The Rebalancing World

Influence can come in the form of a crisis or event but can also develop over time. The same can be said about influence’s decline. The world is entering another fascinating decade of geopolitical and economic change that will certainly rebalance the world’s influencers. International governing bodies are experiencing increasing levels of infighting and ineffectiveness. Low growth and global distrust could very likely persist for years to come.

What must we do to keep a steady footing as the world rebalances?

Rebalancing world - FACTS
  • For the 110 Chinese companies in the Fortune 500, 80% of their revenue is earned domestically.5
     
  • In Germany, an estimated one in three companies has major Chinese customers, and around 80% rely on Chinese suppliers – significant exposure in the event of Chinese disruption.73
     
  • As China’s middle class grows, more consumers will travel abroad, creating even more global dependencies on China for one of the world’s largest sectors: tourism. 

The rise of China’s international influence

  • 125 BCE Silk Road trade route connects East and West
  • 1980 China’s active-duty military becomes world’s largest, at 4.8M
  • 1982 China’s population reaches 1B
  • 1986 China’s “Open Door Policy” begins
  • 1995 World Trade Organization (WTO) is founded
  • 1999 Jack Ma founds Alibaba
  • 2001 China joins WTO
  • 2003 SARS hits China and Hong Kong
  • 2004 China signs SE Asian trade agreement
  • 2008 China hosts Olympic Games
  • 2010 Tencent creates WeChat (Weixin)
  • 2011 China becomes world’s second-largest economy
  • 2013 Xi Jinping becomes president
  • 2018 China announces first round of tariffs on U.S. goods
  • 2019 COVID-19 first detected in Wuhan

Current events

Regional partnerships. China's neighbor Southeast Asia is the testing ground for China's broader foreign investment strategies.46 Even with China's influential presence in the region, Southeast Asian countries have negoiated more sophisticated agreements than might be expected given the regional power disparity. The investment terms in these deals have been viewed as fair, strengthening China's claim as a fair and equitable investment partner. Energy deals with Russia are evidence that China can also negoiate with larger global powers. 

Belt and Road Initiative, global investments. China's Belt and Road Initiative (BRI) has become one of the most visible and widely referenced programs globally to describe the country's foreign direct investment (FDI) strategy. These investments have been tailored to regional needs and their strategic importance to China. At it's core, BRI was designed to:47

  1. Create export markets that reduce Chinese overcapacity 
  2. Accelerate growth in Chinese sectors with broad value-chain presence
  3. Improve access to strategic natural resources48
  4. Promote China as a great equivalent power to the U.S. 

China's Digital Silk Road (DSR) was formally added to the BRI in 2017. As of April 2020, 16 countries have signed DSR-specific memos of understanding with China,49 signaling growing global openness to China's full-stack 5G solution, which includes telecommunications infrastructure, smart-city technology, cloud services, mobile payments and social media applications. China aims to be at the forefornt of shaping 5G standards and solidifying its place as a tech giant.

Diverging exposure. As the world’s exposure to China has increased – in trade, technology and capital – China’s dependence on the world in those categories is declining.50 China’s ability to acquire larger portions of value chains has decreased its reliance on foreign resources and technology. Deals are struck for resources outside of China’s control to ensure its economic engine is well supplied for future development. As China’s middle class grows, more consumers will travel abroad, creating even more global dependencies on China for one of the world’s largest sectors: tourism.

China’s transition to a consumption economy. China is not only producing more of the world’s goods but also consuming a larger share of its own production. For the 110 Chinese companies in the Fortune 500, 80% of their revenue is earned domestically.51 “Made in China 2025” will only amplify these trends of decoupling from global value chains. This initiative sets domestic market share targets at 40% to 90% in 11 out of 23 priority subsectors.166 Multinational corporations that have enjoyed broad success in China’s consumer markets are quickly losing share to domestic players, even as Chinese consumers expect higher quality, larger quantity and wider variety of the goods and services they purchase.166

Future expectations

These trends send a strong message that the global economic center of gravity is shifting east. China’s growing international influence will shape the global future, including:

  1. The imperative of doing business with China 
  2. Replicating China’s strong-state model
  3. Sustained BRI engagement
  4. Following China’s bellwether signals

Doing business with China will no longer be optional. Whether attempting to distribute to Chinese consumers (who are increasingly making domestically sourced purchases),52 upgrading infrastructure or sourcing from countless supply hubs, multinational companies must contend with China’s expanded political and economic influence. Western Europe’s growing openness to China-based 5G infrastructure is evidence of this evolving dynamic.53

Several countries and regions may adopt elements of China’s model of governance. The country’s state capitalist model facilitates intentional growth (for example, selecting one technology platform nationally) and decisive action to deploy resources in crises. Countries will continue to adopt economic models based on domestic realities, but China’s strong-state example will likely lead some nations to follow suit, including investing in technology and surveillance that support centralized planning and decision making.

Chinese diplomats will continue promoting BRI for the economic and infrastructure opportunities it offers both partner nations and China itself. Economic decline will hinder these efforts, especially if partners are unable to support their share of ongoing labor expense and resource purchases for infrastructure efforts. However, China takes the long view on its investments, accepting short-term challenges for the sake of long-term growth; BRI will be no different. Countries and companies will start watching for signals from China, including China’s actions in Southeast Asia or its “Made in China 2025.” China has far more to gain in positive, stable environments than in hostile foreign relations. When partners acknowledge China’s strategic interests as Southeast Asia has, China comes to the table willing to negotiate. Companies that respect these priorities will find a more favorable negotiating, procurement and logistics partner. Companies will also monitor China’s value-chain investments regarding "Made in China 2025". Aircraft manufacturing, pharmaceuticals, semiconductors and motor vehicles account for low percentages of Chinese imports and exports,54 but that could change quickly as new domestic enterprises are created. Global corporations must prepare for supply disruption or develop technological advancements to stay ahead of China’s growing innovation capacity.