China’s recently closed “third plenum,” held in July 2024, stated that “national security is an important foundation for China’s modernization.” This proclamation underscores a trend that has been increasingly evident over the past year. In 2023, a series of high-profile national security-related cases caught the attention of global investors and China watchers alike. Among these were the arrest of five employees at Mintz Group’s Beijing office in March 2023 for illicit statistical activities, an investigation into Bain & Company’s operations in April 2023, and scrutiny of Capvision Partners in May 2023. The enactment of the Anti-Espionage Law in July 2023 further highlighted China’s focus on national security.

This backdrop is rooted in China’s establishment of the Holistic View of National Security (HVNS) in 2014, with a pronounced shift towards prioritizing security over development since December 2020. In my latest article for Economic Affairs, I examine the economics of China’s national security policy, particularly through the lens of HVNS. By creatively leveraging data from the Baidu Index (China’s largest search engine), I developed a Chinese national security policy index. The data show an upward trend in this index. While many commentators and analysts have discussed the relationship between development and security in China, my article provides a unique quantitative measurement.

Key Facets of HVNS

The HVNS encompasses various facets, including political, economic, financial, and technology security:

• Political Security: This focuses on regime security, influencing policies toward privately-owned enterprises (POEs) and foreign relations. China’s discrimination against POEs, through policies like preventing disorderly capital expansion and regulatory crackdowns on tech firms, undermines economic performance despite their significant contributions. Additionally, China’s strategic ties with Russia within the Belt and Road Initiative (BRI) bolster political security but challenge economic transformation due to reliance on high-end technology from Western countries.


• Economic Security: The importance of economic security has risen due to global supply chain disruptions from the US-China trade war, COVID-19, and the Russia-Ukraine conflict. In the semiconductor sector, China seeks self-sufficiency through government support but faces challenges like inefficiencies, corruption, and overambitious investments. Food security remains a priority, with China diversifying imports and expanding domestic production to reduce reliance on imports, albeit at a higher cost. Energy security, particularly regarding oil, involves overseas investments and developing alternative transportation routes, despite high costs and political instability in BRI countries.


• Financial Security: This focuses on preventing systemic risks. China has enacted a series of regulations. However, these measures, including the crackdown on FinTech and de-financialization, can constrain economic growth.


• Technology Security: Emphasizing data as a crucial element for production and political control, recent laws aim to secure data locally and protect intellectual property from foreign access.

Legislative Initiatives and Economic Implications

Since 2014, China has embarked on a series of legislative initiatives, some of which have significant economic implications. Key measures include:

• Securities Law (March 2020)


• Technology Export Control Lists (August 2020 and December 2022)


• Unreliable Entity List (September 2020)


• Export Control Law (December 2020)


• Measures for Blocking Inappropriate Extraterritorial Application of Foreign Laws and Measures (January 2021)


• Measures for the Security Review of Foreign Investment (January 2021)


• Anti-foreign Sanctions Law (June 2021)


• Data-related laws (late 2021)


• Foreign Relations Law (July 2023)


• Anti-Espionage Law (July 2023)

My analyses show that these legislations may hinder cross-border trade, financing, investment, including Foreign Direct Investment (FDI) and Chinese Outward FDI, and R&D activities, potentially dampening China’s economic growth.

Empirical Evidence

Empirical evidence supports the fundamental analysis of HVNS content and legislation. Initial data from China’s State Administration of Foreign Exchange shows FDI inflows of only $4.9 billion in Q2 2023, the lowest since 1998. Recent data as of Q1 2024 also shows a significant drop. Historically, the average quarterly FDI has been $41 billion, suggesting foreign investors may be reacting to China’s recent policy adjustments on security.

The industry sector, including mining, manufacturing, and utilities, has been China’s largest sector from 2013 to 2023. Rolling correlations between the security policy index and the industry sector’s growth rate from October 2017 to July 2023 reveal a negative trend starting February 2021, indicating that higher security policies correlate with lower industry growth rates. This trend intensified in April/May 2023, likely due to security-related investigations.

The study uses the Efficient Market Hypothesis to analyze the Shanghai Stock Exchange Composite Index (SSECI) and the China Stock Index 300 (CSI300). Using ARDL models, the security policy index negatively impacts the CSI300, which includes the largest firms, while the SSECI shows no significant effect. This suggests large firms are more affected by security policies.

Conclusion

As the world increasingly considers economic security issues, China’s policy shift towards security has particularly attracted attention from the global community. My study carries significant implications for policymakers and investors alike. Understanding the intricate balance between national security and economic growth is crucial in navigating China’s evolving policy landscape.

 

Kerry Liu’s article ‘The economics of China’s Holistic View of National Security: A preliminary assessment’ appears in the latest issue of Economic Affairs. Journal subscriptions are available at: https://ordering.onlinelibrary.wiley.com/Lite/Subs.aspx?doi=10.1111/(ISSN)1468-0270&ref=1468-0270