The Challenges to China’s National Rejuvenation – Part One: The Demographic and Technological Deficits

3 June 2021 Lindsay Hughes, Senior Research Analyst, Indo-Pacific Research Programme Download PDF

China’s plans to become the global technological hegemon could fail. Its dependency on microprocessor technology that it currently obtains from the West, for instance, has major negative ramifications for Mr Xi’s rejuvenation of China. Those negative outcomes will be compounded by its demographic trends, which indicate that China will, if they continue, become a country that gets old before it gets rich.

 

Key Points

  • China’s aggressive foreign policies have led some democracies to push back against it.
  • They now target the pillars of China’s bid for technological and economic hegemony.
  • Anti-China sentiment has also grown among the people of those countries, which encourages their governments to take a stronger stance against China.
  • That sentiment, coupled with China’s inability to create an indigenous semiconductor-manufacturing capability and its ageing population, could severely retard, if not completely derail, its plans for a national rejuvenation.

 

Summary

China’s policies have seen some democracies coalesce to counter its territorial expansionism, trade and commercial predations, military growth, political influence, predatory economic tactics, its manipulation of World Trade Organisation rules and its belligerence that ignores international law. Upon encountering that pushback, Beijing embarked on a less-than-diplomatic tactic, its so-called “Wolf Warrior” diplomacy. The term derives from a Chinese action movie, which was released in 2015, in which Chinese warriors battle against enemies of China, led by an American mercenary. A 2017 sequel called “Wolf Warrior 2” continued the theme and had the by-line, “Even though a thousand miles away, anyone who affronts China will pay”. That approach was adopted by Chinese diplomats quickly, lending to the suspicion that it was authorised by General Secretary Xi Jinping. Thus, when the Attorneys-General of Missouri, California and Florida filed lawsuits in American courts against China over its handling of the initial spread of the Covid-19 pandemic, China’s Foreign Minister, Wang Yi, replied, saying, ‘These frivolous lawsuits against China over COVID-19 have zero basis in fact, law or international precedent. They are utterly shoddy. … We will strongly hit back against malicious slanders and firmly defend national honour and dignity. We will lay out the truth to counter the gratuitous smears and to firmly uphold justice and conscience.’ A Foreign Ministry spokesman went a step further, insinuating that the US military might have introduced the coronavirus to China.

China’s aggression has backfired, however, with democracies aligning to counter its expansionism. Its aggressiveness and mercenary actions have accelerated ties between the US and India, reconstituted the Quadrilateral Security Dialogue between Australia, India, Japan and the US, and re-warmed ties between the US and the European Union. Those outcomes will impact China’s rejuvenation.

This paper will, as a whole, demonstrate that China’s deteriorating relationships will challenge its planned rejuvenation. This part of it will demonstrate that in addition to growing international suspicion of its motives and actions, its hopes of weaning its economy off its dependence on exports, enhancing domestic consumption and becoming the global technological hegemon could be dashed because of its demographic trends and technological shortcomings.

 

Analysis

The US has been sensitised to the Chinese government’s activities, which the American media casts for the most part in an anti-US light. That perception is reflected in national polls, one of which, conducted in October 2020, showed that 73 per cent of Americans viewed China poorly. That perception is not limited to the US, however. Of the 14 countries in which the survey was conducted, Italy recorded the least unfavourable views of China, with “only” a 62 per cent unfavourable rating.

 

 

Those negative perceptions are not limited to an abstract notion of “China”. The number of people in those democracies who hold an unfavourable view of General Secretary Xi Jinping has also risen.

 

 

As a consequence of the increased suspicion, the number of US citizens who want Washington to take a firmer line against China has also increased. As a poll conducted this year found:

Roughly nine-in-ten U.S. adults (89%) consider China a competitor or enemy, rather than a partner, according to a new Pew Research Centre survey. Many also support taking a firmer approach to the bilateral relationship, whether by promoting human rights in China, getting tougher on China economically or limiting Chinese students studying abroad in the United States. More broadly, 48% think limiting China’s power and influence should be a top foreign policy priority for the U.S., up from 32% in 2018.

 

 

In fairness, while China’s standing has plummeted in liberal democracies, that has not been the case in other countries, as this article demonstrates.

It is not only the Chinese Government that has witnessed a fall in perceptions of US citizens, however. Increasingly, the actions of individual Chinese citizens and organisations are also being cast in a negative light, with some justification. Chinese nationals are increasingly being suspected of money laundering and association with drug cartels that smuggle drugs into the US, and smuggling technology back to China. Chinese manufacturers sidestep US trade barriers by moving their operations to countries from which they may continue to export their products to the US. To be clear, US military contractors are themselves shown to be guilty of transferring technology to China, lending to the perception that China will use bribery and steal US technology wherever it can. In the febrile climate that now exists, the actions of Chinese diplomats are also suspect. As one source [Chinese] that was widely circulated among Chinese communities internationally alleged, the wife of Yang Jiechi, the Director of the Central Foreign Affairs Commission, the highest diplomatic position under General Secretary Xi Jinping, has resided in the US since 2001 in a property that is owned by China. That information was circulated after Mr Yang’s meeting with US Secretary of State, Antony Blinken, in Alaska, during which he lectured Mr Blinken for 17 minutes on the hypocrisy of the US. Mr Yang’s daughter is purported to have also lived in the US at least since 2010. That led, unsurprisingly, to calls to cancel the visas of Mr Yang’s wife and daughter if the allegations were found to be correct.

If the growing international lack of confidence and increasing distrust concerns China, it ought to be even more concerned with its economic and demographic situations. Recognising that its relationship with the US will likely not be mended in the perceivable future, that its relationship with Europe is at risk of going the same way and that demand from its traditional markets could fall due to issues such as the Covid-19 pandemic, China has moved to reduce its dependence on exports to sustain its economy, seeking instead to increase domestic consumption and spending. It seeks to develop a “dual circulation economy” in order to achieve that goal. That model is predicated, however, on a large population that has money to spend. It is unlikely that China’s population will remain as large as it is for much longer if its current demographic trends continue.

China’s population growth rate slowed dramatically between 2010 and 2020. According to the National Bureau of Statistics of China, the National Population Census, a once-in-a-decade count that was conducted last year, showed that its population had reached 1,411,778,724, up from 1,339,724,852 in 2010. That equated to an average annual growth rate of 0.53 per cent. Arguably more worryingly for China, that growth rate has continued to slow even after Beijing officially scrapped its one child policy in 2016, with the number of births in 2020 at 12 million, a drop of 18 per cent from 2019.

 

 

Worse, as the China Daily reported earlier this year, relaxing the existing family planning policy is unlikely to solve the numerical imbalance in China’s rapidly-ageing population. As one authority put it, ‘Even if the birth rate increases, it cannot fundamentally alleviate the effects of the greying population.’ Citizens aged 65 or older accounted for 13.5% of its 1.4 billion population in 2020, jumping from 8.87% a decade ago. You Jun, China’s Vice-Minister of Human Resources and Social Security, pointed out that by end 2019, more than 18 per cent of the population was aged 60 or more. That demographic is expected to grow over the next five years even as the workforce has decreased in recent years, with a further 35 million workers expected to retire over the next five years. That finding was supported by Nankai University, which said that by 2050, about 500 million people in China would be 60 years or older, placing China in the top rank of countries with elderly populations.

The China Daily also reported that a study by Peking University shows that the country’s total fertility rate (TFR), broadly the number of children per female of child-bearing age, ‘has fallen below 1.7.’ A US-based demographer reported, on the other hand, that China’s TFR last year was 0.90 and could not have exceeded 1.1. That estimate is at the lower end but is consistent with the China Daily’s reporting of a TFR of 1.05 in 2015. The replacement TFR for most societies is generally 2.1, but some demographers suggest that China’s replacement rate is actually 2.2 because of its higher child mortality rates; China’s under-five mortality rate is 7.9 compared to Australia’s 3.6, for example. If its TFR stabilises at 1.2, China will have a population of around 480 million by the end of this century. If it does not increase from where it is now, however, that number could be closer to the 400 million mark. To put that in context, according to the UN’s projections, the US will have a population of 433.9 million in 2100, up from 331 million in 2020. The disparity in the number of men compared to women – in 2019 there were 30 million more Chinese men than women and that disparity is increasing – is, furthermore, a consequence of the Chinese preference for male children and its one-child policy. That factor, when combined with the growing preference for small families, and the high costs of housing, health and education, lead to the conclusion that China’s population will continue to fall. As a Chinese demographer said, ‘Most people want no baby or at most one baby, so even if you remove all the limits right now, it won’t have much effect.’ If that is true, China’s recently-announced three-child policy, which was met with derision in China, will not alleviate the problem of its ageing population. That could explain its supplemental measures to lower educational costs for families, increase housing support and guarantee the legal interests of working women. Greater social engineering is required, however; in its Global Gender Gap Report 2021, which uses economic, educational, health and political metrics to rank countries by gender disparity, the World Economic Forum notes, furthermore, that China’s ranking has fallen from 69 in 2013, the year Mr Xi took office, to 107 out of 144 countries.

Compounding those concerns, China’s hukou system, which came into force in 1958 to control internal migration, could cause the current economic divide between urban and rural Chinese to widen. The system also creates disparities in educational opportunity between rural and urban China, disincentivises rural China, imposes a social cost on rural immigrants to urban regions and exacerbates the widening healthcare divide. As an IMF report notes, income inequality in China increased sharply from the early 1980s and rendered China among the most unequal countries in the world. Beijing’s efforts to amend the system have had mixed results at best.

Given those factors, a dual circulation economy that is based on consumption will depend to a very large extent on China’s urban demographic in a decreasing overall population and can only be viewed as a stop-gap initiative.

Apart from its demographic concerns, China faces another problem. A major objective for Mr Xi is China’s so-called “rejuvenation”, i.e., his plan to make China the world superpower with himself at the top. As a China expert put it, ‘Xi Jinping sits on top of the Communist party, the Communist party sits on top of China, and China sits on top of the world.’ As Mr Xi said in a 2017 speech:

The Chinese nation … has stood up, grown rich, and become strong – and it now embraces the brilliant prospects of rejuvenation. … It will be an era that sees China moving closer to centre stage and making greater contributions to mankind.

That objective can only be accomplished by becoming the leader in scientific fields such as telecommunications, artificial intelligence, robotics, biotechnology, etc. Faced with the technological curbs placed on it by then-US President Trump, however, a Chinese Communist Party (CCP) statement in 2020 proclaimed, ‘Science and technology should be self-reliant as a strategic support for national development’. In other words, China had to develop in-house the technology that was required to meet its goals in those fields. Technology is key to the CCP’s campaign to promote self-sustaining growth based on domestic consumer spending and to build a moderately prosperous society in the first instance. China’s factories require US, European and Japanese components to assemble most of the world’s smartphones, personal computers and consumer electronics, which the CCP sees as a strategic weakness. It is especially worried about China’s reliance on US suppliers for the processors used in smartphones, electric cars and other technologies that are central to its plans. China has to be able to develop, in short, the processors used in computers that are its single biggest import by value, ahead of crude oil. According to the China Semiconductor Industry Association, China’s semiconductor imports in 2018 were valued at US$312 billion ($401 billion), US$304 billion ($390 billion) in 2019 and over US$300 billion ($385 billion) in 2020. In 2014, China announced its intention to become a leader in manufacturing semiconductors by 2030. Official plans called for China to produce 70 per cent of the semiconductors it uses by 2025. In 2020, it produced about 20 per cent.

China’s ambition to become the leading manufacturer of semiconductors may not eventuate, however. A news report noted that China faces delays in miniaturising semiconductors with most of the seven major Chinese semiconductor manufacturing equipment manufacturers saying that their primary products could manufacture 14 nanometre to 28-nm chips, which are two or three generations behind the world’s current chips, with others saying that even older generation machines were their main products. A combination of factors, led by the US’s curbs on the export of technology to China, has led to a simultaneous shortage of semiconductors in China. As the report concludes:

China’s government under Xi had put large amounts of subsidies into semiconductor projects across the country until 2020, but the results of the funding were limited, with many projects failing. The government now seldom mentions the 70% self-sufficiency target laid out in its Made in China 2025 industrial policy.

Making matters worse, the world’s biggest chip foundry, the Taiwan Semiconductor Manufacturing Company Co. (TSMC), announced its intention to join a new lobbying group, the Semiconductors in America Coalition, which includes 65 major players along the semiconductor value chain (Taiwan’s centrality to the semiconductor supply chain is highlighted in this analysis.) The Coalition’s immediate purpose is to lobby the American Government to provide subsidies to companies to manufacture processors in the US. A second report goes a step further, alleging that while TSMC announced last year that it would invest up to US$12 billion ($15.4 billion) to build a processor factory in Phoenix, Arizona, it actually plans to pump tens of billions of US dollars more into cutting-edge processor factories in that state than it had previously disclosed. The report notes, furthermore, that TSMC’s factory in Arizona could be the first of up to six plants there. TSMC officials are allegedly discussing whether to build a factory to manufacture processors of 3-nm technology in the first instance, which would cost around US$23 billion ($29.6 billion), or one to manufacture chips of 5-nm, which would cost less. Intel, the world’s leading designer of semiconductors, and Samsung, the South Korean firm, are also increasing investment in US manufacturing facilities. Intel is building two new fabrication plants in Arizona and Samsung is building a US$17 billion ($21.9 billion) plant in Texas.

Separately, President Biden has called for US$50 billion ($64.3 billion) in funding to support domestic chip manufacturing, and a group of Senate and House of Representatives lawmakers introduced the “Endless Frontier Act”, calling for US$100 billion ($128 billion) over five years for basic and advanced technology research and US$10 billion ($12.8 billion) to create new “technology hubs” across the country. In the event, the Endless Frontier Act was renamed the “United States Innovation and Competition Act”, incorporated proposals that directly target China, and given funding of US$250 billion ($322 billion). Some of its proposals include incentives for US domestic semiconductor manufacturing, research and development in artificial intelligence, 5G telecommunications, quantum computing, biotechnology and robotics (the fields that China identified as central to its plans for global technological hegemony), a renewed focus on spending and diplomacy in the Indo-Pacific, funds to counter China’s influence globally, Taiwan’s inclusion in international institutions, an unclassified report on the origins of the coronavirus, the restriction of funds offered by international development banks to China, funds to counter “predatory bilateral lending” (a reference to China’s “debt-trap diplomacy”) and further sanctions on Beijing for its human rights abuses in Xinjiang. The Act also proposes sanctions against individuals and organisations that engage in cyber-attacks against the US, with particular reference to China, and the withdrawal of funding from American universities that host Confucius Institutes. Those initiatives could cement the US’s position as the global leader in semiconductor design and manufacture and force Beijing to depend on Washington for its supply, as is now happening. They would also further isolate China.

Compounding China’s concerns, Taiwan has banned listings for jobs in China, a major initiative to prevent the outflow of vital technological talent to the mainland. In other words, in addition to being unable to find the skills required to create a domestic semiconductor industry, China will now find it increasingly difficult to acquire those skills internationally. That situation would jeopardise China’s overall plan to become a technology hegemon, hinder its development in its other fields of endeavour and, consequently, its plan to rejuvenate the Chinese nation.

China’s plan to dominate the renewable energy sector is also in doubt. A recent report published by Sheffield Hallam University, titled “In Broad Daylight: Uyghur Forced Labour and Global Solar Supply Chains”, highlighted China’s use of slave labour to manufacture the solar panels that it exports. The report has the potential to disrupt China’s overall exports of solar panels and cause it further embarrassment internationally by negating Beijing’s refutation of the accusations of human rights abuses in Xinjiang Province that have been levelled against it.

China’s ambitions to become the global technological hegemon could fail. Its dependency on semiconductor technology that it currently obtains from the West has major negative ramifications for Mr Xi’s rejuvenation of China. Those negative outcomes will be compounded by its demographic trends, which indicate that China will, if they continue, become a country with a majority of elderly citizens who are dependent on a diminishing working population before it becomes rich.

China’s concerns are widening. Continuing to show that it faces a turbulent near-future, the next part of this paper will demonstrate that, due to Beijing’s behaviour, its relationships with Western democracies and their allies, on whose markets it will continue to depend over the foreseeable future for the export of its manufactured goods, are deteriorating rapidly.

 

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