Outlook: Systemic competition on new terms – what a crisis-driven, globally ascending party state means for European stakeholders

by Mikko Huotari

You are reading the last chapter of the MERICS Paper on China "The CCP's next century: expanding economic control, digital governance and national security". Click here to go to the table of contents.

For China’s current leadership, expanding the robustness of the Chinese state comes above everything else. As previous chapters have laid out, Xi Jinping and his team are implementing a hard charge to transform China’s governance system. They are reinforcing the center’s grip on an organic party-state economy and leading with integrated digital governance while increasing the global reach of China as a comprehensive national security state. 

European stakeholders should expect a China that is doubling down on non-convergence. They will meet a more offensive and less compromising China; presenting itself as a distinct alternative model, seeking to pre-empt perceived attacks and prevent criticism, more conditional in collaboration and “retaliating” against perceived misconduct by others.

When five years ago, MERICS authors proposed scenarios for China in 2025, they assessed that there was no chance that the Chinese party-state is “developing into a liberal competitive democracy under the current leadership”. In contrast, they predicted as China’s likely development path until 2025 a “centralized and disciplined party and security state (the Xi-system)”. However, the prediction was, that this system would have to “moderate” itself by granting significant concessions, specifically in terms of economic policy, considering slowing growth rates and rampant economic inefficiencies.¹

Today, we have seen few signs of moderation and concessions, and must go one step further in our assessment: China is not only not converging – its leadership is assembling an anti-fragile, less efficient, but largely effective system of party-state governance capable of coherent autonomous action that aims at robustness under uncertainty and in previously unknown environments. 

Just in time to celebrate the CCP’s 100th anniversary, China can present itself as a global force that not only has withstood critical tests at home but is a dominant factor shaping global developments. Leading the world once more in its economic recovery, the CCP is leveraging China’s gravitational force abroad, consolidating its grip at home and in “periphery” regions, including Hong Kong and Xinjiang. The previous chapters have indicated that China is not just temporarily operating from a position of strength; Xi’s team is pursuing an ambitious re-structuring of the Chinese party state, seeking to benefit from global turbulences and preparing for tougher times ahead. 

Often ignored by international observers, China under Xi is on high alert. When he called upon his fellow CCP leaders 2019 to take “strategic initiative to prevent and defuse major risks” he was, with hindsight, making the right call. The party state began preparing the country internally for an escalating trade and technology conflict with the only peer-competitor, the United States, and potentially other shocks, which soon enough materialized in the form of a global pandemic emanating from China’s homeland.

Xi’s increasingly entrenched governing philosophy is built around crisis prevention and risk management. It pervades all aspects of the new architecture of CCP power that has been established since the 19th party congress in 2017. China’s government now has a full integration of state and party organizations to enforce the CCP’s monopoly on political power and ideology as deeply as possible. Doing so, the party state is proving not just responsive and adaptive to the changing societal, technological, and global environment, but proactive. Its leaders are leveraging digitalization and technological development while adjusting China’s global economic interdependence to bounce back stronger from new domestic and international challenges.

Much more clear-eyed about its own weaknesses and vulnerabilities than most international observers, the CCP is preparing for “challenges unseen in a century” – disruptions at home and profound global structural change.

• Politically, the coming year is probably the most precarious period in a decade. On the road to the 20th Party Congress in Fall 2022, Xi's men are trying to clear the ground for extended Xi Jinping rule. Yet many of the costs for his break with the party's protocol for leadership succession are still hidden within the system that has been forced in line, but not necessarily convinced.
• Societally, growing nationalism and political performance requirements are only masking the challenges of mobilizing a fragmented, polarized and often exhausted society.
• Economically, Beijing will be overseeing a confluence of multiple challenges coming to a head in coming years: productivity gains will be harder to achieve, social and regional inequality are becoming more pronounced, high leverage leaves the financial system vulnerable, social insecurity and what the government describes as “disorderly expansion of capital” will keep leaders in Beijing occupied.
• Technologically, CCP leaders are struggling to deal with deep dependence on critical inputs and components, and the threat of further decoupling from global markets as well as sources of innovation looms large.
• In the international environment, leaders in Beijing are searching for support to respond to growing alignment and nascent coalitions of “like-minded countries” against China’s influence (seen as “hostile forces”) – as well as preparing for a Taiwan crisis.

This is, therefore, a new kind of “systemic competition” between China and Europe as well as other liberal democracies. Under conditions of deep interdependence and global connectivity. Beijing sees itself mostly competing for sources of political robustness and economic stability, building up effective state capacity and dealing with what it perceives as existential global risks.

For leaders in the West, this competition should less be about simple dichotomies such as capitalism/democracy vs communism/dictatorship but about dealing with a one-party-state successfully integrating with and restructuring global capitalism, shaping international rules, and reinventing dictatorship under digital conditions.

Does all of this make conflict inevitable? Many international observers – including at MERICS – continue to hope that with such challenges ahead, China’s current leaders could conclude that it is in China’s best interest to turn back to more open, liberal, cooperative, and decentralized approaches. But the track record of Xi’s decision-making patterns from the past seven years makes it clear that a more likely trajectory – considering predictable crises – sees China in permanent struggle mode, more radical internally, and restricting international connections that are perceived as risky.

China’s leaders appear convinced they do not need “the West” anymore, or only very selectively. And where they depend on such global connections, they seem confident that they can co-opt and disunite foreign counterparts to maximize China’s state interests. Under such conditions, Beijing makes cooperation with China more conditional, expecting compliance in return.

While the CCP-led government is driving this development, growing domestic (cyber) nationalism and an increasingly difficult environment for foreign residents and business are likely to have an amplifying effect. Fueled by years of intense patriotic education, but also the real successes of China’s government, its hardline global posturing and the propaganda surrounding it, emotions and societal perceptions will shape relations with China much more than in the past.

This more nationalist, non-compromising and self-centered China will seek to further limit and excessively control access to information and political actors in China as part of its risk management strategy. It is a key characteristic of the Xi Jinping era that externals know too little about the internal deliberations and divergences within the Chinese leadership. While tight control of narratives, and the space for debate, might make sense seen from Zhongnanhai, Chinese leaders will know less and be faced with growing myopia abroad. This is likely to result in a greater possibility for tensions to escalate and for accidents to occur.

More specifically, international counterparts will need to prepare for:

Integrating and competing with a party-state economy that is expanding globally

As the CCP expands control over the economy, foreign business needs to prepare for further politicization and greater need to toe the party-line. Companies will have to further localize while acting as “good corporate citizens” on CCP terms. In Beijing’s eyes, this means shifting profits and value-added production to domestic actors and proving their investment utility by contributing to Chinese domestic development.

Hopes that international agreements or internal pressure will lead to a level playing field for foreign companies in China remain pipedreams. They will need to compete with Chinese firms in an extremely challenging environment. In effect, foreign firms are not only competing with their peers but often with integrated industrial systems. In China, realizing the ideal of “competitive neutrality” remains an illusion. A networked party-state capitalism drives innovation and leverages domestic advantages in strategic industries while selectively deploying international competition at home.

China’s leaders aim at dominance in an expanding set of strategic industries by achieving full control of relevant value chains. This can involve diverse actors and different modalities of party-state influence, but the underpinning goals are clear: control, reducing dependence, import substitution and, eventually, global market dominance. 

Engaging with a digital power player and norm-setter aiming for self-reliance

Western actors – private companies, non-governmental organizations, and individuals – situated in China are affected by the expansion of digital control mechanisms. Data is collected and often insufficiently protected. New regulations and initiatives strive to further allow the government access to data and make monitoring more comprehensive.

Digital interconnectedness with the outside world remains critical to achieving the party’s 2035 goals for “socialist modernization”, core tech autonomy, full informatization and digital economy. The party has to juggle access to ‘open’ cyberspace with its own model of cyber sovereignty. The long-term solution is to ensure foreign interactions increasingly take place on China’s terms.

European businesses in China will need to further localize operations to comply with different rules and political pressures. Where this proves impossible, they will face hard choices about prioritizing or even choosing between key international markets.

China has made setting technical standards and norms in cyberspace a key goal. European stakeholders will meet and compete with forceful Chinese initiatives in relevant UN forums, governance and technical standards bodies. China’s digital infrastructure footprint in parts of the developing world will grow rapidly, creating challenges on the ground for European governments and businesses.

Facing-up to a comprehensive Chinese national security state with global reach

National security will become the dominant paradigm in China’s foreign relations. With Xi’s ‘security first’ perspective permeating institutions in and interactions with China, international counterparts are likely to be surprised by increasing intransigence in exchanges and cooperation.

When security gains are a predominant goal, costs in the form of worsened bilateral relations become more tolerable. Xi’s China will not just be more assertive and proactive in its foreign relations but potentially aggressive – where it perceives key interests under threat. More diplomatic partnerships and cooperative arrangements are likely to be disrupted by China’s ‘security first’ approach.

The biggest impact for Europeans will result from China’s steady shift towards ‘extra-territoriality’, the intent to proactively control behavior and narratives beyond China. China will claim and police formerly domestic red lines more forcefully abroad - leaving public and private sector counterparts torn between competing value imperatives.

While it was already apparent in 2016 that China is charting a different course, back then one could still assume this would have a moderate impact for Europeans. This is different now: in the 100th year of the CCP, China’s party state presents itself as a force to be reckoned with – despite the persisting domestic vulnerabilities caused by, i.e., demographic challenges or inherent instabilities in the financial system. It remains in Europe’s best interest to deepen relations with China, but China’s organic party-state economy, digital leadership, and globalizing national security state require responses.

European public and private sector stakeholders, therefore, need to: 

• Invest in pooled foresight and anticipatory capacity on China-related risks based on a realist assessment of China’s anti-fragile trajectory. Play out “what if” scenarios. Prepare for crises. 
• Further invest in China competence and policy coordination at all levels of governance, from local to regional, national and EU levels.
• Craft consistent China policy: actions on China should be guided by clearly defined national security challenges, an identification of vital interests, specified assumptions and desired end-states.
• Work towards a European consensus on an overarching China paradigm, combining open strategic competition with principled precaution. 
• In the meantime, continue to cooperate where necessary; maintain openness for dialogue and exchanges.
• Prevent an over-securitization of relations. Invest in strategic confidence building, Track-2/1.5 dialogues and capacities to understand mutual signaling better.
• Avoid symbolic posturing but coordinate proportionate responses to Chinese violations of international law and agreements as well as threats to national security and vital interests.
• Support economic diversification more offensively. A robust European anchor to transatlantic engagement and cooperation with like-minded liberal market economies around the globe matters more than ever. 
• Europe must “win at home”, by playing offense and running faster. Focus on increasing innovation and being better than, not undermining, competitors.

Endnote

1 | Sebastian Heilmann (2016). "China’s core executive - Leadership styles, structures and processes under Xi Jinping." MERICS, June 01. https://merics.org/en/report/chinas-core-executive. 

You were reading the last chapter of the MERICS Paper on China "The CCP's next century: expanding economic control, digital governance and national security". Click here to go to the table of contents.