China's Tech Landscape: A Primer

China’s technology sector has seen remarkable growth in the past few decades. Its digital economy, defined as the integration of internet-based technologies to all areas of the economy, is now worth around 30% of its GDP. The country’s extraordinary technological advance is already having significant economic, security and geopolitical implications around the world. In response to its rising influence the US has attempted to constrain the nation through tariffs and investment restrictions, while Europe is still defining its relationship. One thing is clear: China’s influence will continue to grow, and the West will need to work out clear points for cooperation as well as those of competition. And in order to do so, policymakers must understand the trends that have defined China’s technological rise:

1. In its initial stages China’s strategy was defined by imitation. The government protected companies such as Alibaba, Baidu and Tencent in their infancy as they adopted insights from Western Big Tech companies. The country’s strategy is now one of innovation. This is being promoted through Made in China 2025, a state-led industrial policy which strives to secure China’s global dominance in high-tech manufacturing. It is also investing massively in R&D and education and has experienced venture capital investment in its start-ups. As a result, China has increased its competitiveness across multiple sectors.

2. This two-stage process has seen the sector experience substantial growth. China now excels in areas such as Artificial Intelligence and 5G, increasing its potential to expand its leverage on the international system. China is increasingly challenging the West in multiple technologies and industries. In e-commerce, fintech and energy sectors the country is a world leader. For example, the country accounts for almost half of the world’s e-commerce transactions, is home to nine of the 23 privately held fintech unicorns and holds 29% of the world’s renewable energy patents. 

3. As a result, China is spreading its own tightly controlled digital standards across the world, enabling it to project global power and leading to the emergence of conflicting global technology standards. The country is using technology to secure political power at home, through high levels of censorship and surveillance. But its attempts to exert power also extends its borders. It is exporting its own digital standards through its Digital Silk Road and is increasingly shaping global standards for technologies according to its own interests. This is resulting in the balkanisation of internet governance and is threatening democracy and global security.

There are some key questions that policymakers must begin to engage with to appropriately respond to the fast-changing and increasingly complex technology landscape in China. 

Some of these questions consist of opportunities; for example, how can the West leverage China’s science and innovation potential to generate global benefits? Or how – in the face of competition – can the West build a more unified stance and consolidate the transatlantic relationship in new spheres in response to China’s rise? An immediate concern for the West is how to approach Big Tech to ensure that innovation and competition flourishes, while firms that have large market power act with social responsibility. 

But the West must also remain clear about the threats. Key to this will be the question of whether it is possible to have a single internet based on one set of values, and what mechanisms the West can use to prevent further divergence of internet standards. Similarly, questions about cyber-security and trust are becoming more important than ever as China exports its technologies to the West. These are some of the fundamental questions that policymakers in the West will have to grapple with as China continues its ascent. It is crucial that they provide answers and establish how technology will influence bilateral and multilateral relations in the future. 

“We have to consider the single biggest challenge we’re going to face. It’s going to be the rise of China. We’re really not understanding in the West just how big this geopolitical challenge is.

“China is going to have a power no western country has had in history. It’s going to challenge us not just economically, but politically, militarily. It’s going to offer a way for working that’s altogether different.”
Tony Blair, WIRED Live

In the past few decades China has transformed into a global powerhouse. Its meteoric development, in which hundreds of millions have lifted themselves out of poverty, started with Deng Xiaoping’s reforms nearly four decades ago. Government was given a directive role, creating an adaptive policy environment, but with a focus on export-led manufacturing. It is now the world’s second largest economy. Chinese citizens have moved from low- to higher-productivity sectors and from farms into cities. And the government is now a leading technological power, with a broad and complex technology landscape. 

Elements of China’s rise have attracted widespread attention: through the Western lens, the social credit system has raised worries about its applications, as the Communist Party of China (CPC) uses it to tie political power to social and economic development. Huawei has become a focal point for global trade and security issues, with the US placing the company on its entity list. The recent debate following a tweet supporting protests in Hong Kong by Daryl Morey, the general manager of basketball team the Houston Rockets, has opened a major discussion on competing value systems. This builds on Eric Schmidt’s prediction that two internet systems will form, as China exports its walled off, censored version to illiberal nations. But Western nations still often find themselves stuck between the challenges and the hard place of cooperation.  

For a long time, there has been an uneven playing field between the West and China, riddled by an asymmetry of access to markets. The origins of the current US-China trade war also partly lie in a failure to reconcile Western liberal capitalism and Chinese state capitalism. While US attempts to constrain China through tariffs and investment restrictions have been strategically mishandled, and remain unpredictable, Europe is still defining its relationship. Earlier this year, it labelled the country a “systemic rival”, an “economic competitor” and acknowledged the security risks. But finding common positions will be hard, even though its power and ability to compete will be defined by unity. The German Chancellor Angela Merkel has, for example, opened the door to Huawei to supply the country’s networks, whereas France is still discussing the issue. 

To correctly find the balance between cooperation and competition, policymakers must understand the trends that have defined China’s technological rise. Broadly, these are as follows:

1. In its initial stages China’s strategy was defined by imitation. The government protected companies such as Alibaba, Baidu and Tencent in their infancy as they adopted insights from Western Big Tech companies. The country’s strategy is now one of innovation.

2. This two-stage process has seen the sector experience substantial growth. China now excels in key technologies and sectors, such as Artificial Intelligence (AI) and 5G. This has increased China’s potential to expand its leverage on the international system.

3. As a result, China is spreading its own tightly controlled digital standards across the world, enabling it to project global power and leading to the emergence of conflicting global technology standards.

This is not to present China as purely a threat. Its development in this space – as well as its economic development more generally – should not be considered in zero-sum terms. Instead, China’s rise presents huge opportunities for the West. But unless the West focuses on building capabilities and increasing competitiveness, China will continue to exert a greater influence on world affairs. 

To address this, this primer lays out some key questions that policymakers must begin to engage with to respond appropriately to the fast-changing and increasingly complex technology landscape in China. 

For decades, China’s technology strategy has focused on imitating products and services originating in other, predominantly Western markets. However, the country is now renewing its approach to focus on innovation. In practice, this means that whereas previously China was viewed as a tech ‘copycat’, creating cheap knock-offs and selling parts^[_], it is now creating novel technologies and providing services of its own.^[_] China’s role in the global value chain has increased. 

This renewed focus is part of China’s broader ambition to become an “innovative nation”.^[_] Xi Jinping has stated that science and innovation are the keys to military upgrading and national security; in a 2014 speech at the joint meeting of the Chinese Academies of Science and Engineering, he stated “only by mastering crucial core technologies with our own hands can we fundamentally safeguard our national economic security, national security and security in other areas”.^[_]  

The country is achieving its goal of innovation through its state-led industrial policy Made in China 2025, its investment in R&D and education, and through venture capital investment in Chinese start-ups. This strategy has enabled it to forge ahead in technologies like AI and 5G, develop its economy and increase its standing on the world stage. But for the West, China’s focus on innovation - and its means of achieving it - poses an economic and security threat. 

China’s desire to become an innovative nation is illustrated by Made in China 2025, a state-led industrial policy which strives to secure China’s global dominance in high-tech manufacturing.^[_] Released in 2015, the plan communicates China’s desire to become self-sufficient in high-technology output^[_] by reducing its dependency on foreign technology in sectors such as semiconductors, robotics, new-energy vehicles and aerospace.^[_] Through Made in China 2025 the Chinese government has encouraged entrepreneurship and innovation, coupled with protectionist state policies: it has introduced government subsidies, mobilised state-owned enterprises and pursued intellectual property acquisition, to attempt to get ahead of global competitors.^[_] China has justified this approach on the grounds of national security.^[_] 
    
So far, the plan has been relatively successful. Whether this success is predominantly due to China’s protectionist state support, or the entrepreneurial drive of companies and large base of internet users, is contested.^[_] But it is widely agreed that China is increasing its global competitiveness across multiple knowledge-intensive sectors^[_] and is leading the way on some technologies. Western tech giants are now even mimicking products from Chinese counterparts, illustrating the country’s innovative potential. For example, Facebook and Apple have both taken inspiration from Tencent’s WeChat app – an all-in-one hub for socialising, gaming and payments.^[_]  

Dependence on foreign technology 

However, some obstacles to innovation remain and in some core technologies China is a long way off from becoming self-sufficient. In 2018, over half of all technology owned by Chinese firms was derived from foreign companies, mainly based in the US.^[_] China still imports six times more intellectual property than it exports.^[_] And although China holds a strong position in some high technologies such as AI, its dependency on imports for core technologies is still high. For example, despite large investments, just 16% of China’s semiconductors are produced in the country, and only 50% of these are made by Chinese firms.^[_] As semiconductors are a vital component of the digital economy, China’s reliance on imports represents a serious obstacle to its efforts to become an innovative nation. China’s high reliance on foreign technology is further exemplified by the US’ recent ban of telecommunications company ZTE, which resulted in the near collapse of the firm as it could no longer buy American technology.^[_]

Made in China 2025 has sparked widespread concern among Western players – most notably the US and Europe – who view the plan as a threat to global trade and security. Western commentators have claimed that the plan breaks WTO rules by distorting global markets and that China’s control of entire supply chains means that whole industries could come under Chinese authority.^[_]

Washington also maintains that the plan relies on forced technology transfers and cyberespionage,^[_] and the Chinese government has been accused of using its market access rules to gain intellectual property from foreign companies. Joint ventures between a Chinese domestic firm and a foreign firm are common in China, with the domestic partner often holding a controlling stake. This in turn provides a mechanism to force foreign firms to hand over sensitive information to Chinese firms. Despite Chinese assurances that forced technology transfers would stop, the number of occurrences is still on the rise.^[_] 

US-China trade War 

China’s methods of innovating have led Washington to block some Chinese technology firms from US markets and introduce tariffs on Chinese goods. The Trump administration’s crackdown on Huawei reflects concerns about China’s strategy.^[_] To some extent, the US response is negatively impacting China’s potential to grow and innovate, by damaging its international reputation and impacting its sales and investment.

Nevertheless, some commentators have noted that the US response is encouraging China to become more self-sufficient, thus damaging the US position further. For instance, since the US government banned companies from shipping technology to Huawei, China’s efforts to develop its own semiconductors has accelerated and it now stands in a better position to challenge the US.^[_] The country has recently set up a new $29 billion semiconductor fund in an effort to become less dependent on US technology.^[_] Jinping also recently stated the country’s intention to strengthen research and investment into blockchain technology as part of its technological innovation.^[_] 

From a global economic perspective, however, the tensions are adding significant downside risks to growth. The IMF have warned that as the US-China trade war continues, the world economy is slowing to its weakest pace since the global financial crisis. The world economy is expected to shrink by 0.8% in 2020 as a result of the trade war alone.^[_]

Until recently, China’s potential to innovate was dismissed by the West, primarily based on the view that the country’s education system and culture would fail to provide key skills for the workforce at large. For example, some commentators noted that Chinese culture – based on conformity – wouldn’t encourage creativity^[_], while its education system – which was based on rote learning – meant that Chinese students could not think for themselves.^[_] However, China has since proved that it can still innovate despite not following the Western model. In fact, some of China’s cultural traits – such as longer-term holistic thinking – have contributed to its success.^[_] It is now successfully investing in both R&D and education as part of this innovation drive. 

R&D

Made in China is part of broader long-term ambition for the country to become a leader in science and innovation by 2050. To achieve this, there has been significant investment in research and development. Last year alone, China spent $300 billion on R&D, nearly 2.2% of its GDP.^[_] Its R&D budget is only surpassed by the US in terms of overall expenditure ($477 billion)^[_]  although in GDP terms it lags behind world-leaders South Korea (4.3%), Israel (4.2%) and Japan (3.4%). R&D investment growth in China has, however, greatly exceeded that of the US and Europe who have traditionally led in scientific research and development. As a result, China has emerged as a new science and technology powerhouse.^[_]

China’s investment in R&D is reflected in the number of scientific journals it publishes, where it is now only second to the US. In AI, Chinese researchers publish more papers than the US.^[_] However, it was estimated that out of 204,575 global AI researchers and engineers in 2017, 13% were from the US whereas just under 9% were from China. Furthermore, the majority of those regarded as ‘world class’ were from the US.^[_] Despite this, many commentators agree that the quality of journals published in China has improved significantly in recent years and is set to continue in the future.^[_] By 2020, it’s estimated that China could be on a level playing field with the US, in terms of both the quality and quantity of journals published.^[_] This puts China in a strong position to enhance its development of innovative technologies.

China’s education drive

China also values education highly, which has bolstered its path to domestic innovation. China produces nine times more graduates in science and technology than the US^[_] and in 2018, the OECD ranked China 10th in the world in student maths, science and reading scores. By comparison, the UK ranked 23rd and the US 31st.^[_] Although many Chinese students study abroad, the vast majority return to China.^[_] If Western powers are serious about competing with China, education in science and technology must improve.

Global venture capital investment in China’s start-ups has increased substantially over time. China accounted for just 4% of global venture capital investments in 2013, compared to 30% in 2018.^[_] That same year, for the first time, China’s VC investment surpassed that of the US.^[_] In 2018 around 100 tech start-ups became unicorns and are now worth more than USD $1 billion.^[_] This demonstrates the confidence of investors in China’s ability to innovate and compete on the world stage. 

China’s attractiveness to investors partly stems from its large population, which enables companies to experiment and innovate, as well as scale in a large market. Baidu, Alibaba and Tencent are also significant funders. For example, in 2016 the three collectively provided 42% of venture capital investment in China and have helped many start-ups to grow. Today, one in five Chinese start-ups has been founded by BAT.^[_] 

Recent slowdown in growth

More recently, however, VC investment in technology companies has begun to decline. In the first six months of 2019, it fell 60% from the same period a year ago.^[_] This fall in investment runs parallel to a general decrease in China’s digital growth, which has been driven by the US-China trade war, an increasingly saturated market and increasing regulation.^[_] Despite this recent fall in growth, generally China’s digitisation is expected to continue. An IMF report has predicted that the size of China’s digital economy is expected to reach around 50% of GDP by 2025.^[_] 

China’s broad strategy, which has taken the country from imitation to innovation, has brought about the substantial growth of its technology sector. Today, China’s digital economy, defined as the integration of internet-based technologies to all areas of the economy, is worth around 30% of its GDP, having doubled since 2008.^[_] However, in terms of overall digitisation of its economy, China still lags far behind the US and the UK, whose digital economies as a percentage of GDP are worth 59% and 55% respectively.^[_]  

Yet there are signs that America’s technological supremacy is under threat from China. China’s big three technology players, collectively known as BAT (Baidu, Alibaba and Tencent) have experienced rapid growth for over a decade. BAT is now valued at over $1 trillion and these three tech giants are challenging Western competitors like Facebook, Google and Amazon.^[_] For example, the market capitalisation of Tencent recently exceeded that of Facebook.^[_] Other emerging Chinese companies also exceed the value of their US counterparts – DiDi is worth more than Uber, while Meituan is worth 10 times more than Groupon.^[_] 

China is challenging the US and European positions in key emerging technologies, such as Artificial Intelligence (AI) and 5G. In e-commerce, fintech and energy sectors China is already viewed as a world leader. This has increased China’s potential to expand its leverage on the international system.

KEY TECHNOLOGIES 

China has long prioritised its domestic information communications technology. The government provides financial support through beneficial regulations and tax incentives to encourage the development of future technologies. According to Fitch Solutions, the Chinese ICT market grew 8.2% in 2018.^[_] AI and 5G are two areas where China is performing particularly well, and its advances in these key emerging technologies is transforming the market for Western companies.^[_]  

Artificial Intelligence

China has developed a particularly strong position in the AI arena and is well positioned to strengthen it further. In July 2017 China’s State Council announced its “New Generation Artificial Intelligence Development Plan”, which set the goal of creating a $150 billion AI market and becoming a global leader by 2030. This goal is linked to China’s efforts to innovate its economy, advance its military and gain influence on the world stage.^[_] 

China has made significant advances towards achieving this goal. Its AI market is expected to reach RMB 71 billion by 2020, an annual growth rate of 44.5% since 2015.^[_] It is rolling out AI across several sectors, including smart cities, access control and surveillance. China boasts recognised leaders in areas such as facial and speech recognition, and in 2018 filed 30,000 patents in the AI sector, 2.5 times more than the US.^[_]

China’s approach to AI development, which combines market forces with strong state support, means that it can quickly mobilise resources to accelerate AI development and consequently gain an advantage over Western players.^[_] China also has access to vast amounts of data, made possible by its large number of internet users. Some commentators have claimed that this will bolster China’s AI development^[_] in comparison to Western AI developers, who are constrained by data protection laws such as Europe’s GDPR. On the other hand, it has been argued that China’s data will be of limited use beyond its borders, because its population doesn’t behave freely, whilst high data protection standards in Europe will actually produce better quality and therefore more useful data.^[_] Others have noted that access to large datasets will not be that useful in the long-term development of AI.^[_]

Despite China’s success in this area, the US still leads the way in multiple indicators, such as R&D and the global chip market share. Furthermore, the US contains 42% of the global total of AI companies, compared to just 23% in China.^[_] However, China is in a strong position to gain the edge in the future development and commercialisation of AI. As Kai-Fu Lee argues in his book, AI Superpowers, China, Silicon Valley, and the New World Order, China is well positioned to dominate the AI era. 

5G

China has described 5G as a key technology under its 13th five-year plan.^[_] It plans to invest $411 billion in upgrading its telecommunications systems to 5G between 2020 and 2030.^[_] China also leads the way in 5G patents, and by 2025, it is expected that China will have the largest market with 430 million users.^[_] Significantly, China is the only country that is ahead of the UN’s International Telecommunication Union’s “2020 5G development schedule”.^[_]
 
Huawei, China’s major telecommunication company, has been largely responsible for China’s success. Its state-sponsored programme offers cheap finance, which means that Huawei has been able to offer significant discounts on its base stations. As a result, the company has already shipped 200,000 units to 50 telecoms operators in Europe and Asia, despite sanctions from the US.^[_] In the past year, Huawei has supplied 28% of global telecoms equipment.^[_] The West has no company comparable to Huawei in 5G.

China’s success in developing and rolling out 5G is likely to have wider consequences for its digital economy. By enabling massive device connectivity, 5G is facilitating progress in other areas, such as IoT, smart cities, telesurgery and virtual reality. 5G will also enable advances in self-driving cars and industrial robotics. From an economic perspective, it is likely to trigger significant competitive advantages. 

Huawei’s superiority presents a challenge for the US and Europe, who fear the dominance of a single company. The West have brought the issue to politics under fears of intellectual and technology transfers, and loss of influence over the definition of standards. China has already announced it is working on 6G, while the race for 5G becomes a geopolitical battle.^[_]  

KEY INDUSTRIES

China has also been successful in its integration of technologies into key industries. Beijing introduced the concept of ‘Internet Plus’ in 2015 – a plan to integrate technologies such as cloud computing, big data and the Internet of Things with traditional manufacturing and consumer industries.^[_] President Xi emphasised the concept in his address at the 19th party congress, stating his desire “to promote the deep integration of the internet, big data, and AI with the real economy”.^[_]

China is leading the way in key emerging sectors, such as e-commerce and fintech. China has also been successful in its application of new technologies to traditional industries, such as energy. 

E-commerce 

China’s growth in the e-commerce sector has been remarkable: it accounts for almost half of the world’s e-commerce transactions, compared to less than 1% a decade ago.^[_] The value of its e-commerce transactions is estimated to be greater than the value of those of the US, UK, France, Germany and Japan combined.^[_]

Alibaba has been a major player in this sector. Having started as an online shopping business in 2003, it has grown to rival Amazon. It has also diversified its services to include Alipay (a digital payment business), entertainment and digital wealth management.

China’s success in the e-commerce sector is partly down to its large market; China has an enormous base of working-age consumers, who are also ‘tech savvy’. Its number of internet users stood at 804 million in 2018, more than the EU and US combined.^[_] 98% of these people use mobile internet.^[_]  

The growth of China’s e-commerce sector is fuelling social and economic growth in the country. For instance, Alibaba’s platform created over 40 million new jobs in 2018, a 10% increase on the year before.^[_] The net impact on employment has been positive despite a loss of jobs in traditional industries.^[_]

Fintech 

China is emerging as the world’s fintech market leader. Fintech investment in China increased by 252% from 2010 to 2016,^[_] by which time the value of China’s mobile payments by individuals totalled US $790 billion – 11 times more than the US. Nine of the 23 privately held fintech unicorns are based in China.^[_] This success can be attributed to a mixture of an initially relaxed regulatory environment, as well as favourable market conditions in the form of a large population.^[_]  

It’s clear that China’s influence in the global financial system is growing.  Earlier this year, the Chinese Central Bank announced the launch of a state-owned cryptocurrency which will be issued to seven different Chinese institutions, including tech companies Alibaba and Tencent.^[_] Furthermore, President Xi Jinping has recently stated his desire for greater research and investment into blockchain, which can be applied to finance.^[_] Facebook CEO Mark Zuckerberg has stated that US leadership in finance is being threatened by China, and the threat will only be exacerbated if American regulators block Facebook’s cryptocurrency, Libra. In the fintech sector, as China continues to innovate, the West risks being left behind.^[_] 

Energy

As the world’s highest producer, exporter and installer of electric vehicles, solar panels and batteries,^[_] China is the world-leader in clean technology. It holds 29% of the global total of renewable energy patents,^[_] and has invested more in renewable energy than the US and EU combined.^[_] China’s commitment to a transition to renewables is evident through its technology roadmap, which outlines its ambition to reach a 90% share for new energy vehicles by 2025. In 2017, Chinese EV battery companies accounted for 53% of the global share.^[_] Beijing alone has almost as many EV chargers as the whole US.^[_]

Impact on the West 

Technology capability and economic growth are inextricably linked. As China excels in its development of multiple key technologies and industries there is a risk of some Western companies falling behind. This is mainly in the form of a loss of competitiveness, as Chinese companies increase their ability to offer lower costs for technology. Competition from Chinese companies could reduce the profitability of Western companies, and hence the West’s ability to fund R&D. This in turn could slow innovation in the West, which may result in Chinese companies storming ahead at an increased pace.  

China’s technological growth also gives it power and leverage in the international system. As Chinese companies continue to excel in multiple sectors, the West must decide how to approach them. 

China’s technology strategy should not only be viewed as an economic exercise. At home, its digital strategy is part of a wider attempt to secure political control. But more importantly for those in the West, China is now spreading its tightly controlled digital standards across the world to gain global technological leadership. This is having serious geopolitical and strategic consequences; it risks creating a divided internet, threatening security, and challenging democratic values. 

CHINA’S TIGHTLY CONTROLLED INTERNET 

The Chinese regime has challenged Western assumptions about the emancipatory capabilities of technology, as its centralised system of government has adapted to the digital age. Beijing has used technology to take surveillance of its state to unprecedented levels. As a result, China has ranked last in the annual freedom on the Net Index every year since 2015.^[_]

Great Firewall and digital censorship

China is the pioneer of digital censorship.^[_] Its ‘Great Firewall’ refers to the CCP’s attempt to regulate the internet by blocking several foreign websites from Chinese users, such as Google, YouTube, and Twitter, and by censoring flows of online information to control its residents’ freedom.^[_] 

In order to enforce this strict control, the Chinese state plays a strong role in the activities of private companies. The CCP has introduced several measures in the form of security, intelligence and cybersecurity laws, to ensure that these companies conform to the state.^[_] For example, the 2017 Cybersecurity Law ‘requires all network operators to monitor user-generated content for information that is prohibited from being published or transmitted by laws or administrative regulations’.^[_] The government also demands stakes in private technology companies, and resultantly has an influence over management.^[_] Although the system is effective overall, many internet regulations are vague and there is a huge variety in how companies implement censorship.  

State Surveillance

The Chinese state is increasingly using technologies such as AI and machine learning to exert surveillance and social control over its citizens. By 2018, Beijing had installed over 200 million cameras across the country to identify and monitor the behaviour of citizens.^[_] More recently, the Chinese government has implemented a rule which requires all mobile phone users to submit a facial recognition scan when registering a new sim card.^[_] Another way in which the state is tracking its citizens is through its ‘Smart Cities’ projects, which have been rolled out in around 500 cities across China.^[_] The state has pioneered many of its surveillance technologies in Muslim provinces in Western China. In Xinjiang, home to the country’s Uighur Muslim minority, authorities track citizens through facial recognition technology. Officials claim this is to stop any actions which are thought to harm national security, though their actions are generally understood to be part of the widespread profiling and repression of Uighurs.^[_] It is estimated that Chinese authorities have detained hundreds of thousands of Uighurs in camps in recent years.^[_] Use of technology in this way raises serious questions about human rights and has been heavily criticised by civil liberties advocates.^[_]

China’s widely-discussed social credit system, which is expected to be fully operational by 2020, is another way in which the state is using technology to exert control.^[_] The system works by monitoring citizens and collecting their data to create a punishment and reward system.^[_] Many characteristics of this system conflict with US and European values, such as the lack of privacy protection and freedom of expression.^[_] 

CHINA IS EXPORTING ITS CONTROLLED DIGITAL STANDARDS

This conflict is more troubling for the fact that it is not just contained to its borders. China is actively attempting to export its digital standards across the world. Beijing has been relatively open about its desire to push its version of internet governance by enhancing the global influence of its internet companies, such as Alibaba, Tencent, Baidu, and Huawei.^[_] China no longer views technology in terms of just economic development, but also its value to geopolitical power.^[_]

China’s ‘Going out’ strategy

For the past few decades, the Chinese government has encouraged domestic companies to invest in overseas markets.^[_] As a result, China is now a leading investor in foreign technology firms.^[_] So far in 2019, venture capital investment in South-east Asia has surged four-fold.^[_] And through these investments, China is increasingly shaping the digital landscape.

The Chinese government has also stressed the importance of the country leading the way in setting the global standards in areas such as AI.^[_] Beijing encourages technology companies to register patents, to increase its role as a ‘standard-setter’. Xi Jinping recently called for China to ‘step up the standardisation of blockchain to increase its influence and rule-making power’.^[_] Companies such as ZTE, Dahua and China Telecom are now proposing international standards in areas such as facial recognition in the UN’s International Telecommunication Union (ITU).^[_] This is likely to have negative implications for the US and Europe in their own quest to set the standards for technology.^[_] 

Digital Silk Road

A key channel for China’s expansionism is its “Digital Silk Road”. Part of the wider Belt and Road Initiative (BRI), the Digital Silk Road integrates big data into BRI trade routes, to help disseminate China’s technology and standards abroad. For example, China plans to build fibre optic cables and is installing 5G technology across many of the 60 participating BRI countries.^[_] Huawei has reportedly built 70% of its 4G networks in African countries.^[_] Through this Digital Silk Road, China is giving countries with less developed technology infrastructure a chance to catch up. 

However, many commentators believe that the strategy is more focused on control than connectivity. China has already started to introduce its own technical standards in participating countries.^[_] And as it expands abroad, China is growing an increasing presence on international bodies. For example, it currently holds the chair of the International Telecommunication Union.^[_]

Through its Silk Road, there is a risk that China ends up dominating the key technology markets, and consequently dictates the future of cyber governance.^[_] For example, the roll-out of popular Chinese payments systems, such as AliPay and WeChat, could weaken Western influence in the global financial system.^[_] 

A DIVIDED INTERNET AND CONFLICTING GLOBAL STANDARDS

The growing global influence of China’s technology is raising multiple strategic and security concerns for Western players. Through its ‘going out’ strategy, and by securing leadership positions in international standard setting bodies,^[_] China is increasingly shaping international standards for technologies according to its own interests . 

“Splinternet”

China’s version of a tightly controlled internet contrasts greatly with the open, free internet advocated elsewhere. This is leading to the balkanisation of internet governance. It is likely that in future the digital economy will continue to fracture, and inconsistent standards will emerge in ICT spheres.^[_] This means that products developed in China may not be compatible with the rest of the world, and vice versa. This belief has been voiced by Eric Schmidt, the former CEO and Executive Chairman of Google, who last year predicted that within the next decade two separate internets will emerge: one led by the US and the other led by China.^[_] 

This “splinternet” has already proved problematic for Chinese companies who sometimes find it difficult to integrate technologies abroad. Due to different domestic and foreign internet standards, Chinese companies are increasingly split between appealing to international users and staying in line back home. Non-compliance with foreign regulations has occasionally been damaging for Chinese companies as they attempt to spread their presence globally.^[_] For example, WeChat has experienced some international backlash because it has ‘accidentally’ imposed censorship on international users, threatening international confidence in the service.^[_]

China’s growing geopolitical power

Similarly, Western companies that operate in China are subject to strict controls. In 2017, Apple was accused of enabling the Chinese state’s surveillance of the internet by removing VPN apps from its app store.^[_] More recently, Apple was forced by Chinese state media to remove a Hong Kong mapping app on the grounds that it endangered law enforcement officers,^[_] while the Houston Rockets’ manager Daryl Morey removed his tweet about the Hong Kong protests after it caused uproar in China and threatened Chinese sponsorship.^[_] The NBA have since been criticised for prioritising financial gains over human rights. 

These events are indicative of China’s leverage over internet practices, and ultimately of the country’s growing power on the world stage. As China’s influence continues to grow, an increasing number of private companies operating in China are likely to be faced with questions about prioritising profits over principles.^[_] 

China’s technology strategy is a threat to democracy

By exporting its technologies that can be used for repressive purposes to countries around the world, China’s strategy is challenging democratic standards. For example, China is supplying telecommunications hardware and advanced facial recognition technology to multiple countries, some of which already have poor human rights records.^[_] According to a September report by the Carnegie Endowment for International Peace think tank, Chinese tech companies, including Huawei, supply AI surveillance technology in 63 countries around the world.^[_]

Some of China’s methods appeal to many semi-authoritarian states^[_]and, increasingly, its technology is being used for repression and censorship in these countries.^[_]  For example, China has exported surveillance systems to Venezuela,^[_] while Chinese firm CloudWalk has signed an agreement with Zimbabwe to build a national facial recognition database and monitoring system.^[_] The country is also exporting its illiberal innovation to the West, despite banning US companies from operating in China. For example, TikTok was one of Apple’s most downloaded apps in 2018 and has since been criticised for censoring content which is not in support of the Chinese state.^[_] By exporting these technologies, the Chinese government is spreading standards for the internet based on restricted freedom, ultimately undermining democratic principles. 

China’s technology strategy is a threat to global security 

China’s expanding technological footprint presents a security threat as the country’s data collection now extends its borders. As BRI countries are increasingly dependent on China for internet, there are fears that Beijing can monitor and divert data traffic, which may in turn feed its intelligence. This threat is exemplified by the reported espionage of the African Union’s headquarters by China in 2017.^[_] But the threat is not only confined to emerging economies on the BRI route. The US and UK have both accused the Chinese state of stealing trade secrets from governments and high-tech companies.^[_] One way in which the US has responded to national security concerns is by blacklisting Chinese companies such as Huawei, which Washington claims is using its products to feed information back to the Chinese state.^[_]  Australia and New Zealand have also blocked local operators from using Huawei equipment, while the issue has spurred a debate on whether Huawei should be banned from the UK.^[_]

The growth of China’s technology scene is impressive feat: as its strategy has moved from imitation to innovation, it has increased its competitiveness in multiple technologies and industries and is now exerting its geopolitical power across the world. As the country’s technology landscape continues to evolve, it raises questions for Western policymakers. 

The West needs to find solutions to deal with both the cooperative and the competitive aspects of China’s rise. There are both great opportunities that the West should seek to harness, as well as threats that Western policymakers must attempt to mitigate. The following presents some key questions that need to be addressed.

OPPORTUNITIES

Education, R&D and collaboration with China
Can the West leverage China’s science and innovation potential to generate global benefits? If so, how? 

Education and R&D is the backbone of innovation. China currently spends more on R&D than both the US and the EU. It is essential that Western states invest in R&D in order to remain competitive with China. The West should also think about ways to improve education and retain talent. 

The West also faces an opportunity to engage with China to advance worldwide science and technology capabilities, which would be in the long-term interests of both sides. Although, Western nations must be careful and pragmatic when deciding areas in which to collaborate. The current UK approach to collaboration with China is not well thought-through: for example, a recent report shows that UK universities have extensive links with Chinese defence companies, which could threaten national security.^[_] However, on issues where the West and China both face common challenges, such as healthcare and climate change, there is a huge amount to be gained from a collaborative approach between the world’s two greatest powers. Collaboration could also be an effective way to ensure that Chinese research is responsible and transparent. 

Healthcare

As China has risen on the world stage, it has increased its contribution in the global health arena. With its large and aging population, and ability to quickly adopt consumer technologies, China holds enormous potential to advance digital healthcare. It is already investing in new technologies such as robotics, AI and wearables, and has become a world leader in genome editing with its CRISPR technology. The two powers should therefore think about how they can pool resources to develop new innovations and bring advances to healthcare for the global good. Issues in data governance will need to be resolved, but researchers can benefit from sharing data, which would accelerate progress in drug development and treatment. 

Climate change
As the threats brought by climate change become ever more urgent, China and the West – as the two largest energy consumers – should work together to accelerate the transition to a low-carbon economy. Despite having backtracked more recently, to date China has taken the lead in investment and deployment of renewable technologies: the country owns five of the six largest solar-module manufacturing companies and is the world’s largest market for electric vehicles. Western nations should work with China to set ambitious targets, exchange best practices, and develop new innovations in technologies such as renewables, battery storage and carbon capture. Collaboration is likely to bring benefits for both sides, such as advancing research, bringing down costs and increasing the scale of deployment of renewable technologies.

Knowledge
What is China’s tech landscape likely to look like in in the future?

The decision to admit China to the WTO in 2001 was taken without a full understanding of the intricacies of the Chinese economy, and this decision has had significant effects. It is crucial that Western policymakers are equipped with an accurate and comprehensive knowledge of China’s digital economy today before making decisions about their future relationship with China. 

Western policymakers need to make it a priority to understand the complex components of China’s technology landscape. China’s tech capabilities can sometimes be overstated; for example, it is still behind in its production of semiconductors. Policymakers need to be realistic about China’s capabilities in order to plan and respond to future developments. This also involves getting to grips with China’s Digital Silk Road: How can nations and communities benefit from Chinese innovation in future, notwithstanding vulnerabilities that might arise from relying on Chinese tech for critical services and infrastructure? 

Alliances and the Transatlantic relationship 
Is it necessary to have a more coordinated Western response to China’s rise? What mechanisms can the West use to better coordinate its response to technology issues? 

The US and Europe are currently inconsistent in their approach to China. Given that the US and EU share common values, a primary concern should be how the EU and US manage their own relationship – perhaps by seeking greater alignment – in order to respond to China in the most effective way possible. As outlined in our report, a New Deal for Big Tech,  an opportunity lies for a next-generation regulator to re-write rules for the internet age and hold tech companies accountable for their behaviour. The regulator should work across borders, focusing first on building a transatlantic relationship.

Europe must also carefully consider its own strategy, to avoid a position where it is stuck between the US and China. The EU may, for example, benefit from taking a more coordinated stance in response to Huawei, to safeguard against security implications. Europe, as a bloc, will be crucial in competing with China in future. A unified approach could help Europe to build up technology capability, strengthen competitiveness and uphold European norms, ultimately protecting its interests and values. The European Commission President Ursula Von der Leyen has displayed a determination to secure Europe’s ‘technological sovereignty’ and willingness to take a tougher stance against China.^[_]

Economic 
What do Western players need to do to make their products more competitive with China’s products?

As China forges ahead in important sectors like AI, 5G, e-commerce, fintech and energy, the West needs to work out how to remain competitive. China’s technology advances and ability to offer cheap prices give it excessive power on the world stage, which has rightly raised concerns in the West. However, given the magnitude of trade and investment links, the West cannot afford to turn its back on China completely. Doing so could damage the Western economic position further as China strives to become more self-sufficient. Looking forward, Western policymakers must decide both where to compete with China, and where to cooperate. For example, to remain competitive the US might hesitate before breaking up US tech companies if this would risk enabling Chinese companies to become more powerful. 

The West should also embrace the opportunity to learn from China’s successful innovation and sophisticated infrastructure. For example, China’s ecommerce sector is far more advanced than that of the West. Chinese companies have integrated services like shopping, taxi hailing, booking, and bank transfers to offer an improved user experience. China’s competition strategy, which emphasises reinvention, has also encouraged the country’s innovation-driven development. The West can look to China to inspire developments in areas such as fintech and ecommerce. 

CHALLENGES

The divided internet
Is it possible to have a single internet based on one set of values, given that different cultures have fundamentally different values? What is the alternative to this? What mechanisms can the West use to prevent further divergence of internet standards?

If a divided internet is problematic, the West needs to work out how to prevent China’s tightly controlled version of the internet from spreading further. The West should start by working to ensure that its model of the internet, based on openness, freedom and inclusivity, is an attractive model for other nations to follow. A related question for the West is how it can ensure that it creates the norms and standards that shape new technologies. Measures such as promoting open-source designs for semiconductors could help prevent further divergence of technologies. The West also needs to think about how to incentivise China to do this, rather than free-riding on Western open-source. Finally, the West needs to increase its own presence in international standard setting bodies to uphold Western norms at a time when China is increasingly dominating these bodies. 

Security
What position should Western policymakers take when unfair policies are deployed?

Cyberespionage and forced technology transfers have been a major concern for Western states in the context of China’s rise. Western governments should set limits on cooperation with China and should work towards their own agreements on privacy and cybersecurity standards. Specifically, security legislation must be revamped to reflect the challenge presented by new technologies like AI. It’s increasingly clear that the current US approach – which involves simply banning companies like Huawei – may not provide the answer to successfully competing and may in fact encourage further innovation in China. The West needs to think about how to strengthen its own technology to make it attractive to users, perhaps by investments in privacy-protecting technologies. The US also needs to think about whether it’s possible to design sanctions which penalise unfair Chinese behaviour without encouraging greater self-sufficiency.

Defending democracy 
How do Western states defend the democratic norms that are being threatened by China?

Western technology companies are increasingly put under pressure to comply with Chinese rules and regulations, which often reflect the controlled nature of the Chinese regime. This raises fundamental concerns for democracy. Should Western tech companies be allowed to sacrifice ethical values for financial gain? Governments could introduce rules to help to defend their own companies from being forced to comply with antidemocratic practices for the sake of profit. A solution would likely require governments to collaborate with technology companies and civil society organisations. The West should also consider taking a harder line on anti-democratic practices from China, by – for example – enforcing bans on companies pushing into the US market, such as WeChat Pay. Finally, Western policymakers need to think seriously about actions which could stifle Western innovation and enable China to have a greater global influence, such blocking Facebook’s Libra. Facebook Chief Mark Zuckerberg has claimed that this move could put US financial leadership – and ultimately democratic values – in jeopardy, as China’s influence on the global financial system continues to grow.^[_]

The rise of China’s technology landscape is one of the most important debates in politics and technology today. And it’s becoming increasingly important that the West forms a coherent and coordinated strategy in response to this rise – one which enables the West to harness the opportunity to collaborate with China on key global issues, whilst mitigating the threats in order to protect our technology and values. A failure to appropriately respond will have serious geopolitical consequences as China continues to influence world affairs. 

This primer sets out the big picture on China’s technology landscape, but given the prominence of this debate, we’ll be kicking off a longer series of work on China and the technology debate over the coming months.