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| 9 minutes read

A China 2030 Scenario: Middle Income No More

The geopolitical landscape in the Indo-Pacific is shifting quickly. Despite the change in U.S. administration, the U.S.-China rift continues to grow. The intensification of the competition across the diplomatic, military, and trade domains is redrawing the lines of allegiance in the region. Ultimately, the direction and outcome of the competition will largely depend on how China meets its own domestic challenges and manages to extract itself from the middle-income trap. One of the possible scenarios is that China might just succeed. 

Detailed below is a hypothetical scenario of what that might look like.

Xi Jinping has consolidated his internal and external power and has curried diplomatic favor with new trade partners, leaving the U.S. in the cold.

In 2027, Xi Jinping reshuffled the party’s top decision-making bodies at the 21st National Party Congress (NPC) with loyalists and maneuvered himself into a fourth term as China’s paramount leader – a feat not seen since Mao Zedong. A younger group of leaders entered the fore during the NPC – increasing the chance one of them could be Xi’s successor – decreasing the prospect of a chaotic succession.

In line with growing nationalism, Xi is more forcefully “making China great again” by increasing its defense budget and asserting itself abroad. China has managed to change the status quo in its favor along the Indian border and established an air defense identification zone in the South China Sea – effectively taking operational control over the region. Taiwan is now more firmly in Beijing’s crosshairs and Xi has set a date of 2049 for unification – peaceful or not. Taipei’s diplomatic allies seem to be dwindling by the year. Chinese military exercises in the South and East China Seas and areas near Taiwan are a regular occurrence.

China’s growing belligerence is offset by its economic policy toward Southeast Asia. Beijing has retooled the Belt and Road Initiative to better conform with international best practices. While still lagging in many areas, its focus on what Southeast Asian countries want and need, as well as a lack of demands to reform governments and societies, beats Western alternatives that usually come with governance requirements strings attached. Trade between China and Southeast Asia, but also South Korea and Japan, has steadily increased. Beijing has finalized an accession agreement to join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) – firmly anchoring China as the heart of the Indo-Pacific economy. Given increased regulations at home, private Chinese firms, especially tech companies, have also increased their investments in the region and around the world. Private Chinese companies are now more competitive than ever before. And because the U.S. failed to deliver major investments or conclude new trade agreements in the Indo-Pacific, the region is now leaning toward China.

U.S. allies and partners beef up their defensive capabilities to deter China, but much more will be needed.

Key U.S. allies and partners Australia, India, Japan, South Korea, and Taiwan are putting more money into their armed forces and revising their defense postures. The Indo-Pacific region is now in an arms race not seen since the Cold War. Manned – particularly nuclear-powered – and autonomous submarines are becoming the primary weapon of choice to compete with China’s blue water navy. Japan and Australia have deployed missile defense systems and advanced cruise and ballistic missiles in an attempt to contain China.

While relations have improved, South Korea and Japan do not yet have a formal alliance of their own. India – on track to great power status – remains supportive of a free and open Indo-Pacific but refuses to formally ally itself with any country. Vietnam, courted by the U.S. for years, continues to hedge and play Beijing and Washington off one another to maximize Hanoi’s benefits. Taiwan is intent on turning itself into a porcupine to make any Chinese invasion as painful as possible. However, after a continuous streak of losing wargames – even with Japanese and Australian support – it is growing increasingly unlikely that the U.S. would be willing to risk a nuclear exchange to save the island democracy. Despite these setbacks, the Quad diplomatic and security grouping of the U.S., India, Australia, and Japan have strengthened and seen considerable progress on technology transfers, intelligence sharing, and trade.

At home, China continues to make economic and social progress, but at a much slower rate than expected.

The Common Prosperity drive is growing the middle class at rates not seen in decades. Thanks to higher taxes and an increase in philanthropy, income inequality has fallen – albeit it is still high. But Xi’s signature domestic policy is failing to encourage families to have more children. An even stronger social safety net and financial incentives may be required to see an increase in fertility. Failure to address the demographic decline will negatively impact China’s economy and future growth.

An increase in social stability has been a major result of China’s domestic focus. Though more nationalistic than ever before, protests against property prices and healthcare issues have declined. Beijing continues to place millions of Uyghurs and other ethnic minority groups in reeducation camps in Xinjiang. Tibet faces a similar situation. The heavy-handed approach to both regions has kept unrest at bay. Though successful, foreign companies operating in China have effectively shut themselves out of China’s westernmost regions.

Common Prosperity hasn’t been all good. While the government has increased support for small and medium-sized entities, large companies – especially consumer technology, tech platform, and other sectors not deemed strategic – have suffered from increased government regulations. Firms must now be more cognizant of Beijing’s goals and adjust themselves accordingly. Economic growth has slowed more than estimated, but it is expected to be stable.

Beijing’s “Technology Diplomats” have acquired enough critical technologies to successfully challenge Western economic and national security interests in the Indo-Pacific and beyond.

Chinese S&T diplomats alongside domestic STEM experts have systematically executed on both President Xi’s Innovation Driven Development Strategy and his Military-Civil Fusion development strategy, designed to promote the integration of S&T between China’s economic and security apparatuses and improve its ability to compete economically and militarily with the United States. These diplomats methodically collected critical technologies on Beijing’s technology wish list. Uncompromising interpretations and applications of its S&T Conversion Law have accelerated the conversion of S&T achievements into political, economic, national, and defense wins for the CCP who doggedly targeted technologies that aligned with goals of major policies like Made in China 2025, the Medium-and-Long-Term Plan for Science and Technology Development (2006–2020), and the Strategic Emerging Industries Strategy. As a result, Beijing has made significant progress in building a resilient, scalable, and sustainable technology ecosystem. Despite U.S. efforts to freeze them out, the Chinese fell back on their historic drive to obtain advanced technology with respect to previous efforts in the international community to deny them access to critical technologies, like semiconductors, and have built a sizable domestic semiconductor production capacity. The goal to be in the top tier of S&T countries is now within sight, and Beijing continues to allocate the resources and political capital to be able to compete with the U.S. and potentially overtake it by 2050.

Beijing’s domestic subsidies to its biggest technology companies have further antagonized Western competitors and confirmed fears that it was seeking to rewrite the international rules with its China Standards 2035 initiative, leading to a technology Cold War where decoupling has played out over the internet. The West has rejected Chinese technologies like 5G from Huawei and ZTE. Instead, it chose to build a dual standard internet to avoid the state-capitalism that the CCP prefers, calling it “cyber sovereignty.” Thus, the worldwide web is no longer really worldwide and users must endure a hodgepodge of national interests similar to that in Iran and Saudi Arabia.

This splinternet of things has created a dual system where countries must carefully choose alliances because the costs of switching are high. Beijing has successfully implemented a central bank-backed digital currency and has cornered the regional markets for online shopping and digital commerce. Moreover, Chinese biotech, medical device technology, and advanced materials research have progressed to the point that they are more than competitive with Western technologies and have dual applications for both economic and national security purposes. Beijing has mastered water sanitation and air purification to the point that they are able to remediate some of its domestic environmental damage and is now selling that technology at a premium. In other technology advances, China has begun mass producing electric vehicles and autonomous drones with advanced surveillance capabilities and integrated AI. In fact, its autonomous drones have polarized video systems capable of excellent littoral monitoring, and its AI-enhanced urban drones are capable of object recognition. As the decade closed, China made significant strides in both quantum computing and nuclear fusion, and announced its intention to become the world’s technology leader in both by 2050.

The end of the gilded age leads to a more mature, predictable legal environment.

By 2030, as China successfully pursues de-risking, greater equality, and more sustainable growth, more sectors are facing growing regulatory oversight. China does not want to eliminate private enterprise or go back to its Marxist roots, but it wants to redirect the entrepreneurial class toward productive activities that align with the party’s economic goals of more inclusive, sustainable, and equitable growth. Increased regulations and stricter enforcement are the means to that end. Tighter curbs have been enacted on sectors that have enjoyed exponential growth but generated systemic risks, such as banking, real estate development, gaming, and pharmaceuticals. Unproductive wealth is also in the bull’s eye. Xi has imposed a modern and expansive anti-trust regime that allows for better regulated markets and prevents the rise of capitalistic juggernauts that could become a political counterweight to his power. Cost-cutting regulations are put on key sectors that affect social welfare and equality, including healthcare and private education, in an effort to curb cost pressures on households. Quality control regulations have multiplied to meet expectations of the rising middle class with regard to privacy and data management, consumer safety, pollution, and to a lesser extent workers’ rights. Primary targets are some portions of the technology and energy sectors, as well as consumer products. High-tech sectors the state considers key to addressing the country’s growth and productivity challenges are relatively spared. Despite a chaotic implementation-by-experimentation early on (2021-2024), the maturing legal framework and more professional enforcement means greater convergence with global standards in key sectors, reduces regulatory politicization, and levels the playing field for international companies, as with more regulatory coherence, Chinese companies have less flexibility on business model innovation and adaptation.

Emissions peak by 2030 as planned, but it’s still unsustainable.

Responding to both international and domestic pressures, China has accelerated its green transition in the next decade. By 2025, China met the climate targets included in the 14th Five Year Plan of lowering carbon intensity by 18%, energy intensity by 13.5%, and increasing the share of renewable energy to 20%. In its next five year plan (2026-2030), Beijing makes a clear commitment to start “phasing down” coal consumption and increase the share of renewables in the energy mix to 25%. Despite a boost in coal production in the aftermath of the pandemic, these efforts allow China’s carbon emissions to peak around 2030 at between 13.2 and 14.5 GtCo2e, allowing China to claim a major win on the international scene. Despite the progress, China’s lack of ambition in setting targets for carbon emissions and incremental progress in phasing out coal means that it is not on track to meet its ambitious, long-term goal, of carbon neutrality by 2060. By 2030, Beijing is still refusing to commit to firm emissions caps or reduction targets. It also continues to finance coal production domestically. Meanwhile, the emissions trading system set up in 2021 does not entice a faster transition pace as the carbon price remains too low. These targets are insufficient to put meet the Paris Accord limit of 1.5ºC warming. Rather, they portend of a warming of over 3 º C. Beijing’s policies severely handicap its 2060 lofty goal of carbon neutrality, constrains climate international policy cooperation, and further sours relations with the West. Beijing’s lagging policy makes it more difficult for Western companies to operate or supply in China and comply with increasingly stringent ESG disclosure requirements in the West.

To learn more about how China’s evolution impacts your organization’s strategy, contact Ankura’s Geopolitical Advisory practice. We help provide the competitive advantage and confidence you need to succeed in the global marketplace.

© Copyright 2022. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.

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aerospace & defense, geopolitical intelligence, risk & compliance, memo, f-risk, technology media telecoms, f-strategy

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