China builds up infrastructure security: Daryl Guppy
19 May 2022


Editor's note: Daryl Guppy is an international financial technical analysis expert. He has provided weekly Shanghai Index analysis for Chinese mainland media for more than a decade. Guppy appears regularly on CNBC Asia and is known as "The Chart Man." He is a national board member of the Australia China Business Council, SRCIC member organization. The article reflects the author's opinions and not necessarily the views of CGTN.


Hard infrastructure sits at the core of what many people believe about China's economy, so Chinese President Xi Jinping's recent observation that "infrastructure serves as a pillar for economic and social development" confirms their belief.


A hard infrastructure build will play a role in economic development, but even more important is the soft infrastructure build. A combination of internal and external factors is at play in pushing these infrastructure efforts into the spotlight.


President Xi tied some of the infrastructure focus to the idea of security. Many Western analysts were quick to link this to military security rather than economic and environmental security.


In particular, Xi mentioned improving the planning of waterways, the building of coastal and inland ports, and the upgrading of water transport facilities nationwide. He included developing a smart grid along with a series of new green, low-carbon energy bases and fine-tuning the oil and gas pipeline network. 


These are all related to non-military security and improve the country's capability to cope with extreme situations such as those caused by climate change which is a major challenge to economic security. Mitigating the impacts of floods, typhoons, droughts and protecting arable land are the new security frontiers.


Common prosperity and economic security are the foundation of all national security. It's the idea of sovereign independence that cannot be threatened by sanctions, disruption to trade settlement, or interruption to trade routes. Unhackable soft infrastructure is the foundation of the digital economy.


Some commentators see this call for infrastructure as a move to save China's economy. These are the same people who have been forecasting the collapse of the Chinese economy for the past 20 years. They fail to see that China has a coordinated approach to breaking through the middle-income trap by developing the digital economy and continuing to improve the physical infrastructure and thus economic benefits are more widely spread.


Domestically, the "dual circulation" strategy is designed, which takes domestic development as the mainstay, with domestic and international development reinforcing each other. Sovereign independence of supply chains is a lesson from COVID-19. The infrastructure required to build a digital and clean economy helps to break free of the middle-income trap.
The essential objective of "dual circulation" is to develop a robust economy, less reliant on external factors. An escape from the middle-income trap rests on improved productivity and new economic processes. This is a digital economy and soft infrastructure is required to make it work.


Innovation is emphasized because new tech underpins the digital economy. Henry Ford, the founder of the Ford Motor Company, transformed Western production and economies with his assembly line. It was a new way of using existing resources. New tech is the foundation of the digital economy and China is way ahead in this development than Western economies.


Consider a Huawei cell phone. Remove the apps and the phone is just a way to talk to people. The real value of the phone is the software infrastructure that enables WeChat, TikTok, Alipay and others. Their functionality rests on innovation and the soft infrastructure of the digital economy.


Externally, the U.S. use of financial market sanctions highlights the need to move away from the Society for Worldwide Interbank Financial Telecommunications (SWIFT) system to ensure sovereign independence in trade settlement. This desire for financial independence suggests that rather than using taxpayers' money this time, China will try to implement new financing methods for infrastructure expansion.


Unlike the U.S., China draws on reserves rather than borrowing, but this may change in the future through increased bond issues. These objectives are consistent with recent policy and regulatory announcements designed to attract international capital. This may see greater use of China debt instruments similar to U.S. treasuries. These are infrastructure and project bond issues for domestic and international fund managers.


In the longer term, this may lead to the expansion of Chinese capital markets as participants see them as a store of wealth and a finance source rather than an opportunity for short-term capital gain. 


Essential soft infrastructure development includes improved security of trade settlement, the growth of the digital economy using quantum computing and reduction of business inefficiency. This includes soft infrastructure like the real-time balancing of power grid demands using quantum computing, and optical messaging from satellites.


The keywords in Xi's observation are that infrastructure serves as "a pillar for economic and social development." Developing the infrastructure to support and expand common prosperity is the essential foundation of security for any country.


Source: CGTN