Source: WSJ Published: 2022-05-03

Like his predecessors who built the Great Wall to thwart foreign threats, Chinese leader Xi Jinping is raising ramparts to make his nation more self-reliant, a mission Russia’s war in Ukraine has mademore imperative.

China has pumped billions of dollars into semiconductor production, stockpiled grains and oil, andestablished international links to its fi nancial system. At the root of the push is the fear of gettingblocked out of Western economies by heavy penalties of the sort the U.S. and European Union havethrust at Russia.

No stranger to the bite of U.S. sanctions, China could face more signifi cant ones in the case of amilitary confrontation with the U.S., perhaps over Taiwan, or if Beijing off ers pivotal assistance toMoscow during its war in Ukraine.

It wasn’t missed in Beijing that when confronting Moscow, “the Western powers moved withtremendous alacrity and as a united front,” says Eswar Prasad, the International Monetary Fund’sformer China division chief and now a professor of trade policy at Cornell University.

China’s much larger economyis more difficult to cut off than Russia’s. Nonetheless, Mr. Prasad says,“One lesson that China is probably taking from the fallout is it remains vulnerable to fi nancial,economic and technological sanctions.”

During Mr. Xi’s time in offi ce, three successive U.S. administrations have leveled sanctions at China,including Huawei Technologies Co. and companies with alleged military ties as well as offi cials andentities Washington holds responsible for human-rights abuses.

Each move has appeared to deepen Mr. Xi’s quest for self-reliance.

A day after Russia launched its Ukraine invasion, which quickly triggered Western sanctions, aneditorial in the Communist Party’s People’s Daily said, “Independence and self-reliance ensure thatthe cause of the party and the people will continue to move from victory to victory.”

Better defenses

In contrast to Russia’s weak manufacturing sector and an export base dominated by commoditieslike oil and gas, China has large scale and broad reach in production. “This is China’s advantage,”crowed a March commentary in the nationalistic tabloid Global Times.

China supplies a third of the world’s textiles, more than 27% of its electronics and almost 20% of themachines, according to data from Harvard’s Center for International Development. It is virtually the only exporter of rare-earth metals necessary to make items from night-vision goggles to batteries forelectric vehicles like Teslas.

A Russia-style retreat from China wouldn’t be easy for the American economy. A U.S. Chamber ofCommerce-Rhodium Group report last year estimated that if half of the U.S. investment in Chinawere abandoned, it would cost American companies $25 billion annually in lost profi ts, with theaviation, chemical and medical sectors particularly hard hit, on top of a $500 billion hit to the U.S.gross domestic product.

Wang Wen, executive dean of Chongyang Institute for Financial Studies at Renmin University inBeijing, argues that multilateral coordination would be too unwieldy against an economy 10 timesthe size of Russia’s and that Beijing would power through the challenge, much like it did during theTrump administration’s trade war.

Awareness is growing in Washington that the power of U.S. sanctions is also being eroded by thepossibility they are being overused. Over 1,000 China-linked entities appear on sanctions listsmaintained by U.S. government agencies.

The Treasury Department alone manages 37 separate sanctions programs and last year said thesystem has been reviewed in the face of “technological innovations such as digital currencies,alternative payment platforms, and new ways of hiding cross-border transactions [that] allpotentially reduce the effi cacy of American sanctions.”

Ray Dalio, founder of hedge fund Bridgewater Associates who has argued China is rising at the U.S.’sexpense, says that if Russia sanctions help bring an end to the war in Ukraine, it would enhance U.S.leverage. However, Mr. Dalio wrote this month, “If they are not eff ective, we will risk seeing Americalose its most unique and greatest power—its control over the world’s reserve currency and capital-markets system—as others increasingly escape it.”

Historical blueprint

As a young nation, the U.S. found itself on the receiving end of sanctions—and turned the situationinto a coming-of-age moment.

It declared war on Great Britain—the War of 1812—in part over its seizure of American merchantships to block American trade with France. “Before the war, there’s this idea of dependence onEurope, and after the war there was emergence of independence and national identity,” sayshistorian Walter R. Borneman.

China has its own historical blueprint: Mao Zedong’s striving for self-suffi ciency was borne from thedeep economic trouble after the civil war that brought the Communist Party to power in 1949.Poverty followed as the strategy backfi red, but all subsequent Chinese leaders have adopted someelements of Mao’s inward-looking vision.

Still, China’s post-Mao leaders also opened to global trade and investment. A fierce nationalist, Mr.Xi has increasingly borrowed Mao-era terminology of “self-reliance” to describe his core defensive strategy.

“Xi Jinping’s version of self-reliance is certainly more focused on domestic production and domestictechnology than we saw from other Chinese leaders in the reform era,” says Neil Thomas, New Yorkpolitical consultancy Eurasia Group’s regional analyst.

Supply lines

As tension in Ukraine pushed up grain prices, Mr. Xi applied the self-reliance calls to domestic foodproduction. “Who will feed China? China needs to be self-reliant and support itself,” Mr. Xithundered to legislators in Beijing in March.

In practice, what self-suffi ciency has meant for China, the world’s biggest trading nation, is fi ndingalternatives to imports or creating dependable supply lines.

U.S.-China Business Council fi gures show 10 U.S. states each exported over $1 billion in oilseeds andgrains to China last year for a total of nearly $22 billion. China also relies on imports for many fruits,vegetables and seeds.

Its biggest import bill is for oil, with 70% of its needs coming from overseas. However, the sources arenations in the Middle East and Africa that have benefi ted from China’s development fi nancing andpolitical support, along with Russia.

Partly to protect supply lines, China has poured massive fi nancing resources into helping poor butresource-rich countries build ports and railways under Mr. Xi’s Belt and Road Initiative. DerekScissors at Washington-based think tank American Enterprise Institute says such links wouldprovide Beijing limited insurance if the U.S. imposed very substantial sanctions.

Under a wartime scenario in which the U.S. might sanction China’s banks, for instance, countrieswould face a choice of maintaining good relations with Beijing and getting cut off from the dollarsthey need for trade. “In a serious case, most of the Belt and Road peels off ,” says Mr. Scissors.

Paper wealth

Ultimately, the dollar is the choke-point that makes U.S. sanctions eff ective.

On paper, China is exceptionally rich with little international debt and $3.2 trillion in foreign-exchange reserves. But how much of that money China could access during a confl ict with the U.S.was thrown into doubt when the U.S. Federal Reserve and other leading central banks froze abouthalf of Russia’s $600 billion in reserves after its invasion.

To raise the attractiveness of its own currency, Beijing has lowered barriers to stock and bondinvestments in China, while it has taken steps to develop networks for money to move around theworld in ways that could avoid the dollar.

The People’s Bank of China’s Cross-Border Interbank Payment System is designed to rival the dollar-based money-transfer system known as Swift

. China is also working with other central banks tomake a digital version of its yuan acceptable in other countries.

China’s UnionPay credit card, which boasts more users than Visa, has become a go-to network forRussian banks. Yet, analysts say China’s parallel fi nancial systems aren’t used by enough othernations to provide a viable alternative to escape from American sanctions.

And Mr. Prasad said Beijing stands at a dangerous point in its fi nancial-market liberalization, sinceforeign institutional investors have pumped in enough money to infl ict pain if a loss of confi denceprompts them to race for the exits but not enough where the state has much leverage over them andtheir home governments.

Corporate connections

After Russia’s invasion, hundreds of multinational businesses, including fast-food chains, automakers, oil giants and banks, signaled partial or full pullout

from Russia. Many are more embedded in China.

No major shift followed former President Donald Trump’s 2019 urging that American companiesexplore alternatives to doing business in China, according to a recent study focused on electronicsand machinery produced by Paulson Institute’s MacroPolo think tank.

While the share of U.S. imports of such equipment originating in China dropped to 32% in 2021 froma peak of 42% in 2018, the study said the change primarily refl ects a China exit of the lowest-value-added assembly activities.

China has also tightened its legal defenses against foreign economic pressure. New “blocking”statutes include an Anti-Foreign Sanctions Law that provides a legal basis to retaliate againstindividuals or companies that hurt Chinese national interests in responding to sanctions imposed byanother nation.

The so-far unused measures allow China “to punch back” on sanctions, according to a summary ofthe statutes published by Washington think tank Peterson Institute for International Economics. Co-author Mary E. Lovely, an economics professor at Syracuse University, said that without a verysubstantial breakdown in Sino-U.S. relations the likelihood is low China would pull the trigger andhit an American company.

Technology shortfall

High technology like semiconductors may be China’s largest vulnerability, where it remains highlydependent on the U.S.

U.K.-based Oxford Economics researcher Innes McFee calculates that since about a quarter ofChina’s technology exports depend on components sourced abroad, the U.S. and EU would beaff ected if they cut off China from such supplies, but, he says, the annual impact on China’s economywould be three times worse.

Complex manufacturing of solar panels and the dozen steps needed to make batteries used inelectric cars is within China’s capabilities, but it depends on foreign expertise for more advancedscience-based applications like producing jet engines and mastering the software that runsequipment to make semiconductors, says

Dan Wang, a technology analyst at China-focused researchservice Gavekal Dragonomics.

“China is not bulletproof,” he says.

Key Words： China Economy The Wall Street Journal Wang Wen