Chapter Title: China’s International Strategic Environment

Chapter Author(s): Zhang Yuyan, Feng Weijiang and Liu Wei

Book Title: The Jingshan Report

Book Subtitle: Opening China’s Financial Sector
Published by: ANU Press

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 1
China’s International
Strategic Environment
Zhang Yuyan,1 Feng Weijiang2 and Liu Wei3

Introduction
The international strategic environment refers to the external environment
in which a country designs and implements its national strategies.
The international strategic environment determines China’s medium- and
long-term development strategy and foreign policy and constitutes the
background of financial reform and opening up. This chapter analyses
the international strategic environment from three perspectives: peace,
development and governance. These three perspectives cover a wide
range of issues including new approaches, factors with a sustained
influence, material, ideological and institutional factors, and the tactical
characteristics of actors. Moreover, with China’s increasing role in the
global system, China’s own development and behaviour is affecting the
external environment more significantly. As a result, examining variations
in the external restrictions China is facing and evaluating the external
response to China’s influence are equally important in judging and
analysing the international strategic environment.

1 Director of the Institute of World Economics and Politics at the Chinese Academy of Social
Sciences.
2 Staff researcher at the Institute of World Economics and Politics at the Chinese Academy of Social
Sciences.
3 Staff researcher at the Institute of World Economics and Politics at the Chinese Academy of Social
Sciences.

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 The Jingshan Report

Part 1: Although overall global peace

can be maintained, the international
security environment is becoming
increasingly complicated
Peace and war are both closely related to a country’s survival. They also lie
at the centre of a national strategy. A revolutionary change in international
relations has significantly decreased the possibility of war between major
powers. As a result, overall global peace can be maintained. However,
local security risks and unconventional security threats are increasing
and have become an important source of threats to national stability and
prosperity. In particular, the continuous extension of people’s activities
and communication has a spill-over effect in various realms, including the
economy, society, culture, healthcare and information. This is seen across
different countries and appears to be increasing.

Normalisation of peace among major countries

Since the first half of the twentieth century, four revolutionary changes
have weakened the motives for major powers to resort to war and have
restrained many indirect or accidental causes of war. They provide a basis
for long-term group values that make lasting peace among the major
powers possible. These four changes are outlined below.
First, with the advent of nuclear deterrence and other new-type weapons
(e.g. long-range, precision munitions), wars among major powers are no
longer a reasonable option to gain war benefits such as annexation of
land and securing of resources. Second, wars among major powers are no
longer the only way to secure a country’s war interests, as countries are
more effectively using their economic and social means to enhance their
influence. Third, the decision-making systems and processes of modern
foreign policy have progressed rapidly, inhibiting the incentives for wars
among major powers. Fourth, information technology, globalisation and
consumerism enhance anti-war values in the populations of major powers.
For China, the ‘new normal’ of long-term peace among major powers has
the following strategic implications.

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 1. China’s International Strategic Environment

First, the long-term judgement is that World War III will never happen
and peace and development is the theme of the time. Specifically, the
overall external environment for China’s reform and development will
remain stable. China must also consolidate its foundations, coordinate the
domestic and international situations, promote the stable development of
its economy and a society driven by reform and innovation, and advance
modernisation in the national governance capacity. On this basis, China
will steadily enhance its influence on the world stage, while avoiding
aggressive strategies.
Second, competition between major powers under the ‘peaceful new
norm’ will be enduring and complex. Specifically, in the next five to 10
years, hegemonic states will increase the structures around China and
across the world to improve their influence and increase their involvement
in regional issues. China’s situation in relation to global and peripheral
affairs may worsen, crises may break out more frequently and pressures
on safety will increase. China may be placed in a disadvantaged position
in relation to longstanding and multidirectional enemies. This requires
more sophisticated forecasting and assessment capabilities in the short to
medium term, and the comprehensive use of diplomatic, economic and
other responses.

Neighbouring regions are ‘disordered without battle,

fighting without splitting up’
Despite overall peace among the major powers being maintained, China
still faces increasing uncertainty from its neighbouring regions, along with
a more diversified and dispersed security risk. Non-traditional security
threats have become prominent. China’s neighbouring countries and the
Asia-Pacific region are regarded as a key battlefield for shaping future
international patterns. Strategic mutual trust among major countries is
reduced, and the security problem is highlighted. The region’s security
issues seem more complicated with the involvement of foreign powers.
Heated issues frequently and increasingly escalate into crises. However,
the situation is generally controllable.
Although the United States (US) has abandoned the Asia-Pacific
rebalancing strategy as such, the overall trend of concentrating US
resources in the Asia-Pacific region will continue. In recent years, with
its diminished comparative advantage in national strength, the US has
continued to draw India, Australia and Singapore to its side, forming an
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 The Jingshan Report

arc that encourages these three nations to take an active role in achieving
‘shared responsibilities’. This makes the security threat faced by China
even more complicated. Disputes over neighbouring territories and
territorial waters will become more serious. Connections between the
proliferating geopolitical issues of the South China Sea and South Asia
will be significantly enhanced. In the future, the South China Sea and
South Asia will represent a significant crisis for China. Fortunately, in the
foreseeable future, South Asian countries will be greatly restricted by their
internal affairs and resources, ensuring that their capacity for intervention
is limited. They will be unable to affect the security environment of
China’s neighbouring regions in a fundamental way. In the long term,
the US’s deployment of the Terminal High Altitude Area Defense system
will significantly damage the strategic balance and mutual trust between
China and the US. In the meantime, North Korea has made many
breakthroughs in its research and development of nuclear missiles and,
in theory, has the ability to launch nuclear attacks on the contiguous
US. Responding to and settling the North Korean nuclear issue requires
all parties to focus on the long-term and comprehensive use of various
policy instruments.

The comparative strengths of major powers are

undergoing substantial change
Currently, global patterns are undergoing profound changes. With an
increase in their strengths, developing countries and emerging economies
are entering the global stage at a rapid pace. Conversely, the vested interest
groups of developed countries have gradually lost absolute dominance in
the global system due to a decrease in their relative national strengths.
Despite this, the US will assume the position of a superpower in the long
term. With its expanding economic scale, China’s economic strength is
approaching that of the US. The gap between other countries and the US
or China will be further widened.
The most important actors globally are the US and China. China’s gross
domestic product (GDP) has grown rapidly from a volume equivalent to
that of Japan to more than twice the GDP of that country, and as much
as 60 per cent of the US’s GDP. Even if calculated using the ‘inclusive
wealth’ concept, which includes human, physical and natural capital, the
speed at which China is catching up with the US is amazing, despite
the significant gap. Developed countries, led by the US, have already
reached the plateau of their overall national strength. The growth of
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 1. China’s International Strategic Environment

the national strength of developed countries is generally slowing down.

One explanation for this may be the financial difficulties that industrial
countries generally face. Fiscal conditions not only influence people’s
welfare and extend or restrict space for policy decisions, but also have
a direct effect on the implementation of a country’s foreign policies,
especially for major powers or groups of states. Fiscal pressure has, to
some extent, influenced the strategic contraction of the US in the Middle
East and other regions. The situation is similar in regard to challenges
from Russia in relation to Syria, and influence from the Philippines and
Malaysia in relation to China. US President Trump wants to renegotiate
the North Atlantic Treaty Organization and North American Free Trade
Agreement with the US’s allies because the US cannot afford to ‘play this
game’ financially.
Although the US is experiencing stagnation or even a decline in power,
it will remain the most important global player over the next decade.
Having witnessed a rapid economic development for one-third of
a century, China has risen to become the only country able to challenge
the current and future global hegemony of the US. With the narrowing
gap between China and the US, and the widening gap between these
two and other countries, the global order is likely to become polarised.
The rapid rise of China has worried the US, forcing it to treat China as
a genuine competitor. As the US has a relative advantage, it may be the
only country that can impede China’s modernisation process. Strategic
competition between the countries is likely to fall into the ‘Thucydides
Trap’. Fortunately, the existence of nuclear weapons has significantly
decreased the possibility of a Sino–US war, because nuclear weapons
change the rules of the games played by major powers. The nuclear
deterrence strategy ensures that large-scale wars are less likely to develop.
This means that the major global players have few choices for resolving
disputes other than nonviolent means. The competition between nuclear
states has, as a result, become even more complex.
Against this background, China is shifting from relying on exogenous
strategic opportunities to creating endogenous opportunities. As the
second-largest economy with a significant potential for development,
China’s foreign policies reverberate internationally. When China
proposed ‘a period of strategic opportunities’ a decade ago, it emphasised
the exogeneity of strategic opportunities. The shift from exogeneity to
endogeneity is, to some extent, a result and signal of the substantial
changes in the relative strength of China and the US.
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 The Jingshan Report

The ‘double-edged sword phenomenon’ of cyber

technology is becoming evident
Generally, people regard technological innovation as an indicator of
human progress, because it can increase the productivity of labour,
promote welfare and improve living conditions. However, the uncertainty
(or even destruction) created by technology can be significant, at least in
certain historical periods. This is the ‘double-edged sword phenomenon’
of technological progress.
Technological innovation is changing people’s way of production and
lifestyle rapidly in the twenty-first century. The rapid development
of information technology has expanded the way people acquire
information, stimulated the spread of various values and ideologies and
facilitated interaction and collective action among humans. Due to such
characteristics as openness and anonymity, the internet has evolved into
a major platform for groups to obtain information and express emotions.
Some extreme or even distorted information has spread quickly through
the internet. This situation could lead to accidental and violent mass
incidents at any time.
The ‘double-edged sword phenomenon’ also applies to cyber technology.
Due to the lack of relevant laws and the fact that users can remain
anonymous, the general public has resorted to the internet more often to
voice their concerns, which can gradually evolve into anti-establishment
grassroots movements. These bottom-up movements question and
challenge existing rules. Many extreme phenomena, such as trade
protectionism among blue-collar workers in the US, the integration of
ultra-nationalism and populism in Western society and the religious
extremism represented by the Islamic State (also known as ISIS or
ISIL) are not recent developments. However, the values related to these
developments are now disseminated and exaggerated through the internet
and have influenced the political orientations of larger groups. The world
is now exposed to the danger of cyber war because of the global network.

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 1. China’s International Strategic Environment

The rise of terrorist attacks signals the clash

of civilisations
Terrorism was one of the most important unconventional security issues in
the realm of international relations during the twentieth century. Despite
the large amount of personnel and capital invested in international
counter-terrorism alliances, terrorist activities are still on the rise and
have evolved into new forms. Under pressure from international counter-
terrorism alliances, the Islamic State has begun to establish branches and
alliances, leading to the spread of terrorist organisations to other countries
such as Libya, Egypt, Nigeria, Afghanistan and Pakistan. The Islamic State
has also used new technology and social media to incite radicals to initiate
terrorist strikes in several cities around the world. They mainly target train
stations, ports, hotels, sports stadiums and other public facilities, causing
considerable loss of life and property, as well as social panic.
The rise of terrorism reveals not only the conflict created by economic
inequality, but also the conflict of values created by different civilisations.
The ‘clash of civilisations’, coined by Huntington, states that the root of
future international conflict will be related to culture instead of ideological
or economic issues. The confrontations and conflicts between civilisations
will become the major battle lines. The competitive coexistence and
confrontation among different civilisations will become the dominant
theme of international politics.
Demographic structures and the racial composition of a society can
undergo substantial changes. With intensified religious beliefs, integration
in multi-ethnic countries becomes increasingly difficult. This affects not
only international relations, but has also led to the rise of nationalism in
developed countries. Currently, there are more than 50 million Muslims
in Europe. Half of all newborn babies in the Netherlands and Germany
are from Muslim families. At the current growth rate, in 2050, Muslims
will account for more than half of the population in France and Germany,
and 50 million of the total population in the US. Currently, there are
about 10 million Muslims in the US, along with 30 million Hispanics.
This figure is still increasing. Demographic changes in the twenty-first
century have made conventional ‘white’ elites in Europe and the US
anxious. They attribute social crises and domestic challenges to the clash
of civilisations, an approach that eventually strengthens the strain between
mainstream Western society and Muslim immigrants. Thus, the ‘conflict
of civilisations’ becomes a self-perpetuating prophecy.
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 The Jingshan Report

It is worth noting that religious nationalism is not exclusive to Islam.

Racism in some forms of Christianity has long been a political
undercurrent in Western society. This racism is restricted and concealed
by political correctness. Trump’s rise to political power has revealed the
religious conflict hidden in US society. With the rise of nationalism in
developed countries, the pressure related to nationalism and populism
that has accumulated over a long time is released in election cycles
or social movements. This may result in social unrest and terrorist
activity, or even international conflict due to the transfer of domestic
problems abroad.

Part 2: International strategic environment:

A development perspective
Development is a basic demand of human society, as well as the key to
solving all problems. Only with development can we eradicate the roots
of conflict, ensure people’s basic rights and meet citizens’ demands for
a better life. However, lack of development is still a challenge faced by
many. A number of problems, such as income inequality, either between
or within nations, the energy and resource bottlenecks that developing
countries face, and a lack of global economic growth are constraining
economic and social development.

The global economy shows signs of short-term

recovery, but long-term sustainable and balanced
growth faces challenges
The prospect of global economic growth is an important condition for
China’s economic development. China’s foreign trade and investment are
dependent on strong, sustainable growth in the global economy. Recently,
global economic growth has improved markedly, the labour market has
continued to improve, the price level has risen moderately globally, and
the growth of international trade has increased. However, long-term
factors supporting the rapid growth of international trade have not yet
been formed. The adjustment of the US’s fiscal and monetary policies will
have a spill-over effect on the world economy; anti-globalisation, especially
protectionist trade and investment policies, continues to strengthen; the
debt problem has become more serious; and asset bubbles are rapidly

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 1. China’s International Strategic Environment

accumulating and may burst at any time. Geopolitical risks and terrorism
remain, indicating the lack of a solid foundation for sustained, stable and
balanced growth (Zhang & Yao, 2018).
During the decade before the global financial crisis (GFC) (1998–2007),
the annual global GDP growth was 4.2 per cent. In the nine years
following the GFC (2008–2016), the annual global GDP growth rate fell
to 3.2 per cent (International Monetary Fund [IMF], 2017). At present,
global economic growth is dramatically variable. Since mid-2016, the
global economy has entered an upward cycle, and this momentum has
accelerated. According to the IMF (2017), forecasts for 2017 and 2018
global economic growth rates have been raised by 0.1 percentage points
to 3.6 per cent and 3.7 per cent respectively. However, economic recovery
remains uncertain: ‘The short-term recovery is still fragile and robust
growth may not be sustainable, and the medium and long-term prospects
in many areas are not satisfactory’ (IMF, 2017). From a longer-term
perspective, the medium-term growth rate of most developed countries
is still below pre-GFC levels. As a result, the current economic recovery
remains fragile, and uncertainties may be intensified. Sustainable growth
faces long-term challenges.
One of the biggest problems faced by global economic growth is the
slow increase in labour productivity. According to data released by
the Conference Board, the average annual labour productivity growth
dropped from 3.2 per cent between 2003 and 2007 to 1.8 per cent
between 2012 and 2016. In 2017, global labour productivity growth
witnessed a slight increase to 2.2 per cent. The slow or even stagnant
growth is caused by a number of reasons, such as the slowdown of
technological advances and investment growth, slow technology diffusion
because of inadequate market competitiveness and institutional inertia,
slowdown of human capital accumulation and population aging in major
economies, and misallocation of resources resulted from the quantitative
easing policies in many countries (Zhang & Yao, 2018).
The slow recovery of global direct investment is also an important factor
affecting economic recovery. Global direct investment is an important
force in promoting the international division of labour, as well as
economic integration and prosperity. According to the United Nations
Conference on Trade and Development, global foreign direct investment
(FDI) inflows increased by 5 per cent to 1.8 trillion dollars in 2017,
thus reversing the negative growth in 2016. However, while a series of

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 The Jingshan Report

investment promotion policies have been introduced, some countries have

strengthened restrictive policies for foreign investment, such as unilateral
termination or reassessment of international investment agreements,
so the increase of global transnational direct investment is likely to be
small in 2018. The downturn in global direct investment activities has
been associated with slow progress in promoting investment access and
openness, as well as the policies of advanced economies that encourage
manufacturing to go back to home countries.
Additionally, the continued rise of global debt levels has not only
increased the vulnerability of financial markets, but also slowed recovery
of consumption, hindering economic recovery. During the GFC, to
eliminate liquidity panic in financial markets, central banks did not
reduce their debts. Instead, they injected liquidity into the market and
expanded the debt scale. After the GFC, central banks continued to use an
expansionary monetary policy, including quantitative easing to stimulate
economic recovery. Monetary expansion does not lead to a decline in debt
levels. Rather, it created higher debt levels.
The uncertainty of global economic recovery and sustainable development
will form the background of China’s participation in the international
division of labour in the future. Over the past three decades, China has
relied on the international competitiveness of its labour-intensive and
export-oriented manufacturing industries to meet the growing demand
in the global market. Consequently, China has developed into the world’s
largest exporter. However, demand in the global market has been sluggish
and the traditional comparative advantages of China are diminishing.
Long-term structural problems with the Chinese economy have become
prominent. Thus, China must adapt to the ‘new normal’ of slow global
growth and vigorously promote technological innovation and structural
reform. In the highly integrated global economy, national structural
reform policies have significant spill-over effects. In addition to promoting
supply-side reform, China should also actively promote coordinated
reform among countries. At the G20 Hangzhou Summit in 2016, China
proposed 48 guiding principles in nine priority areas, including boosting
trade and investment liberalisation, promoting labour market reform,
encouraging innovation and promoting fiscal reform. China provided the
other G20 member states with guidance for these reforms.

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 1. China’s International Strategic Environment

Income distribution inequality leads to the rise

of anti-globalisation forces
Economic globalisation is the most obvious trend since the Cold War.
Globalisation is conducive to expanding the world market and improving
the efficiency of global resource allocation. It is also conducive to
developing the international division of labour and global production
capacity. Global prosperity and development depend largely on the
advance of globalisation. China has become a significant beneficiary of
globalisation through its reform and opening up policy by participating in
the global division of labour. However, since the GFC, discussions about
globalisation have changed direction. ‘Globalisation’, as a frequently used
word after the Cold War, has begun to be replaced with ‘de-globalisation’
or ‘anti-globalisation’.
An important reason for the rise of anti-globalisation forces is the growing
imbalance among countries and the widening gap between the rich and
poor within countries. The imbalance between developed and developing
countries is still an important issue that the international community must
face. According to the IMF, the per capita GDP of developed countries
based on purchasing power reached US$49,111 in 2017, equivalent to
4.2 times the average level of developing countries (IMF, 2017).
Meanwhile, economic globalisation has widened the income gap
between individuals within countries. The failure of governments
to implement effective redistribution and social security policies has
aggravated income inequality. Although the US has always been the
largest beneficiary of globalisation, its domestic wealth distribution
gap is expanding significantly. The net gainers and net losers in US
society are highly divided. The richest families, which account for only
0.1 per cent of the total population, have accumulated ever-increasing
amounts of wealth. Today, they own 22 per cent of the total wealth in
the US; that is, 0.1 per cent of the US population holds roughly the same
amount of wealth as 90 per cent of the US population (Saez & Zucman,
2016). In Capital in the Twenty-first Century (2014), French economist
Thomas Piketty showed (through statistical data) that income inequality
is evident in all nations that have participated in globalisation. The
continual widening of the gap between rich and poor has become a global
phenomenon. In developed countries, scepticism has emerged around
economic globalisation, with some commentators complaining that their

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 The Jingshan Report

country’s trading partners have taken local jobs. Calls have been made
for governments to adopt protectionist trade policies. The inequality of
wealth distribution caused by globalisation is eroding the domestic social
basis of global economic integration.
It is natural that such dissatisfaction can result in attributing unemployment
to economic opening. However, the idea of free trade will ultimately
prevail, because the global division of labour brings massive trade benefits.
No country can bear the cost of trade protectionism or achieve economic
growth on its own; rather, countries must remain in an integrated global
system. Although income inequality is not a sufficient reason to reverse
economic globalisation, it has exposed problems with the current process.
We need to make globalisation more inclusive.

Deepening economic interdependence continues

to change the connotation of opening
Global economic integration can promote optimal allocation of
production and increase in global, as well as national, welfare. Thus,
along with intensified economic interdependence, the construction of
an open and free international economic system has become a common
interest of all states. As the core of economic globalisation, the free flow of
goods, services and capital without discrimination demands institutional
support. A free and open economic system should be based on
international rules negotiated and agreed to by all states. At the domestic
level, the market economy demands a system that protects property rights
and ensures contracts are enforced. At the international level, a free and
open international economy requires all states to negotiate, cooperate
and forgo ‘beggar-thy-neighbour’ policies, such as trade protectionism,
competitive devaluation and lack of coordination of financial regulatory
policies. In the meantime, with globalisation, the spill-over effect of
nations’ policies is enhanced, which necessitates increased coordination of
macroeconomic policies. As a result, with increasing interdependence, all
states must make a collective effort to protect a multilateral trade system,
construct an open global economic system and promote the free flow of
production factors globally.
Currently, with the development of information technology and
deepening of global value chains, mankind has entered a highly
interdependent period. China’s dependence on the rest of the world is also
at the highest level in history, especially in relation to technology, market
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 1. China’s International Strategic Environment

and resources. In the 1990s, global exports totalled US$5.7 trillion per
year. This rose to US$14.6 trillion between 2000 and 2012. At the same
time, the scale and speed of global capital flows have increased. In the
1990s, the global FDI outflow was about US$400 billion per year. This
has increased to about US$1.5 trillion over the past 10 years. Against this
background, economic integration has moved across borders, requiring
countries to coordinate public policies and regulatory standards. In the
current trade pattern, the global value chain has been normalised.
Integrated transnational production needs all states to shift from
conventional open measures, such as tariff concessions, to cross-border
measures and regulatory coordination. The profound integration of the
global economy has given opening up a new connotation. Some countries
are trying to upgrade their systems, build up new competitive advantage,
promote innovation and explore new approaches to opening. China
should steadily press for reform through opening, build an open economy
and push forward reform in ‘deep-water’ areas such as financial services
and public services. China should enhance the level of opening of the
financial industry; steadily promote RMB internationalisation; expand the
scope, method and scale of cross-border RMB use; and accelerate RMB
capital account convertibility with caution. Additionally, China’s opening
strategy should not only focus on itself, but also coordinate with other
countries through actively preserving and developing multilateralism. This
will create a stable and open environment for its reform and development.

Emerging economies emulating the development

patterns of developed countries are restricted by
resources and environmental factors
Resources and environmental factors place constraints on long-term
economic growth. Human beings have consumed too much and have
begun to ‘pay’ for the excesses.
There are two types of emerging economies: resource importing and
resource exporting. The former is represented by China and India, and the
latter by Russia, Brazil and South Africa. Resource-importing countries
do not have enough resources to meet their development needs, so they
are very constrained by resource availability. Resource-exporting countries
are rich in resources, but their economic development is seriously affected
by international energy and resource prices; as such, they are prone to
resource dependence or the ‘resource curse’.

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 The Jingshan Report

Resource-importing countries face two types of risks. One is availability;

that is, whether the country can obtain the necessary energy and raw
materials from the international market. The other is price; that is, the
impact of energy and resource price fluctuations on the international
market. Take China as an example. With a great demand for energy and
resources, China possesses increasing bargaining power in the international
market. However, China must work hard and maintain strategic patience
to alleviate the energy and resource bottleneck when considering such
factors as the rise of economic nationalism in resource-rich countries,
obstruction from multinational corporations, containment by strategic
competitors and lack of capacity to protect waterway safety.
For resource-exporting countries, an economic model that relies heavily
on resource exports renders their domestic economies vulnerable to
fluctuations in international commodity prices. In a time of declining
prices, the economic growth of these countries is generally slower. Russia
and Brazil even experienced negative growth between 2015 and 2016.
Conversely, when domestic capital and technology are concentrated on
resources, other industries develop slowly. Due to an overdependence on
gold, coal, iron ore and other resources, the economies of Russia, Brazil
and South Africa were significantly damaged when global commodity
prices plummeted in 2013. This led to a sharp decline in government
revenue, and some departments, such as education and energy, have
become seriously underfunded as a result.
With global warming, environmental pollution, rapid population growth
and other issues becoming global problems, environmental issues have
become a common constraint on both resource-importing and resource-
exporting countries. China, Russia and South Africa are significant
producers and users of coal, and China has the highest carbon dioxide
emissions of any country. The key to reducing the proportion of coal
consumption in emerging economies (and, thus, reducing carbon
emissions and the irreversible damage caused by environmental pollution)
is to promote the use of alternative renewable energy and clean energy;
accelerate large-scale production of shale gas, nuclear and other new
energy; and upgrade the energy industry’s structure. Emerging economies
and developing countries remain at a stage of high population growth.
This rapid growth places much pressure on economic development and
the natural environment. In China and India, population growth rates
have dropped significantly, but due to the large population base, tens of
millions of people are still added each year.
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 1. China’s International Strategic Environment

Resource and environmental constraints made it impossible for emerging

economies to replicate the growth and consumption models of developed
countries without regard to ecological factors. The development models
of emerging economies have been adjusted, but the transformation will
be difficult and take a long time. Development will still be a priority
for China in the foreseeable future, but with the country’s development
moving into a new stage, the goals are being upgraded. China should
no longer simply pursue GDP growth, but should instead seek ‘green’,
inclusive and sustainable development.

Part 3: International strategic environment:

A global governance perspective
In an era where global interdependence has reached an unprecedented
level, humanity is facing a series of increasingly pressing global issues. These
issues are characterised by their cross-border nature, great externality and
spill-over effects, among other things. During the process of economic
globalisation, problems such as trade protectionism, turbulent financial
systems, environmental pollution, infectious diseases and terrorism
have had a stronger spill-over effect, threatening the interests of various
global actors. Resolving these issues is beyond the capacity of one or
even several countries. These problems must be solved through broad
global cooperation. Since the end of World War II, with the joint efforts
of the international community, the global governance system has been
continuously improved and perfected. However, due to continuously
emerging global issues and changes of national strengths, the existing
system has encountered severe problems in relation to its legitimacy,
validity and representativeness, showing a lack of ability to adapt to the
ever-changing situations. Therefore, the international community must
reform this system urgently.

The dilemma of collective action has aggravated

the global governance deficit
In his speech at the opening ceremony of the Belt and Road Forum for
International Cooperation in May 2017, Chinese President Xi Jinping
acknowledged that global governance deficit was one of the most serious
challenges for humanity. The deficit is manifested mainly in the following
two aspects. First, the contradiction between the growing demand for
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 The Jingshan Report

global governance and the inadequate supply of global governance or

global public goods is becoming increasingly prominent. Second, flaws
in the current governance mechanism have become increasingly serious,
while reform of the system is uncertain.
Global public goods have a non-exclusive feature. Maintaining world
peace, global trade and financial stability and promoting sustainable
development is costly, while all the countries can have access to these
products. In other words, even if a country does not contribute to the
provision of these products, it can still enjoy the benefits. This gives
countries an incentive to let other countries bear the costs of providing
public goods while becoming ‘free riders’ themselves. As a result, the
supply of global public goods is impeded. Therefore, a core issue to be
addressed is how to coordinate the different players in the international
community to increase the supply of public goods as much as possible.
In addition to the inadequate supply of public goods, there are cases of
ample or excessive supply of some other types of public goods, such as
biased international trade and investment rules. This can be explained by
Mancur Olson’s ‘logic of collective action’. With a lack of incentive and
the absence of a global government, a small number of players who are
willing, capable and highly concerned with their own interests will form
small action groups operating according to cost–benefit calculations.
These groups will participate actively in the supply of public goods
that can bring the maximum interests or minimal loss. Once a narrow
interest group driven by selective incentives gains a dominant position,
the resulting global governance will be biased and non-neutral. Through
using non-neutral global public goods, group leaders will enhance their
own interests, even at the expense of most other stakeholders. In some
ways, global public goods in the form of international organisations or
global order have been ‘privatised’ and become the tools of certain interest
groups to achieve their goals.
The current global governance mechanism was mainly established
by developed countries after World War II. To a certain extent, this
mechanism has maintained a peaceful and stable world and a free and open
international economic order. However, it should be noted that conflicts
in some ‘hot spots’ still arise. Various forms of trade, investment and
financial protectionism remain prevalent. There are increasing challenges
in new areas such as climate change, cyber security, polar region and space
issues. In particular, the GFC in 2008 exposed, in a profound manner,

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 1. China’s International Strategic Environment

many weaknesses of the current global governance mechanism. Due to

the lack of effective collective action, some traditional mechanisms have
been unable to adapt to new situations.

Changing distribution of global power stimulates

reform of global governance
As the comparative strengths of the world’s major players have changed
drastically, it is increasingly necessary to engage emerging economies in
solving global issues. They have become important stakeholders in the
current system and their awareness about maintaining and expanding
their own interests through the global system is also growing. In this
context, a need to adjust the existing order and make the global system
more unbiased has emerged. However, at the same time, countries
with vested interests in the current system wish to maintain their
dominant positions.
Emerging economies should enhance collaboration through platforms
such as the BRICS (Brazil, Russia, India, China and South Africa)
cooperation mechanism and G20 to promote representation of the rights
and voices of emerging market economies and developing countries in
relation to global governance. However, the structures of some global
governance mechanisms have not been improved for a long time and
have been obstructed by countries (or groups of countries) with vested
interests, especially the US and European countries. Even if a consensus
on reform is achieved, it is often difficult to realise such consensus in
a timely and effective manner due to the national interests of involved
countries. For example, the US Congress did not approve the IMF’s
2010 quota and governance reform program until December 2015,
and further attached a condition of greater supervision over the IMF.
Besides obstructing emerging economies from increasing their voices
in international institutions, developed countries have begun to worry
about the trend of developing countries catching up through multilateral
rules and international division of labour. Some countries have used
a unilateral strategy to stimulate reform of the multilateral system to
preserve their advantages.
China will play an active role in the historical process of global
governance reform. First, development is the key that China will provide
to the international community to solve various global problems. China’s
greatest contribution to global governance has been its exploration
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 The Jingshan Report

of a development path of reform and an opening with Chinese

characteristics. The country has been a role model and led the world in
development. Second, China will adhere to the principle of achieving
shared growth through discussion and collaboration and strive to build
a more inclusive international order. In the face of global governance
reform, China should always retain its mission of maintaining world
peace and promoting common development. China does not seek to
overturn the current system, but will actively promote its reform and
improvement. China will firmly uphold the international order with the
United Nations Charter as its core. It will also promote the reform of
unjust and unreasonable arrangements in the global governance system,
striving to make the system more balanced, beneficial and reflective of the
will of most countries.

The waning of ideology in global governance ideas

Globalisation has brought about significant economic and cultural shocks
to countries. Trump’s populism highlights the division between income,
social class, racial groups and cultures in US society. The social foundation
for anti-globalisation is thus further strengthened. Trump’s campaign
promises and policies are largely against multilateralism. Some researchers
even claim that Trump has subverted the post-war values of the US and is
likely to put an end to the ‘liberal international order’ created by the US.
However, Trump’s hit on the multilateral system focuses on the idea of
liberalism instead of the multilateral coordination system. Trump is trying
to change the tradition of US liberalism and cultural pluralism in various
realms such as immigration, climate, democracy and human rights; he is
also challenging the basis of US foreign policy values.
The shock instigated by Trump’s election reveals that the norm of
international order, which has long been dominated by Western countries,
is being challenged. This challenge originates from the complex problems
of Western countries and is related to the social split caused by economic
globalisation. It is also caused by the competition of different development
modes and paths in emerging economies.
The GFC in 2008 gave people a chance to reflect on the effectiveness
of the policy framework based on the ‘Washington Consensus’ and to
appreciate the experiences of emerging economies. Under the leadership
of the G20 Group and the Financial Stability Board, Basel III, which
emphasises both macroprudential and microprudential measures,
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 1. China’s International Strategic Environment

replaced the Anglo-Saxon model that was centred on relaxing financial

regulation.4 The IMF, an advocate of capital account liberalisation, has
also begun to recognise the validity of capital flow management measures.5
The principles advocated by emerging economies, such as sovereignty
equality, inclusive development, diversity of development models and
culture, and ‘common but differentiated responsibility’, are becoming
core values of the international community and mainstream norms of
global governance. The success of the Chinese model, which discards
ideological differences and concentrates on development, provides
sharp contrast to the US model, which has become inflexible and less
effective. The influence and appeal of China’s model has also significantly
increased worldwide.

The world has expected and demanded China

to participate in global governance
After 40 years of reform and opening up, China’s economy and society
have undergone unprecedented changes. China has developed into the
world’s largest trading nation, second-largest economy and second-largest
investor. The biggest change has been the rapid growth of the Chinese
economy and the substantial increase in China’s overall strength. In other
words, China’s development has brought enormous shock and made the
world order increasingly complex.
China’s impact on the international order is manifested mainly in the
following four aspects. First, is the impact at the physical level. This
mainly refers to the significant increase of China’s demand for energy
and resources. Second, is the impact at the monetary level. The process
of RMB internationalisation has already begun. In the next 30 years,
the RMB is expected to become a currency for international trade and
reserves, and a key currency in the international monetary system. If this
goal is achieved, the international monetary and financial system will
be significantly altered. Third, is the impact at the institutional level.
Although a fundamental change in international rules is not possible in
the short term, the rapid increase of China’s national strength will enable

4 Basel III relies mainly on market discipline, self-regulatory hedge funds and financial derivative
trade to join the international regulatory framework. See Helleiner and Pagliari (2010).
5 In February 2010, the IMF released a report on the regulation of international capital flow,
recognising the appropriateness of capital account management and setting a guide for how to use it
effectively. See Ostry et al. (2010).

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 The Jingshan Report

and require China to seek fairer international rules. Fourth, is the impact
at the conceptual level. At this level, China’s impact on the contemporary
world is reflected mainly in the country’s development mode. Therefore,
the certainty of China’s future development is an important background
for the interaction between China and the rest of the world.
The long-term rapid growth of China and other emerging economies has
given the US and its Western allies a difficult choice. The latter wishes
to place China and other emerging economies in an open trade and
investment system with higher standards and stricter enforcement. As such,
they will be able to use biased rules that are more favourable for them to
constrain China. Additionally, they fear that China and other emerging
economies will seek to establish a new set of international institutions in
parallel to those dominated by the US and its allies. To prevent China
from using its increasing influence to change the international order,
Western countries—in particular, the US elite class—will more actively
seek to have China accept the various international rules or institutions
designed and dominated by developed countries. However, these rules are
biased and favour developed countries.
When developed countries shift their focus to domestic issues, the
international community raises its expectations for developing countries,
especially China, in addressing global issues. Although quickly becoming
a key player in the global arena, China is still a developing country.
It should safeguard its own interests while taking on more international
responsibilities. As the country’s reform and opening up enters their later
stages, its goals are also changing significantly. This has a profound impact
on China’s relations with the rest of the world. The Chinese economy
is becoming increasingly dependent on the international system, while
the US’s leadership and support for a free and open international
economic order is diminishing. International economic and trade rules
are being restructured, and an open economic system urgently needs
new momentum. This calls for China to shoulder more responsibility in
developing a free and open multilateral system.

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 1. China’s International Strategic Environment

Part 4: China’s strategic options for shaping

the future global landscape

Engage in cooperation to disperse external pressure

The pressure China currently faces mainly relates to international rules.
China should establish new platforms to address this. For example, it could
strengthen cooperation among the BRICS countries and the Shanghai
Cooperation Organisation, and promote negotiations on the China–
Japan–South Korea Free Trade Agreement.

Shoulder appropriate responsibilities and participate

in economic globalisation
Along with China’s rapid economic development and rising global
impact, there is a growing call for China to be a leader in the
international order. An emerging economy like China should take
on international responsibility according to its own conditions. The
responsibilities must be in proportion to its national strength and
development level. In doing so, China should follow three principles.
First, responsibilities must correspond to rights. The principle of parity
of responsibility and authority is commonly recognised in international
law. In the current system, global governance rules and mechanisms were
established under the auspices of developed economies, which are the
major beneficiaries of the system, while the majority of emerging and
developing economies do not enjoy fair treatment, nor can they wield
influence commensurate to their power. Although China became the
world’s second-largest economy in 2010, its power of discourse is far
weaker than that of the US and other developed economies. Second, China
must take on responsibilities based on its own conditions, capabilities and
needs. China will continue to be the world’s largest developing country
for a long time. According to the IMF, China’s per capita GDP in 2017
was US$8,677, ranking 75th in the world. The number rose to more than
US$9,580 in 2018, ranking 72nd. Third, China should properly balance
short-term and long-term interests, as well as localised and national
interests.

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 The Jingshan Report

Strive for inclusive development

China should seek not only peaceful development, but also inclusive
development, which means one country’s development will benefit the
entire world, and all countries will share the opportunities for welfare
improvement. Inclusiveness is an important part of China’s commitment
to international responsibility. China’s development has both positive
and negative externalities. Compared to peaceful development, inclusive
development emphasises strengthening positive externalities while
minimising negative externalities.
Inclusive development also means China participates in global
governance based on the principles of ‘extensive consultation, joint
contribution and shared benefits’. Consultation means that all participants
form consensus on the basic principles, key areas, mechanisms and
development planning of global governance based on discussion and
consultation. Joint contribution means all members of the international
community give full play to their advantages and potential to jointly
promote reform and innovation of the global governance system. Shared
benefits means that all countries have a fair share of the benefits of
global governance. These principles embody openness and inclusiveness
in global governance and conform to the global trend of democratic
development. In practice, they actively involve all members of the
international community, especially developing countries, heeding their
concerns, better safeguarding their legitimate rights and ensuring they
share in the benefits of global governance. The practice could enhance the
trust between China and the rest of the world, and is a reliable path for
burying doubts and achieving expectations.

Promote gradual reform of global governance

As an expanding country, China is a taker, rather than a maker, of
existing international rules and institutions. Previously, interactions
between China and international institutions were mostly conducting
coordination under the current system and internalising the rules. As the
legitimacy and effectiveness of the global governance system face more
challenges, and as China plays an increasingly important role in the global
economic system and security affairs, China has become a major force in
promoting reform of global governance. In this regard, some may have
unrealistic expectations that the increase in China’s national strength will

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 1. China’s International Strategic Environment

bring fundamental changes to international rules and the international

order. In fact, the evolution of the international system is a long-term
process. It is not realistic or necessary to make revolutionary changes to
unreasonable international order or rules, especially those that favour
vested interest country groups.
In its participation in global governance, China does not wish to
establish an entirely new system or instigate a revolution of the
existing system. Rather, it seeks modest reform of existing multilateral
mechanisms. In doing so, China should take a cooperative path and
emphasise the rise of emerging economies and developing countries
and focus on complementing, not replacing, the current mechanisms
(i.e. improvements, rather than revolution). To deal with mechanisms
in various areas, China should employ differentiated approaches based
on its own conditions, national interests and the characteristics of those
mechanisms. China should promote the concept of inclusive development
to improve the current system. The system is influenced by Western values
and institutional patterns and does not adequately acknowledge the
diversity of development paths and national conditions.
As China grows, it may seek reform of rules and institutions. In the next
decade, China should seize opportunities and work with other emerging
economies to make improvements to the current system and exert
a larger influence.

Rationally respond to external challenges

China is on the road to ‘great rejuvenation’. A peaceful global environment
is critical to accomplishing this mission. While defending its territory and
marine rights, China should exercise care and take appropriate actions.
China should also be aware of the harmfulness of extreme nationalism
and the danger of falling into an arms race trap. In addressing global
issues, China must be patient and properly identify priorities.
In terms of foreign relations, China has two priorities. First, is the
establishment of a new major power relationship based on mutual
respect, mutual benefits and win–win cooperation. This is a new way of
dealing with conflicts and contradictions between emerging countries and
existing powers. The major obstacle to China’s long-term development is
the US, which intends to bring China into the existing system using the
rules dominated by and favourable to itself. In engaging with the US,

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 The Jingshan Report

China should consolidate risk management to avoid a lose–lose situation

and promote win–win cooperation to establish a new major power
relationship.
The second priority involves creating a stable peripheral environment.
Peripheral instability is still a threat to China’s security. Pressing issues
in relation to islands, seawaters and resources in surrounding areas will
continue or become worse. China should prioritise establishing a new
regional security mechanism with Northeast Asia. While protecting its
national sovereignty and core interests, China could enhance its influence
in the region and explore new ways to solve disputes, break deadlocks and
create new and favourable situations.
Specifically, China should reconsider the practicality and feasibility of
some foreign policy objectives and respond to changes in the external
environment in a flexible manner. China should improve weak links in
foreign policymaking—for example, improving coordination among
government departments, information sharing, intellectual support and
personnel training mechanisms—to enhance the effectiveness of decision-
making. Multiple policy instruments and contingency plans should be
employed to respond to uncertainties in the external environment.

Actively seek support from the international

community
As developed countries currently dominate international public opinion,
China should enhance communication with other countries, actively
express its voice and create an atmosphere beneficial to the dissemination
of China’s ideas of ‘peaceful development’ and ‘inclusive development’.
In particular, it is necessary for China to articulate how its rejuvenation
contributes to the welfare improvement of all countries, so that the
international community accepts China’s development.
The Chinese Government should enhance the impact of its
communication with the rest of the world, equip itself with
modern communication technology and make full use of communication
resources. This can be achieved by using new media tools and adopting
multiple perspectives and narrative forms to shape China’s international
image more vividly. At the domestic level, China should promote cultural
prosperity by establishing institutions and creating a favourable cultural
environment. At the international level, the government and the public

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 1. China’s International Strategic Environment

should actively use multilateral and bilateral communication channels to

conduct cultural diplomacy. China should also leverage its position as the
host country of global conferences to raise Chinese topics, concepts and
plans and shape the agenda. Additionally, in the process of promoting
international economic cooperation, China should disseminate
knowledge of Chinese enterprises that have met social obligations and
promoted people’s livelihoods abroad, and tell success stories of the Belt
and Road Initiative.

References
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and derivatives in global financial governance. In E. Helleiner, S. Pagliari &
H. Zimmermann (Eds), Global finance in crisis: The politics of international
regulatory change (pp. 74–90). New York, NY: Routledge.

International Monetary Fund. (2019, October). World Economic Outlook, October

2019: Global Manufacturing Downturn, Rising Trade Barriers. Retrieved from
www.imf.org/en/Publications/WEO/Issues/2019/10/01/world-economic-
outlook-october-2019

Ostry, J. D., Ghosh, A. R., Habermeier, K., Chamon, M., Qureshi, M. S. &
Reinhardt, D. B. S. (2010, February). Capital inflows: The role of controls
(IMF Staff Position Note 10/04). Washington, DC: International Monetary
Fund.

Piketty, T. (2014). Capital in the twenty-first century (Arthur Goldhammer trans.)

Harvard University Press. (Original work published in 2013)

Saez, E. & Zucman, G. (2016). Wealth inequality in the United States since 1913:
Evidence from capitalized income tax data. Quarterly Journal of Economics,
131(2), 519–578.

Zhang, Y. & Yao, Z. (2018). Global economic recovery accelerated while

foundation needs to be enhanced. Qiushi, 2.

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