I'm hoping for your audience today is that they leave today's show, more confused, less clear, and more boggled about this relationship, because too many times people come into what China is doing in Africa or other parts of the global south with their minds already made up. They think, 'Well, China is a great thing for Africa. It has done amazing things. It's broken, as you quoted Sam, many of the dependencies that African countries had on Europe". Yes, that's all true. But we can also spend the whole time on the show saying that China is the worst thing that has ever happened to Africa, in terms of environmental destruction, in terms of elite capture, in terms of any number of different things, trade imbalances, we're talking about debt problems now as well, all of that would be true, too.

So if you are looking at this complex relationship from either that ‘it's all good’, or ‘it's all bad’, you are missing half the story. I think that is a very important starting point. So, this is a relationship that, depending on the country, depending on the region that you are in, in Africa, it varies wildly, it is a highly distorted relationship. There is no such thing as Africa. And I know this first-hand, because one of my employees now is trying to fly from Mauritius to South Africa, and cannot get a visa. He cannot get a visa to fly from Mauritius to South Africa, the South Africans won't give him a visa. My point here is this demonstrates that at the end of the day, Africa is a collection of nation states, and we oversimplify it by calling it Africa. China looks at it increasingly at the nation state level.

When I say this is a highly distorted relationship, 62-63% of all African exports come from just three countries: Angola, the DRC, and South Africa. Two thirds of exports for an entire continent come from just three countries. When we look at the imports, about five countries dominate about 50-60%, of all the imports. So that means that 40 to 50 countries do not really have a deep economic relationship; there are a lot of imports often coming in, but not a lot of exports, so it is a highly, highly distorted relationship. When we look at vaccine distributions, for example, China got a lot of credit for distributing vaccines to Africa. But it turns out when you look at the numbers more carefully, 60-70% of all the Chinese vaccines went to about six countries for the bulk of the pandemic.

Then when you look at the debt issue, too, we talk about Chinese debt in Africa. Let me just be very, very clear here. Africa does not have a Chinese debt problem. About 10 African countries have a Chinese debt issue, but even when you look at those 10 African countries, the quantity of Chinese debt versus the whole is actually often quite small. Kenya, for example, it's about 10%. Even though Kenya is listed as a country that has a serious 'Chinese debt problem'. So you see the complexities of this, that you have to look at it really at a very micro level to understand the nuances of it all.

SP: Eric, that is fascinating. So can we just drill down a little bit into the debt issue, because obviously, this has attracted a huge amount of attention, not just in Africa. We have gone through a period of a very strong US Dollar, which has had a big impact on emerging markets, generally, around the world. A lot of frontier and emerging markets appear to be struggling with their debt repayments.

Are you comfortable with the numbers that you see on Chinese lending to Africa that you are actually seeing the whole picture? Because one of the issues that for example, [Kenneth] Rogoff writes about has been the lack of transparency of China's capital exports, that we simply can't account for what we know are a large part of China's capital exports. So there's a sort of suspicion out there, shall we say, that there is a lot of off-balance sheet debt, that probably is not being counted correctly, might that be applicable to Africa?

EO: It is applicable around the world. So again, when we look at these debt numbers, there is what we know and there is what we don't know. Remember when Donald Rumsfeld said there are the 'known unknowns' and the 'unknown knowns', remember that from the Iraq war? We have to apply that same type of thinking to Chinese debt. Let's look at what we do know, that in Africa today, the total amount of Chinese debt is somewhere between 12-18% of the continent's total debt. Now, that is surprising to a lot of people, because the perception in the West is that the numbers are significantly higher. We also know that over a 20 year period, starting in about 2001 or 2002, China has lent about $150 billion to African countries, and a third of that is concentrated in Angola alone. So if you take Angola out of the picture, and the numbers actually go down quite a bit.

Now you have talked about this issue of the lack of transparency, let's kind of noodle that just a little bit. So there is this opacity in Chinese lending that is the bane for the IMF, the World Bank for private investors, for everybody trying to get their grasp of what's going on here. However, remember, on a contract like this, there are two sides to these parties here. We always put all the burden and the responsibility on the Chinese for the lack of transparency. I'm surprised that you and other commentators never say "why haven't African governments adhered to their own laws, which require transparency, sometimes under their constitution, to force their legislatures to be able to publish these contracts?"

Surely, the burden is on the borrower, not on the lender? This is about the borrower's terms here. The borrower can insist, as the constitutional law says in Kenya, that procurement contracts are made public. Why hasn't the Kenyan government publicised the Standard Gauge Railway contract? Now there is a nondisclosure agreement in that contract, but the Kenyans did not have to agree to that. They could have said, "Listen, this is in our laws, you have to publish this." It's the same thing, by the way, in Zambia. Cameroon, incidentally, has published their contracts, and guess what the sun came up the next day. Ecuador published its contracts, and the sun came up the next day. So that is one of the issues, and one of the frustrations I have in the discourse is that all the burden is put on the Chinese side. The Chinese deserve pressure for this, there is no doubt.

But here is the last part in terms of the off-book lending. This is something that AidData, which is the William and Mary research outfit, has looked at quite a bit. The numbers are staggering in terms of what they're thinking, of these emergency loans now that are flowing from China into the global south, $35-40 billion, is what they're looking at, since 2017. That is disconcerting, because when creditors, when ratings agencies, when investors all go into look at Country X, Y, or Z, they do not know the full scale of the P&L of that country, because of that lending problem and the opacity. Now, part of it is intentional, the Chinese do like these nondisclosure agreements. Part of it also is just accidental. There are a lot of different creditors, so when state-owned enterprise X in China lends to state-owned enterprise Y, in an African country, often it does not get counted as official debt. But the IMF, and investors and Wall Street like to look at that as total aggregate debt, so it gets very, very complicated.

SP: That is really interesting, Eric, and I suppose in defence of those people who do point the finger somewhat at China about this, China has chosen for example, not to be a member of the Paris Club, China has chosen not to disclose its cross-border lending numbers to the Bank of International Settlements, etc. There is a sort of institutionalised reluctance on China's part to disclose where this goes, and I suppose it brings us on a bit to the subject of elite capture when you were talking about African countries themselves, breaching their own legal or even constitutional obligations to be transparent about the finances.

One of the issues that Sam and I have been studying in ASEAN in particular, and just generally across Asia, has been this issue of elite capture where the business or political elites, and often they're pretty much hand in glove, if not the same people in various countries, have had their pockets lined in one way or another in such a way as to motivate them not to be transparent in their dealings with China. Is that an issue? You have mentioned Angola already, and I think there are some very rich people in Angola as a result of the oil relationship with China. Is that fair or not?

EO: I think the argument on elite capture when it is presented the way you have just presented it - and please, I don't mean any disrespect - but it is a little bit sloppy in the analysis, only because the nature of this type of engagement is by definition done by elites. It's the World Economic Forum crowd that does this kind of stuff, it's the Davos crowd. This is all done under Swiss commercial law, and so there is nothing new what the Chinese are doing compared to what the French were doing, what the British were doing, and what the Americans have been doing. This is the nature of this type of finance.

I don't know what elite capture means. I have family who live in Paris, and up and down Avenue Foch, are a whole bunch of African dictator family houses, what's that? Is that elite capture? I just don't know what that means, in this context.

SO: Sorry, let me just interrupt there, because I think that elite capture is something that has been bandied around as a term for a while without really, people digging into what it means. For us, it is quite clear what we mean, which is that elite capture is when the elite of a certain country are co-opted by another country, whether it's China or anyone else, to do things that are in the interests of those individuals at the elite level in contradiction to the interests of the country that they represent.

EO: Okay, so if that's your definition, then we should talk about the role of Wall Street because they have engaged in elite capture as well. I am not trying to do what about-ism here, that is not what this exercise is about. What I am trying to point out is that I think the whole swamp is dirty and rotten. And I think singling out the Chinese as separate from the others to me is highly selective. Do you know what I mean? Yes? Are the Chinese engaging in elite capture in places like the Republic of Congo? And even to some extent in Angola, yes. But should we shocked and grab our pearls? That is the nature of global finance today.

But also, here's the weird part about this, that discussion coming from the West infantilises the African agency in all of this, because basically, what you're reducing and boiling down African agency, all this is saying, "Well, the reason why they are doing this is because the Chinese are so savvy and sophisticated to capture them. And they are so greedy, these people that they're going to stuff their pockets full". There is some truth to that, but at the same time, that argument completely overlooks the desperation that African governments have in raising capital on the global markets. The risk premium that Wall Street and the city charge for bonds is absurd. The fact is that the United States and the European Union have all bailed out of funding infrastructure.

So if you are a president or prime minister in Africa, where are you going to go to close the $100 billion a year infrastructure gap? Where are you going to go?

SO: You raise a very good point, Eric, and this was one of our next questions in terms of the West's relationship with Africa versus China. It is often heard in western commentary, that the Chinese are being rapacious when it comes to Africa to country X, country Y and country Z, and, what they need to do is to stick with Western liberal principles and so on. But the problem is, as you point out, and this is something that Stewart and I have pointed out a lot in terms of the developing world, that it is somewhat hypocritical for the West to tell them to say no to China when the West are not actually coming up with many of the investment goods.

What really struck home for us, is when you have Joe Biden and then Boris Johnson talking at the G7, the last one, about the Build Back Better scheme, which is now being replaced by PGII. And the point on that is, well, how much money is actually being put into that? There is an awful lot of talk about it, but there is very, very little concrete on the ground. Therefore, it is somewhat strange if we are trying to say on one hand, that Africa as a continent, never mind the individual countries within it, develop as part of some humanitarian push by the West, but then the West is not giving them the economic and political tools to do so above and beyond aid, which is not something that is particularly popular in Africa. What would you say, Eric, to Western politicians who do complain about Chinese influence in these countries?

EO: Well, I am blessed that I do have the opportunity quite a bit to speak with Western politicians, and this is exactly what I tell them. "Unless you've got something better, shut up. Shut up". Because at the end of the day, here's the problem. People are making decisions based on what they see on the ground. What do they see? US-Africa trade is what 64 billion dollars, and it has been flat and going down steadily for five or six years ever since the United States stopped buying Nigerian oil. It has basically been on a downward trajectory. The African Growth and Opportunity Act for the United States has been good, but it has not been revolutionary, it hasn't really changed the course of African trade. Don't listen to what American politicians have to tell you on that because at the end of the day, we see what the trade numbers look like.

We know what Europe's policy is on Africa, which is to keep the brown and black people on their side of the Mediterranean. The EU commissioner for Foreign Affairs was very clear a couple of weeks ago, remember what he said, "we have a garden here in Europe and the rest of the world is a jungle." He just said the quiet part out loud. Your politics today do not want these people in Europe, especially in the UK, but also in Italy, also in France, and also in Germany and Sweden today. They see the same news that we do, they have YouTube, they have Facebook, they have the New York Times, they are not stupid.

And then when Antony Blinken, who has been lecturing Africans on the green transition, just transition, climate change, sustainability, and all the Europeans have been saying the same things - oh, except until Germany runs out of gas. Then he shows up in Algeria saying he wants Algerian gas. The hypocrisy and the duplicity is just mind blowing. So when the US and Europe show up and start talking about how they should turn away from China, you get a very strong reaction from people like Cyril Ramaphosa in South Africa on the Huawei issue, who accused the Americans of blatantly being jealous. The Kenyans have turned away too, remember earlier this year, former President Uhuru Kenyatta, he literally said to the cameras in January while he was visiting, "we don't want lectures". Now, here's the problem. The European press in the US press never covered that, so you never hear that.

SP: So Eric, if we were to look at some of China's investment into the continent, and you can choose some specific examples here, what would you hold up as being the best examples of well targeted investment that has had a dramatic economic impact, and in which both parties have walked away with a satisfactory outcome?

EO: We need to be very careful, because a lot of people confuse these loans with investments. Those loans are not investments, those loans are loans. So that's a for-profit loan, that they are going to get a recoup on their investment when they are building these highways in the infrastructure. That's not investment. That is a loan that they are giving to a sovereign government to build.

So China's FDI stock right now in Africa stands somewhere around $45 billion. In many ways, again, China is the indispensable country for many African countries. Let's look in the tech business right now. If you live in most of Africa, there's a chance that you are using a Transsion phone. Transsion is the brand that you have never heard of in Europe or the United States or elsewhere, but they have about 60% of the entire African device market. They are absolutely kicking butt when it comes to mobile.

They not only have the dominant mobile brands, they are also controlling the walled garden platform for it. They are funding start-ups around it. So when you look at the number one music, streaming service is Boomplay. That's the only place in the world where Apple and Spotify are getting beaten, and Boomplay is a Chinese joint venture. You have also the automotive market now where Chery, which is a Chinese brand, is outselling European and American brands in South Africa. You have StarTimes, which is one of the largest pay TV providers, again, all private. Obviously, you have Huawei, the private company with lots of shady weirdness in the back - I think of in many ways is semi-private just because of the lack of transparency in what they are - but nominally private. They have built huge amounts of the 3G, 4G, and now 5G networks. So, I think tech is the one area and investment where China again has just been absolutely incredible.

I was living in Kinshasa when the first Huawei mobile phone started coming out. This was, you have to understand, absolutely transformational, that people for the first time could talk to somebody over the horizon. Since then, the Chinese have come in with innovation on the product side. They are building apps and services on fintech. The Chinese VCs are very active in places like Nigeria, and again they're customising products, specifically for the African market. Transsion now has a $7 billion market cap, mostly based on sales in Africa. This proves that Africa is an opportunity if companies want to invest and build products and services that are tailored for local markets. We in the US in Europe, look at Africa and say the margins are not high enough. I think Transsion is an example of how that is really a misguided notion.

SO: Thanks, Eric. We have spoken a lot about the economic side, but in terms of the political relationship, what do you think that China wants out of the continent? Obviously, again, it is too hard to be generalised because it is a huge place of 50 plus countries. But if you could, just give us a couple of examples from different countries as to why the relationship is important for China specifically?

EO: So I am alone on this one for the most part. But I am going to tell you right up that I do not think that Africa is economically that important to China. In many ways Africa is like the battered spouse that has been denigrated, and told you are worth nothing, it has been abused for that the whole relationship. For 400 or 500 years, people have told Africa and Africans that the only value that you bring to the global economy and to the global political order, is the stuff that comes out of the ground. Everything else we do not care about.

When you look at the Chinese, and today the Chinese are doing about $254 billion of annual trade [with Africa]. While that is significant, compared to other bilateral trading partners, the fact is that that accounts for less than 3% of China's total global trade. Here is the interesting part, as China's global trade has increased, African trade has remained flat at about 2%-3%. That means again, that for the most part, China now does not need Africa anywhere near as much as it did 20 years ago when it first went there because it has the Belt and Road now.

All of the numbers coming out of the Middle East and the Persian Gulf show the Saudis are supplying more oil, and Brazil is supplying more food, so they [China] can go now for the oil, mineral and timber that they used to buy in Africa, pretty much anywhere in the world to get that, here in Southeast Asia, or South America. Bear in mind that they are doing twice as much trade with South America than they are with Africa. Africa rests firmly at the bottom of their trading partners and their trading relationships. So why is this relationship important?

Politics to me is the driver for this because Africa more than any other region in the world votes as a bloc at the United Nations, at the World Health Organisation and at the IMF. This is so important for the Chinese as they are now trying to form a coalition of countries to push back on the US and Europe over issues like Xinjiang, over issues like Hong Kong over territorial issues like Taiwan, the South China Sea, issues like Huawei, to fight back and to push back on narratives on COVID, for example. In all of these priorities for the Chinese, African countries and developing countries are proving to be incredibly useful to the Chinese. And so, I would say in many ways that the relationship, while it started with an economic priority is now transitioning to a political priority. This is why these letters that show up at the UN Human Rights Council or at the UN against sanctions, for example, on Ethiopia, things like that. African countries rally around in groups and in blocs, and really give legitimacy and validate so many Chinese positions that are currently under assault from the US, Europe, Japan and Australia, for example.

SO: Okay, so what you are saying is that the value is more on the political side. Militarily, is there any advantage to China be involved in, in Africa?

EO: Yes, so militarily, and in many ways the military dimension is just one example of this, but Africa provides China a space where it can experiment with things that it cannot do in other parts of the world. It would not be possible for China to deploy armed peacekeepers into Central Asia because of the proximity to the Russians, it would not be possible for them to deploy armed peacekeepers into South America, because that is in the sphere of influence of the United States. Traditionally, it would not be possible to do that in Southeast Asia because of the historical complexities of that. But in South Sudan, it is possible.

China is the largest supplier of peacekeepers among the P-5 on the Security Council, and it is able to do logistics training, it is able to do supply, it is able to get combat experience. It is able to give its forces opportunities that it cannot get in any other part of the world. So we look at the multinational peacekeeping operations that China has been a part of for 14 years off the coast of Somalia and the Gulf of Aden. Again, that is real world experience that they are not able to get anywhere else. Same with South Sudan, same in the DRC, where their medical and engineering personnel is part of the MONUSCO operation. So militarily, it is quite important.

Are we going to see more bases in Africa beyond the base in Djibouti? No, because at the end of the day, and this is, again, this is American fantasy. If you are interested in the subject, I have written extensively on the issue of American allegations and the Pentagon allegations of additional African bases by the Chinese. It does not make any sense because the focus for the Chinese in security is going to be in their near abroad in the South China Sea, focused on Taiwan, focused on Asian Central Asia. It is not going to be in Africa. So that, again, is a Western and US concern, but not backed by any of the writings and the military strategy that we have seen that is publicly available.

SO: Okay, on that note, I think something that Stewart and I have been speaking about, that obviously, listeners have heard many times before on the What China Wants podcast is our worries about the future with regard to Taiwan and how that is going to impact Western relations with China. Of course, one of the things that we have said repeatedly is that is not just about what happens between the West and China if something kicks off over Taiwan, and there's decoupling, it is about the rest of the non-aligned world. What happens in your opinion with again, talking about individual countries really, rather than the continent as a whole because it is so difficult to generalise.

But as and when something does happen over Taiwan, and the West and China rapidly decouple which is one of the scenarios we think is more likely, where do you think many countries in Africa will go? Will they stick with the Western bloc? Or if they had to choose, would they move to a China-centred bloc?

EO: I think the framing of the question is wrong, because number one, I do not think they are in the western bloc today. So, they would not stick with the Western bloc. I think that is an over-

SO: No, hang on, no, I will push back on that. Because if you say that the Western bloc is what is defined by the use of the US Dollar, and is one where that's...

EO: But that is an economic relationship…

SO: …it's an important one though.

EO: Hold on, but in Vietnam, they use the Dollar, but they are not by any sense in the western bloc. That is a political versus a monetary issue.

SO: But it's political as well, because basically, America can and probably would say, to some countries, maybe lots of countries, "are you either with us or against us?" and you prove that with us or against us by using the Dollar.

EO: Well, listen, they have done that already. Hold on. They have done that twice now already, "are you with us or against us", and it has failed miserably. They did it in the Iraq War, George Bush famously said, "you're either with us or against us", and a lot of countries said, "you know what, this isn't our fight". This is what they've done over Russia and Ukraine as well, and the vast majority of the human population has said, "This isn't our fight". You look at India, you look at China, you look at Southeast Asia, you look at Africa, South America as well, you look at the number of countries that have lined up to put their votes down at the United Nations to support US and European and advanced economy positions on Ukraine, and the numbers are not there.

So, this is a hedging strategy for developing countries because they cannot take a side, because when the music stops, they are going to be the ones who get screwed. And it is tone deaf of the great powers to go to small countries and say, "pick a side", because whatever side they pick, they are going to get screwed, because at the end of the day, if they pick the American side, and the American side comes up empty, which by the way, it has quite a few times. The American track record of military conflict is not that impressive over the past 50 years, name a war besides Grenada that they have won?

Then on top of that, if they pick the Chinese side, or they pick the Russian side, that too, could go south, and then they are screwed because they have lost that. So what they are going to do is exactly what they are doing now with Ukraine and Russia, is they are going to hedge as much as they can to avoid taking a side, because that is the only thing they can do. Otherwise if they pick aside, they are going to get screwed one way or another.

SO: Okay, Eric, final question, is China good for Africa or not?

EO: It is ‘both, and’. It is both the best thing that's happened to Africa in the past 25-30 years, and at the same time, the worst thing that's happened to Africa. You cannot see it in those binary terms. You have to look at the good and the bad that sits side by side one another.

SP: Eric, thanks very much indeed for joining us. I think this has been one of the best podcasts we've done, and I am only sorry that we have really only just scratched the surface on the on the subject. Obviously, we would love to have you back on What China Wants to discuss some other regions of the world, but also to go into some more detail on some specific African countries. Thank you very much indeed for joining us, and we will be back next week with more What China Wants.

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