High Winds And Stormy Waves

Chinese leaders are deeply worried about threats to China’s economic security. For decades, China achieved breakneck economic growth that seemed to suggest the country was on an inexorable rise toward “national rejuvenation.” In recent years, however, China’s economic prospects have come under question, and Beijing has grown increasingly concerned about the nation’s economic security (经济安全).

Central to these concerns are threats to the complex web of supply chains (供应链) that keep the Chinese economy humming. In 2020, the Covid-19 pandemic wreaked havoc on global supply chains, prompting China to turn its attention to shoring up its economic security.

The end of the pandemic did not abate Beijing’s worries. The onset of the War in Ukraine in 2022, coupled with worsening U.S.-China relations and slowing domestic growth, convinced Chinese policymakers that they need to better fortify their economy against mounting threats.

▲ Xi Jinping’s Mentions of “Supply Chains”

In one of the most important speeches of Chinese leader Xi Jinping’s career—his report to the Communist Party’s 20th National Congress in 2022—he warned of “a new period of turbulence and change” in the world that threatens China’s quest for rejuvenation. In that speech, he demanded of his party comrades that they “must enhance our sense of crisis, adhere to bottom line thinking, be prepared for danger in times of peace, and be prepared to withstand major tests of high winds and even stormy waves.”

“[We] must enhance our sense of crisis, adhere to bottom line thinking, be prepared for danger in times of peace, and be prepared to withstand major tests of high winds and even stormy waves.”

- Xi Jinping

U.S.-China competition is front and center of Beijing’s concerns. Xi has repeatedly warned that the U.S.-led West is pursuing the “comprehensive containment, encirclement and suppression” of China. Tensions with the United States have intensified as the second Trump administration has applied unprecedented trade and economic pressure on China, and geopolitical hotspots like Taiwan and the South China Sea continue to simmer.

Yet, how exactly does China define its economic security? A broad definition could encompass nearly anything. Policymakers in Beijing are no doubt worried about access to key technologies like semiconductors and artificial intelligence. China’s vulnerabilities in these areas have been the focus of much attention amid Washington’s measures to restrict the flow of those technologies into China.

A close reading of Chinese officials’ speeches, authoritative policy documents, and academic studies suggests three areas are most fundamental to China’s ultimate economic security: food security, energy security, and financial security. Without stability in these core areas, Chinese society and its supply chains cannot properly function, and China cannot compete globally.

Why These Three Pillars?

The 14th Five Year Plan for 2021-2025, China’s most authoritative economic blueprint, included a first-of-its-kind section focusing on economic security. It laid out three strategies for shoring up China’s economic security across the three areas of food, energy, and finance—a clear indication that policymakers view these three areas as most crucial to China’s overall economic health and resilience.

So, how secure or vulnerable is China in each of these pillars of economic security?

This three-part ChinaPower series explores each of these areas in detail. The reports leverage data to analyze the most important vulnerabilities China faces, as well as key areas of strength and progress. Crucially, this series does not view China in isolation, but instead it grounds analysis of China’s situation in a comparative global context, especially in comparison to its chief competitor, the United States.

How Severe Are China’s Food Security Challenges?

Food security is critical to the well-being and stability of all countries. Decades of economic growth have enabled considerable strides in increasing access to food across China, but this growth has also generated new demographic demands and environmental strains. Global shocks like the COVID-19 pandemic, war in Ukraine, U.S.-China tensions, and the effects of climate change have left Chinese policymakers anxious about China’s food security issues. This ChinaPower report lays out the most pressing threats to China’s food security as well as key areas of progress and resilience.

Challenges to China’s Food Security

For Chinese leaders, food security (粮食安全) is an “important foundation of national security.” Chinese leader Xi Jinping famously remarked that “solving the food problem for more than one billion people has always been the top priority of our party in governing the country.” Between 2013 and 2024, Xi mentioned food security in over 450 speeches, meetings, inspections, and other activities.

China faces three main interrelated challenges to its food security, each of which is analyzed below:

1. Surging Food Consumption

2. Constraints on Domestic Production

3. Reliance on Foreign Imports

Challenge 1: Surging Food Consumption

China’s rapid economic growth has brought both enormous benefits and new challenges with respect to food security. On the upside, socioeconomic gains have fueled dramatic reductions in China’s undernourished population. According to the United Nations Food and Agriculture Organization (FAO), the rate of undernourishment in China’s population fell from 10.3 percent in 2001 to 2.5 percent (or less) by 2010. This decline coincided with a tripling of annual per capita disposable income from just 4,070 RMB to 12,520 RMB over the same period, according to Chinese government figures.

China’s increasingly well-off population has led to surging demand for food. In particular, the emergence of China’s urban middle class has corresponded with a shift away from a grain-oriented diet to a more expensive, meat-heavy intake. Today, China is the largest consumer of meat and fish in the world, consuming almost 168 million metric tons of meat and fish in 2023—more than a quarter of the world’s total. At almost 60 million metric tons consumed, pork was China’s top meat choice. The enormous demand for meat also directly translates to high demand for animal feeds, particularly soybeans.

▲ Meat and Fish Consumption in Selected Economies

More affluent urban residents have likewise developed an appetite for other resource-intensive foods, such as dairy products. In 2022 alone, China consumed 64 million metric tons of milk and imported 24 million metric tons, making it the largest milk importer in the world.

Growing consumption has coincided with more food waste. China is the largest waster of food in the world, generating over 200 million metric tons of food waste in 2022. On a per capita basis, China is roughly on par with many other major economies. Chinese individuals wasted an average of 142 kilograms (kg) each in 2022, which is slightly less than the United States (159 kg per person), but considerably more than neighboring Japan (81 kg per person).

▲ Estimated Annual Food Waste (2022)

Given concerns about China’s food security, food waste has become a pressing policy issue. The Chinese government initiated multiple campaigns to reduce food waste, such as the Clean Plate campaign in 2013 and 2020. In 2021, China enacted the Anti-Food Waste Law to institutionalize monitoring and punishment mechanisms, particularly for the food service and retail sectors.

To keep up with booming demand, Chinese leaders have published policies to promote domestic food production over imports.

• Under the banner of an “all-encompassing approach to food” (大食物观), China’s 14th Five-Year Plan for 2021-2025 set specific targets to expand fishery production and the number of aquaculture farms and increase meat production.

• In April 2025, China released the “Plan for Accelerating the Construction of an Agricultural Powerhouse (2024–2035).” It sets out foundational goals for securing China’s food production and supply, including strengthening food production capacity, conserving arable land, diversifying food sources domestically and abroad, advancing innovation and development of agricultural technology and machinery, and accelerating rural reforms.

• In 2024, China’s State Council issued Opinions calling for diversification of China’s agricultural supply chains and modernized food resource management systems.

• Chinese farmers have experimented with some innovative methods to breed and raise more animals, including high-rise hog farms.

Chinese food production policies have sometimes had unintended negative consequences. For example, to meet demand for milk, a 2018 Opinion launched a campaign that dramatically boosted milk production in China, but by 2024, production significantly outpaced consumption, and domestic milk prices plummeted.

Challenge 2: Constraints on Domestic Production

China has long sought self-sufficiency in food. In 1996, the Chinese government published a white paper on food security that called for achieving a self-sufficiency rate of 95 percent for grains. In 2019, China released another government white paper on food security, maintaining the 95 percent target and adding that China must have “absolute security” in staple grains (wheat and rice).

“The rice bowls of the Chinese people must be firmly in our own hands. Our rice bowls should be filled mainly by Chinese crops.”

- Xi Jinping, 2021

Toward these ends, the Chinese government has identified domestic production as the “top priority.” China has achieved impressive gains in domestic production over the years and transformed itself into the largest food producer in the world. It produced 7.5 billion metric tons of food in 2022, nearly 3 billion metric tons more than the runner-up, India. China is also almost twice as efficient in wheat production per hectare as the United States.

According to FAO estimates, China—through domestic production and imports—is able to supply enough food to meet 139 percent of its population’s basic caloric needs. That is ahead of Japan (110 percent) and virtually the same as Europe (138 percent), but behind the United States, which, according to recent estimates, is able to meet 153 percent of its population’s needs through domestic production and imports.

▲ Food Availability in Selected Countries

Despite significant progress, Chinese leaders remain acutely aware that the country faces significant challenges to domestic production.

One of the top constraints is the availability of arable farmland. Rapid industrial growth, sprawling urbanization, overcultivation, widespread pollution, and the growing impacts of climate change are significantly straining Chinese agriculture. According to the World Bank, China’s total arable land declined by over 12 million hectares between 2009 and 2021. By 2022, China had 31 percent less arable land than the United States, while having four times the population.

Beijing has sought to reverse the loss of arable land. In 2006, Chinese leaders established a “red line of 120 million hectares of arable land” in the11th Five-Year Plan. Xi reinforced this red line repeatedly in his speeches and guidelines, including “zero tolerance” and “lifetime responsibility” measures to punish officials who fail to maintain the designated red line of arable land in their jurisdictions.

▲ Arable Land

In a sign of its domestic production challenges, some Chinese farmers have resorted to the overuse of fertilizers to try to help boost crop output. Between 2000 and 2015, China’s fertilizer usage per hectare of arable land increased by 67 percent. While fertilizers can increase output, they also exacerbated China’s arable land problems in the long run, contributing to low nutrient utilization, soil loss, pollution, and broader environmental damage.

In 2015, the Chinese government began promoting “zero growth of fertilizer use” in major policy documents, including the 2016 and 2017 versions of the “Central Document No. 1,” and as a result, fertilizer use declined 17 percent by 2022. China nevertheless remains one of the world’s top consumers of fertilizer, with its usage rate at over three times that of the United States and the European Union.

▲ Fertilizer Use in Selected Countries

Water security challenges exacerbate China’s food production issues. China has roughly the same amount of freshwater resources as the United States, but its population is more than four times larger, and it uses more than twice as much freshwater for agriculture. Adding to these challenges, decades of rapid urbanization and industrialization in eastern and southern China have significantly shifted the center of gravity of Chinese agricultural production toward the north and west, which are relatively water-scarce and suffer from higher degrees of water stress than the rest of the country.

Climate change is supercharging these problems by causing more droughts, extreme heat, and floods. For example, a 2023 study found that extreme rainfall led to an 8 percent drop in Chinese rice yields over the past two decades.

China has consistently called for arable land preservation and improvements to the quality of arable land through expanded monitoring and technical capacity.

In the 2024 “Guiding Opinions on Strengthening the Protection of Cultivated Land, Improving the Quality of Cultivated Land, and Improving the Balance in Land Conversion and Restoration,” the Chinese government imposed “zero tolerance” and “life-time responsibility” measures to punish officials who fail to maintain the red line of arable land in their jurisdictions and implement conversion of cultivated land with centralized monitoring system.

China’s new 2024 National Food Security Law strengthened monitoring measures on the use of cultivated lands and imposed stricter control over the conversion of cultivated land into other land types.

The 14th Five-Year Plan (2021-2025) sets out targets for:

• The protection of nutrient-rich black soil in China’s northeastern regions, which has faced serious soil erosion. The target is set to be about 9.3 million hectares of arable black soil.

• A four percent increase in overall mechanization of agricultural production.

• A more than five percent increase in the reuse of livestock and poultry manure.

• A three million-acre increase in “high standard” farmlands, which are more resilient to disasters and soil degradation.

• Additional efforts in advancing agricultural sciences and developing resilient crops (see below sections for more).

In regard to water security:

• Since 2002, China has invested in a multi-decade mega-infrastructure project, named the “South-North Water Diversion Project,” to transport southern water north and address water shortages in the northern and western provinces. The program has had mixed results.

• The Chinese State Council passed the 2021 Groundwater Management Law to protect groundwater quality and preserve groundwater availability. It published a 2023 Outline on constructing a “national water network” that connects rivers and lakes across the country to better manage water transfer and flood discharge capability.

• In May 2024, China’s State Council passed a water conservation decree to require the government to promote and fund water-saving irrigation techniques, agricultural infrastructure, and research on drought-resistant crops.

To address the impacts of higher domestic food production costs on Chinese farmers:

• China has enacted anti-dumping policies, temporary storage policies, and minimum agricultural commodity procurement price policies. These trade barriers and stockpiling policies aim to prevent cheaper food imports from undercutting Chinese farmers while buffering shocks to Chinese food production.

• China’s Ministry of Agriculture and Rural Affairs issued Opinions in January 2025 to conserve feed usage in animal husbandry industries, citing that 70 percent of animal husbandry production costs come from feeds.

• China has begun to engage in policies to address the issues of high land and labor costs. In February 2025, the State Council released a high-level Opinions document to promote structural reforms in China’s agricultural land transfer system and reduce the rental costs of land. The new policies also restrict rural land transfer to non-rural residents to keep arable land in the hands of farmers.

Beijing has also allowed genetically modified (GM) food products to enter the Chinese market.

• China’s 14th Five-Year Plan (2021-2025) encourages GM-adjacent development in the agricultural and food sectors, paving the way for China to catch up in the adoption of GM organisms to reinforce food security.

• In 2023, China’s Ministry of Agriculture and Rural Affairs approved GM corn and soybeans as well as GM seeds for commercial use. Another 17 GM crop variants were approved in December 2024. This is partly in reaction to China’s concerns over its seed availability and quality. It marked a profound change in Chinese policy, particularly given long-standing public antagonism against GM food products in China and elite opposition to the introduction of GM seeds.

Challenge 3: Reliance on Foreign Imports

Surging demand for food and constraints on domestic production have forced China to look abroad. China first became a net food importer in 2004, and in 2021, it surpassed the United States to become the world’s largest food importer. According to ChinaPower estimates, China imported a staggering $215 billion worth of food in 2023.

As a result, the country’s overall self-sufficiency for food declined from 94 percent in 2000 to 66 percent in 2020. Chinese experts have warned of a looming dip to 59 percent by 2030.

▲ China’s Food Trade Balance

China’s reliance on imports is not uniform across food products. In some areas, such as vegetables, China meets virtually all of its demand through domestic production. For other goods, China is heavily dependent on other countries. For instance, China relies on foreign suppliers (namely Brazil and the United States) for over 80 percent of its soybeans.

China’s sizable food imports leave it susceptible to volatility in global food prices. When international food prices spike, it can tighten the availability of those goods in China’s domestic market and contribute to food shortages and inflation at home. Researchers found that upward shocks in international food prices accounted for approximately 20 percent of fluctuations in China’s overall inflation between 1998 and 2023.

▲ China’s Food Import Dependence (2023)

Global instability in food prices has at times posed significant political challenges for Beijing. In 2018, an outbreak of African swine fever spread from Europe to China, causing China to lose roughly 28 million metric tons of pork production over three years. This strained the supply of the most consumed meat in China and forced it to rapidly scale up imports at a high cost. Chinese officials became alarmed by the crisis, with some calling the issue a “national priority” and resorting to using frozen pork reserves and subsidies to stabilize local volatility.

Russia’s invasion of Ukraine in 2022 also led to significant turbulence in global food trade. Many major food exporters, such as India, began to restrict food exports to stabilize their own domestic prices. China simultaneously faced declining grain imports and rising import prices. Available trade data indicates that China imported 10 percent less grain in 2022 but paid nine percent more compared to the previous year.

The supply shock from the Ukraine war accelerated China’s desire to diversify and reduce its food imports. Amid the war, Xi Jinping focused significant political attention on the issue. In 2022, the year Russia invaded Ukraine, Xi mentioned “food security” in at least 71 speeches, meetings, and other activities—double the year before.

▲ Xi Jinping’s Mentions of “Food Security”

It is worth noting that China can extract some benefit from its large food trade deficit. China’s massive market creates economic leverage over food-exporting economies that depend heavily on Chinese consumers, such as the United States and Brazil. For instance, U.S. farmers have been more dependent on the Chinese market than China has been on U.S. imports. China has leveraged this advantage when it levied tariffs on U.S. agricultural imports into China in retaliation against U.S. tariffs in 2018 and 2025.

The Chinese central government has called for expanding domestic production of food in order to combat imported inflationary pressure:

• A 2022 notice by the Chinese Ministry of Agricultural and Rural Affairs listed the expansion of soybean, oil crop, and corn plantations as the first key task.

• To meet growing domestic meat demand, Xi Jinping has begun encouraging the agricultural sector to develop alternative protein sources since 2022, and the 14th Five-Year Plan on National Rural Technology Development specifically outlined alternative proteins as an important aspect of China’s food security.

Beijing has also sought to reduce tariffs on China’s food imports by joining regional trade agreements like the Regional Comprehensive Economic Partnership (RCEP) in 2020 and signing bilateral trade deals with countries like Brazil. Joining RCEP, for example, removed tariffs on many of China’s major food import sources like Southeast Asia and Australia.

However, China remains reluctant to remove protectionist policies that inflate domestic agricultural production costs. Beijing, for example, has ignored calls to remove minimum grain commodity price policies in favor of market reforms that allow the market to dictate grain prices. The Chinese government continued to implement minimum price policies to ensure stable levels of domestic cereal production and stockpiles.

China’s Food Security Strengths

While China faces considerable challenges to its food security, it has notable strengths in three key areas:

1. Diversification of Food Imports

2. High Levels of Food Access

3. Heavy Investment in Agricultural Innovation

Strength 1: Diversification of Food Imports

Given China’s growing food imports, reliable trade partners are crucial to its push for food security. Xi acknowledged the importance of food import diversification at a 2020 central rural work meeting. In his work report speech to the 20th National Congress of the Chinese Communist Party in 2022, he called for China to “build a diversified food supply system.”

These exhortations come in the context of rising geopolitical tensions, particularly between the United States and China. The United States has long been one of China’s largest foreign food suppliers, but in recent decades, China has incrementally reduced its reliance on food from the United States.

▲ China’s Food Imports from the United States

This process accelerated during the U.S.-China trade war that began in 2018 during President Donald Trump’s first term. In January 2020, Washington and Beijing put a pause on escalating the trade war by signing the Phase One trade agreement, which committed China to purchasing an additional $200 billion worth of U.S. products (compared to 2017 levels) in four sectors, including agriculture. U.S.-China trade in agriculture did rebound somewhat, but China failed to meet its Phase One purchase commitments. As of 2023, just 13 percent of China’s food imports came from the United States—down from almost 28 percent in 2009.

China’s declining reliance on U.S. soybeans and animal products drove much of the overall decline. In 2023, China bought 25 percent of its imported soybeans from the United States—down significantly from 49 percent in 2000. Over that same period, China reduced its reliance on the United States for meat and animal fat from 57 percent to just 13 percent. China has also seen declining reliance on U.S. dairy products, vegetables and fruits, seafood, and grains.

▲ China’s Declining Reliance on Certain U.S. Foods

However, these trends are not universal. The United States remains a dominant supplier of some goods, such as animal feeds. It supplied 63 percent of China’s total feed imports in 2023.

Brazil has been a major beneficiary of China’s food trade diversification—especially with respect to soybeans. In 2000, China bought about 20 percent of its soybeans from Brazil, but by 2023, that figure stood at 69 percent. That amounts to major business for Brazilian farmers. In 2023, China spent a staggering $41 billion on Brazilian soybeans. Following the U.S. tariffs in 2025, Brazil is likely to take up an even greater portion of China’s grain and meat imports.

▲ China’s Soybean Imports

Beyond looking to Brazil, China has sought to leverage its Belt and Road Initiative (BRI) to enhance its food security. Between the launch of BRI in 2013 and June 2023, China signed over 100 agricultural and fishery agreements with 90 BRI countries. According to ChinaPower estimates, China imported about $82 billion worth of food from the BRI countries in 2023. A significant portion of these imports came from countries within the Association of Southeast Asian Nations (ASEAN), which provided nearly 17 percent of China’s total food imports in 2023.

While China is diversifying away from the United States—especially in certain products like soybeans—overall diversification of food sourcing is occurring slowly. In 2023, BRI countries provided China with 39 percent of its food imports. That is only up slightly from 35 percent in 2013, when the initiative was started.

▲ Slow Diversification of China’s Food Import Suppliers

It is also worth noting that diversification away from the United States does not address all of Beijing’s food security concerns. While China’s reduced reliance on the United States does mitigate some of the risk of disruptions due to geopolitical tensions, it still leaves China susceptible to other risks, such as natural disasters. In early 2025, for example, excessive rains slowed down Brazil’s soybean harvest. Worsening climate-driven extreme weather could exacerbate such phenomena and cause significant disruptions to China’s supply down the road.

China has been proactive in building agricultural relations around the world.

• Since 2011, China has become the largest global funder of agricultural research and development (R&D) projects around the world. In 2023, China funded $1.8 billion in direct overseas investment in agricultural and related projects.

• In 2024, China signed a memorandum of understanding on agricultural cooperation with the Arab League, promising deepened cooperation in crop planting, animal and plant disease prevention, animal husbandry, and agricultural trade. These engagements help bind the region closer to Beijing and may help China develop more diverse and reliable food supply chains in the future.

Besides soybeans, China has also moved from the United States to Brazil to supply other food products.

• In 2022, China greenlit corn imports from Brazil, contributing to an immediate halving of U.S. corn imports from $5 billion in 2022 to $2.6 billion in 2023. As Brazilian corn rushed into Chinese markets, China’s corn imports from Brazil went from virtually nothing to $4 billion in the span of a year.

• In 2024, China and Brazil signed a sorghum trade agreement to reduce their dependence on the United States, China’s then-largest sorghum supplier.

China is also actively building transportation infrastructure to further ensure a stable grain supply from Russia, Central Asia, and Europe. For instance, China and Russia signed an agreement in 2023 to construct a specialized railway grain terminal at the border to connect China with grain production centers across Eurasia. Historically, Russian and Chinese railroad gauges have had different widths, so grains going to China from the region needed to be transported by sea. The terminal, named the New Land Grain Corridor, helps resolve this issue and reduces transportation times by up to three months.

Strength 2: High Levels of Food Access

In addition to the availability of food—procured through domestic production and imports—another pillar of food security is “food access.” Food access refers to a population’s access to resources that allow them to meet their nutritional needs. This includes factors like wages, transportation, and proximity to grocery stores. China’s population enjoys a high level of food access, owing to food affordability, robust transportation networks, and large stockpiles.

Chinese consumers benefit from relatively affordable food in China. China’s per capita income has been rising faster than its food costs, as shown by the growing share of Chinese people who can afford a healthy diet despite increases in food costs. The growth and intense competition within China’s online and digitized supermarket industry have also increased the convenience and affordability of acquiring fresh food.

▲ Food Affordability in Selected Economies

China’s robust transportation infrastructure also helps connect food producers with consumers across the country. Like many countries, China’s food producers are concentrated in a handful of regions, and population centers in Eastern China are not self-sufficient in staple grain supply. A great deal of food needs to be transported across the nation. To meet these needs, China relies on its 159,000 km of railway and 128,000 km of domestic waterways (as of 2023), more than any other country besides the United States.

China also maintains large grain stockpiles, reportedly amounting to half of global grain reserves in 2022. This can be inferred from U.S. Department of Agriculture (USDA) estimates, which show China holding massive ending stocks in grains (i.e., the volume of total grain supply subtracted by its consumption volume). For instance, China had nearly five times the level of corn ending stocks as the United States in 2024.

China’s intensive stockpiling policies provide some cushion against supply and demand shocks, especially in population centers. However, food storage facilities in China were often poorly designed, managed, and maintained in the 2010s, leading to loss and waste. These factors have contributed to the growing cost of stockpiling. According to the OECD, China spent $10 billion on public stockpiling in 2023, about 20 times what all OECD countries spent collectively.

▲ Grain Ending Stocks in Selected Countries

In 2017, China published a new evaluation standard for mayor-level cadres based on performance in agricultural output, market access to food, food safety and quality monitoring, and food price control. Food market access, including the density of groceries, constitutes 20 percent of the total possible scores. A 2023 revision increased the scoring of grocery density by one point.

China’s 14th Five-Year Plan for E-Commerce Development includes targets to expand food access through e-commerce platforms and other new technologies. These include new digitally enhanced shopping experiences such as smart food pick-up lockers, unmanned grocery stores, and other web-based enhancements to community infrastructure and consumer experiences.

In 2022, the Chinese government published the “Guiding Opinions on Accelerating Scenario Innovation to Promote High-Level Applications of Artificial Intelligence for High-Quality Economic Development” to further promote business innovation in consumer experience technologies, including at groceries and food services, through leveraging AI technologies.

In June 2024, China’s first National Food Security Law went into effect. It included mandates to establish central and local emergency food distribution and processing systems. The law also required enterprises that store central or provincial grain reserves to divest their commercial operations.

By October 2024, China reported that it had more than 5,100 emergency food storage enterprises, 6,900 emergency food processing enterprises, 3,900 emergency food distribution enterprises, and 59,000 emergency supply nodes. This builds on the growth of China’s wheat, rice, and corn reserves, which reached more than half of the world’s stocks in 2022.

Strength 3: Heavy Investment in Agricultural Innovation

Given China’s constrained supply of arable land, its policymakers are leveraging agricultural technology innovation to increase the yield of crops. The 14th Five-Year Plan lays out specific targets for agricultural mechanization and scientific development. Similarly, the Chinese Ministry of Agriculture and Rural Affairs published a 2025 policy plan that outlines key areas of agricultural innovation, including genetic modification of crops, agricultural robotics, and internet-based tools for farmers.

Beijing’s agricultural modernization drive translates to a boom in ag-tech spending across the country. According to the OECD, China is the world’s top single spender on agricultural innovation, spending about $4.4 billion in 2023. Comparatively, the United States spent $3.8 billion, and the entire European Union spent $7.8 billion in 2023.

Chinese businesses have consistently been the top investors in food and agricultural (agri-food) technology. According to Agfunder, Chinese corporations invested $6 billion in agri-food startups in 2021, and by 2023, China accounted for 41 percent of all agri-food start-up funding in the Asia-Pacific region.

▲ Spending on Agricultural Innovation

One prominent area of modernization is crop seeds, a major preoccupation for Xi and China’s central leadership. To reduce import dependence for seeds and seed technology, Beijing has ramped up incentives for genetic engineering (which Chinese policymakers have historically avoided). Much of the investment goes toward seed-focused biotech companies like Hangzhou RFGene, whose genetically modified soybeans were recently approved for commercial use in China. These efforts have begun to bear fruit: Chinese state media proudly broadcasts China’s status as the top global producer of seed engineering patents, and 99.9 percent of seeds consumed in China are produced domestically.

China’s farmers are also revolutionizing the use of agricultural drone technology. Chinese technology entrepreneurs have heralded the “low-altitude economy” (低空经济) as a key driver of domestic growth and an opportunity to seize global leadership. Agriculture is first on the list of industries benefiting from these technologies: one Chinese drone executive noted that China’s drones collectively spend 98 percent of flight time on agriculture-related functions. The growth of China’s agricultural drone industry has rattled policymakers in Washington, but expansion overseas has continued elsewhere at a rapid pace.

One final locus of agricultural innovation is supply chain analytics. AI investment has poured into the industry, optimizing farm management, delivery networks, food safety monitoring, and strategic stockpile decision-making. One illustrative example is Pinduoduo, a Chinese e-commerce company that has invested billions of dollars in agri-food projects that leverage its e-commerce distribution platform and AI technology. Using cloud technologies, Pinduoduo developed a streamlined, centralized information system that manages dispersed supply chains, processes market information, and conducts sales and customer acquisition—seamlessly linking farmers and consumers from around the country.

China’s Ministry of Agriculture and Rural Affairs published the National Smart Agriculture Action Plan (2024-2028) to promote the establishment of a national data platform for agricultural information, including geospatial information, agricultural output and sales, and environmental data. The Action Plan also promotes the digitization of agricultural supply chains and singals the government’s commitment to supporting smart agricultural firms.

Chinese scientists have been active in research to develop alternative protein sources. Simulations suggest that by 2035, it may be possible to replace 10 percent of meat production with plant-based meat and 15 percent of milk production with plant-based milk.

How Robust Is China’s Energy Security?

Energy security is a crucial pillar of the economic and national security of every country. Disruptions that upset the steady supply of power can cause cascading ripple effects throughout industries and society.

China’s energy security is characterized by a mix of vulnerabilities and strengths. It is by far the world’s largest consumer of energy, placing enormous pressure on policymakers to fuel the nation’s sprawling manufacturing sector. China is also significantly reliant on foreign fossil fuels, leaving it exposed to disruptions stemming from instability and geopolitical competition.

Yet China has major energy security strengths. It is rapidly deploying renewable energy infrastructure to reduce its reliance on fossil fuels. China also leads the world in producing critical minerals that are central to its energy security, and heavy investments in its energy grid are enabling China to prepare for a future powered by renewables. Finally, China’s abundant supply of coal offers policymakers a safety net in the event of major disruptions to other energy sources.

This ChinaPower report explores these key strengths and vulnerabilities. It focuses not just on China’s absolute security needs but considers China’s situation in a global context—especially in comparison to the next-biggest energy consumer, the United States. Overall, China’s energy security position is relatively strong, and its advantages are poised to grow.

▲ Global Energy Consumption by Fuel Source

Vulnerabilities in China’s Energy Security

Beijing is acutely aware of the importance of energy to China’s economic and national security situation. Between 2013 and 2024, Chinese leader Xi Jinping mentioned “energy security” (能源安全) in at least 180 different speeches, meetings, and other official activities.

▲ Xi Jinping’s Mentions of “Energy Security”

Xi’s focus on energy security surged in 2022 as the world grappled with disruptions to global energy flows following Russia’s full-scale invasion of Ukraine. For Beijing, the conflict highlighted China’s need to pursue greater energy independence, with Xi repeatedly emphasizing that energy security “is one of the most important security issues” facing the country.

China faces two important energy challenges, each of which is examined below:

• Massive and Growing Demand for Energy

• Reliance on Foreign Oil and Gas

1. Massive and Growing Demand for Energy

Decades of rapid economic growth have dramatically increased China’s demand for energy. In 1980, around the start of China’s economic “reform and opening” period, China consumed less than one-fourth of the amount of energy of the United States. By 2008, China surpassed the United States to become the world’s largest energy consumer, and, in 2024, China consumed more energy than the United States, European Union (EU), and Japan combined.

▲ Energy Consumption of the World’s Top Economies

China’s unparalleled demand for energy is largely a factor of its globally dominant manufacturing sector. In 2022, Chinese manufacturers accounted for 57 percent of the country’s total energy consumption at approximately 90 exajoules (EJ), which is comparable to the total energy consumption of the United States and nearly 15 percent of global consumption that year.

However, Chinese households are accounting for a slowly rising share of total energy consumption as they become wealthier. Energy consumption in China’s residential sector has expanded from 10.5 percent of China’s total in 2012 to 13 percent in 2022.

▲ China’s Energy Consumption by Sector

China’s energy consumption is slated to increase further in the coming years as new technologies like artificial intelligence (AI) drive greater demand for electricity. Leading technology companies in the United States, China, and elsewhere are racing to set up energy-hungry data centers to power their AI models.

Chinese official estimates indicate that in 2025, data centers in China are expected to consume between 150 and 200 terawatt-hours (TWh) of electricity, which is approximately 1.5-2 percent of the country’s total electricity consumption. That could more than double by 2030 to around 400 TWh, which is roughly equal to the entire electricity consumption of Saudi Arabia in 2023. More bullish estimates suggest an increase to around 530 TWh is possible by 2030.

While China’s energy demand is growing, it will likely eventually plateau. Some studies suggest that this peak will not occur for another two decades, around 2049, but the exact timing will depend on several factors such as macroeconomic conditions and the speed of industrial adaptation.

Improved energy efficiency explains part of the story. In 1990, China consumed twice as much energy as the United States to produce an equivalent amount of GDP. Since then, China’s energy intensity (as this measure is called) has plummeted dramatically, yet as of 2023, it was still 40 percent less efficient than the United States and about 50 percent less efficient than the EU and Japan.

▲ Energy Intensity

Other long-term factors, like population decline, may also reduce energy demand. After peaking at over 1.42 billion people in 2021, recent forecasts project that China’s population will shrink by about 2 million people by 2030, and by 2050, it could fall another 130 million. While a shrinking population presents many economic and social challenges for China, Xi Jinping himself has pointed out that it could help to alleviate some issues like resource constraints and environmental damage.

According to analyses by Chinese experts, China’s approach to meeting domestic energy needs has evolved through three main phases in recent decades:

• Phase One focused on conservation, improving energy efficiency, and reducing environmental pollution. The 9th to 11th Five-Year Plans (spanning 1996-2010) emphasized energy conservation as the guiding principle of Chinese energy policies. The 11th Five-Year Plan specifically identified energy efficiency as the primary challenge in energy conservation efforts and outlined targets to enhance scientific and technological development in energy efficiency to meet national energy consumption.

• Phase Two spanned the 12th Five-Year Plan (2011-2015), which, for the first time, introduced the notion of “energy transition” (能源转型) from a coal-dependent energy structure to a greener, more diverse, and lower-carbon energy structure. It emphasized that deepening international energy cooperation and expanding international energy trade, particularly oil and gas, would be key to China’s energy transition efforts.

• Phase Three, the current phase, continues to focus on energy transition but pivots to indigenous energy production as the primary focus in the face of rising geopolitical risks and heightened energy demands. The 13th Five-Year Plan (2016-2020), for the first time, introduced an energy self-reliance target of 80 percent and removed the mention of international trade from its text. It also introduced policy goals and institutional reform objectives to advance energy transition efforts that continued under the 14th Five-Year Plan (2021-2025). The new plan also identified structural and regional imbalances in China’s energy system and geopolitical risks in oil and gas supply chains as key issues to resolve.

Furthering the third phase strategy, in 2023, the Central Commission for Comprehensive Deepening Reform (CCDR) reviewed and passed the “Opinions on Promoting Dual Control of Energy Consumption and Gradually Shifting to Dual Control of Carbon Emissions.” The Opinions signal a pivot of China’s decarbonization strategy from one focused on reducing energy consumption to one that emphasizes reducing carbon emissions. Following the Opinions, the State Council released a plan to incentivize provinces and municipalities to renew infrastructure and switch to less-polluting alternatives.

To meet China’s current and future data center energy demand, the Chinese government has proposed the plan of “East Data, West Compute” (EDWC, 东数西算). The plan aims to construct a network of eight computing hubs in western China and ten data clusters in eastern China. Western computing hubs can leverage their proximity to renewable power sources to compute data with lower access frequency, while also benefiting from cooler climates that reduce hardware cooling needs. Meanwhile, the eastern data clusters can focus on high-frequency data and offload more intensive computing to the west. According to the outlined goals in the 2023 Guideline on EDWC, the computing power of the new hubs would need to account for 60 percent of China’s total new computing power by the end of 2025.

The Chinese government has published multiple action plans in recent years to construct green data center clusters and enhance the power usage effectiveness (PUE) of data centers through dedicated government monitoring and supervision. A 2024 action plan document sets out a plan to reduce the PUE of new large-scale data centers to 1.25 by 2025—an ambitious goal given China’s nationwide average PUE of 1.48 in 2023.

2. Dependence on Foreign Oil and Gas

Surging demand for energy has left China more reliant on foreign sources. Until the 1990s, China was a net energy exporter, but as of 2022, it imported about one-fifth of its total energy needs.

Compared to some major economies, China is in a less precarious position. For instance, Japan’s limited endowment of natural resources and its island geography leave it reliant on imports for almost all its energy (87 percent in 2023), and the EU imports about two-thirds of its energy.

▲ Energy Import Dependence

China’s biggest energy imports are foreign oil and gas. China is the world’s largest crude oil importer by a wide margin, accounting for about 25 percent of global imports. It is also the largest natural gas importer. In all, China imported 74 percent of its oil and 42 percent of its natural gas supply in 2024.

This stands in stark contrast to the United States’ energy position. In 2018, the United States surpassed Saudi Arabia to become the world’s top crude oil producer, and in 2019, it became a net energy exporter for the first time since the 1950s. U.S. strengths in fossil fuels were primarily driven by the shale revolution, in which advancements in hydraulic fracturing, or “fracking,” and horizontal drilling unlocked vast reserves of oil and natural gas, and the expansion of liquefied natural gas (LNG) infrastructure enabled U.S. suppliers to scale up global exports.

Despite recent efforts, China faces challenges in replicating U.S. successes. While China is estimated to have the largest shale gas reserves in the world—almost twice that of the United States—its reserves are deeper, more geographically scattered, and located in more mountainous areas, making extraction more challenging. As of 2020, China was home to just 1.5 percent of the world’s technically recoverable oil and 4.5 percent of global natural gas reserves.

▲ Oil & Gas Independence: The U.S. vs China

Energy independence and diversification have taken on new urgency for many countries amid worsening geopolitical tensions. Since Russia invaded Ukraine in 2022, the EU has sought to reduce its dependence on Russian energy and deny Moscow income to support the war. So far, the results have been mixed. At the end of 2024, the EU only imported 2 percent of its oil from Russia—down from 18 percent in the fourth quarter of 2022. However, EU reliance on Russian LNG imports increased from 11 percent to 22 percent over the same period, even as pipeline natural gas (PNG) imports have fallen dramatically.

China has moved in the opposite direction as part of Beijing’s broader strengthening of ties with Moscow since Russia’s invasion of Ukraine. Between 2021 and 2024, the share of Chinese crude oil imports coming from Russia increased from less than 16 percent to nearly 20 percent. Over the same period, the share of China’s PNG imports coming from Russia nearly tripled from 13 percent to 38 percent, largely owing to the ramp-up of Russian production along the Power of Siberia 1 pipeline. Russia’s share of China’s LNG imports also climbed from 6 percent to 11 percent during this period.

▲ Chinese Imports of Key Russian Energy Products

China-Russia energy ties could strengthen further in the coming years. Russia is negotiating with China for a new natural gas pipeline named Power of Siberia 2, which would carry gas from Russia’s Yamal peninsula in West Siberia through Mongolia into northern China. Moscow reportedly sought to begin construction of the pipeline in 2024, with the goal of starting gas deliveries in 2030; however, China appears to be waiting to secure a more favorable price for the gas before moving forward. China has been involved with other Russian natural gas projects, including the Arctic LNG 2 plant, which provides further avenues for strengthening energy ties.

Buying energy from Russia offers important benefits for Beijing. Chinese purchases have been a crucial economic lifeline for Russia amid its war in Ukraine, binding Moscow closer to Beijing. Russia’s proximity to China also reduces the likelihood that physical energy deliveries will be cut off, which enhances China’s overall energy security.

▲ China’s Foreign Crude Oil Suppliers

Yet buying from Russia does not solve all of China’s import dependency challenges. China’s reliance on other countries for oil and gas leaves it exposed to disruptions. More than half of China’s crude oil comes from the Middle East, where conflicts and instability have long caused disruptions and price fluctuations.

More broadly, almost all the oil China imports from countries besides Russia (about 80 percent of its crude oil imports) travels by sea through the Malacca Strait, a strategically important maritime chokepoint connecting the Indian and Pacific Oceans. Likewise, nearly one-third of China’s total goods imports transit through the Taiwan Strait, which in 2022 included some $500 billion worth of crude oil, refined oil, and other mineral and metal products. Conflicts over Taiwan or the South China Sea could seriously jeopardize China’s continued access to energy flowing through these key trade routes.

To expand petroleum production capacity, China has actively searched for new oil reserves, with significant success. The 14th Five-Year Plan (2021-2025) outlines goals to expand oil and gas exploration within China, reiterating Xi’s calls to expand domestic oil production in 2018.

• Since then, the country has made numerous discoveries, including multiple hundred-million-ton oil reserve sites in regions such as Henan, Shandong, and the South China Sea. However, the actual technically extractable quantity may remain quite low due to the complex underground geography at many of these newly discovered sites, and drillers’ price margins have been tested by geopolitical turbulence.

China is also actively expanding its strategic oil reserves. The government instructed state-owned oil corporations to add nearly 60 million barrels of crude oil to China’s strategic reserve in July 2024 and called for accelerating annual stockpiling of strategic fuels, including oil, in March 2025.

To mitigate geopolitical risks and circumvent chokepoints such as the Strait of Malacca and the Gulf of Aden, China is constructing rail and pipeline networks that connect China with oil and gas supplies from the broader Eurasian and Middle Eastern regions. In the southwest, China has constructed oil and gas pipelines through Myanmar, which have been operational. However, the civil war in Myanmar has caused disruptions and concerns from China over the security of the pipelines.

Strengths in China’s Energy Security

Despite notable challenges China faces in energy security, it is in an increasingly strong position to overcome surging demand, environmental costs, import reliance, and energy infrastructure. China has four interrelated strengths to secure energy for its population and the economy:

• Technological Leadership in Renewable Energy Technologies

• Leading Player in Critical Mineral Production

• Rapid Progress Toward Grid Modernization

• Deep Reserves of Coal as a Fallback

1. Technological Leadership in Renewable Energy Sources

China’s leaders have set their sights on reducing the country’s reliance on fossil fuels, and they view renewable energy as key to China’s long-term energy security, economic growth, and carbon emissions goals. They are investing accordingly to position China as a global leader in renewable energy technologies.

China is deploying renewables at a rapid pace, with solar and wind leading the way. In 2024, China installed 278 gigawatts of solar capacity—adding more in a single year than the entire solar capacity already installed in the United States at that time. China’s installed capacity in wind likewise increased nearly 18 percent in 2024, three four faster than Europe and nearly six times faster than the United States.

▲ China Is Rapidly Deploying Wind and Solar Energy

China’s impressive gains in renewables are buoyed by unparalleled investments, as its state-backed banks and investment firms pour financing into green energy projects. According to estimates from BloombergNEF, China’s investments in clean energy reached $818 billion in 2024.

Like China, the United States is also investing heavily in renewable energy sources. Its 2022 Inflation Reduction Act (IRA) sought to stimulate renewable energy investments through grants, loans, and tax credits totaling approximately $370 billion. These projects have catalyzed growth in the U.S. renewable energy sector, but despite these gains, U.S. spending continues to lag behind China’s. In 2024, U.S. investments in clean energy only reached $338 billion, less than half of China’s level.

▲ China Leads in Clean Energy Investment

China’s lead in clean energies is poised to widen thanks to high-level policy support. Beijing views clean energy and related technologies as critical to not just energy security and decarbonization but to economic growth as well. In an April 2025 speech, Xi noted that “the green transition… is a new engine for economic and social development.”

Specifically, since at least 2023, Chinese economic planners have referred to the “new three” (新三样)—photovoltaic cells, lithium batteries, and electric vehicles—as a source of economic vitality. Chinese manufacturers have grown to dominate the global supply of these three key green technologies and other renewables like wind and hydroelectric components.

▲ China Leads Global Manufacturing of Green Technologies

Would-be competitors in the United States, the European Union, and emerging markets remain heavily reliant on Chinese suppliers for upstream manufacturing inputs into clean energy projects. As economic competition with China has intensified, U.S. policymakers have moved to reduce U.S. dependence on China for future decarbonization efforts.

Beyond just renewables, China is looking to a broader suite of non-fossil fuels to power China’s economy. The 14th Five-Year Plan for Renewable Energy Development, released in 2022, calls for a “clean, low-carbon, secure, and highly efficient” energy system, and stipulates that non-fossil fuel electricity generation should contribute “about 39 percent” of total electricity generation by 2025. China is on track to reach this target. By 2024, hydro, solar, wind, nuclear, and biofuels collectively powered over 38 percent of China’s total electricity production.

▲ Share of China’s Electricity Production Coming from Non-Fossil Fuels

Nuclear power is an increasingly important part of these efforts. According to the International Atomic Energy Agency, China has built over 55 gigawatts of installed nuclear electricity generation capacity, putting it third behind the United States (97 GW) and France (63 GW). China has an additional 30 GW of nuclear power capacity under construction, which, once completed, would place China ahead of France. According to some estimates, nuclear power could contribute to around 10 percent of China’s total electricity generation by 2035—up from just 4.5 percent in 2023.

In September 2020, Xi Jinping pledged to accelerate policies that would enable China to reach peak carbon emissions before 2030 and net-zero emissions before 2060. These targets, referred to as China’s “dual-carbon goal” (双碳目标), provide the impetus for China’s green transition efforts. More policy efforts included:

• China’s 14th Five-Year Plan calls for an 18 percent reduction in CO2 emissions per unit of GDP by 2025 along with a host of related targets. These targets were enumerated in the March 2022 “14th Five-Year Plan for a Modern Energy System,” which calls for non-fossil fuel power sources to provide about 39 percent of power generation by 2025. “Energy security” features prominently in this document.

• Another key policy supporting China’s renewable energy sector is a high-level State Council Opinions document published in 2021, which calls for 25 percent of power generation to come from non-fossil fuel methods by 2030. This document is supplemented by a series of departmental action plans and more granular policies, which together compose what is referred to as the “1+N” framework.

• China’s National People’s Congress (NPC) drafted a new Ecological and Environmental Code that revises, merges, and retires 10 existing environmental and anti-pollution laws and establishes a legal framework to mandate the government to enforce, track, and expand China’s green energy transition efforts in industries and through global cooperation.

• Subsidies, tax incentives, and other forms of government support played a key role in the rise of China’s green technology sector during the 2010s. These subsidies have mostly ended, but other forms of support (like below-market credit) remain.

• Owing to these subsidies, China’s energy sector hit its target for renewable energy adoption—1200 GW of solar and wind capacity by 2030—six years ahead of schedule.

Despite China’s rapidly growing renewable power supply, it remains heavily reliant on coal, a position which Xi Jinping has endorsed in the near term. Xi described this strategy as “first build, then destroy” (先立后破), referring to building a robust renewable system before coal-based methods are abandoned. This approach informed the subsequent National Development Reform and Commission (NDRC) 2024 Guiding Opinions document, which outlined measures to improve renewable energy utilization.

2. Leading Player in Critical Mineral Production

China’s leadership in many new energy technologies is underpinned by the country’s dominance in critical mineral supply chains. Decades of intensive industrial policy, comparatively lax environmental regulations, and massive economies of scale enabled China to position itself as the leading refiner and processor of many critical minerals that are indispensable to the global economy.

China plays a significant role in both the upstream and downstream portions of many critical minerals. Upstream, China is a leading provider of many ores—the raw deposits containing minerals that can be extracted and processed into more pure products for downstream use.

China’s dominance in downstream refining and processing is even more pronounced. As an instructive example, in 2024, China produced 21 percent of the world’s bauxite—the main ingredient used to produce aluminum—but produced almost 60 percent of the world’s refined aluminum. This has further spillover effects, since processing bauxite into aluminum can generate gallium as a byproduct. That is how China came to produce 98 percent of the world’s gallium, which is used in many energy technologies, including solar cells, electric vehicles, and fast-charging devices.

▲ China Dominates Critical Minerals Important to Energy

Beyond these, China refines nearly half of the world’s steel, zinc, and lead, as well as more than two-thirds of the world’s cobalt and lithium. Furthermore, in 2023, China refined 79 percent of the world’s battery-grade graphite and 92 percent of the rare earth elements used to produce permanent magnets, which are integral to wind turbines, electric motors, and many other technologies.

China’s key role in critical mineral supply chains confers advantages to its clean energy sector. For instance, an abundance of refined critical minerals makes China’s energy transition more cost-effective and scalable, as the country’s metallurgy industry can provide reliable supplies of critical components to downstream green technology manufacturers.

In 2023, China’s State Council issued an Opinion on improving mine operation safety as the government sought to expand mineral extractions in China.

China has expanded lithium exploration since 2021, boosting its global share of lithium reserves from 6 to 16.5 percent. China’s domestic lithium production is growing steadily, though the poor quality of much of its reserves poses a challenge to the price competitiveness of its refining operations.

China recently discovered a major uranium deposit in the Ordos Basin in its northwestern region, as well as a major thorium reserve in Inner Mongolia. These two discoveries could help fuel China’s expansion in nuclear power and substantially reduce China’s reliance on uranium imports, especially from the United States and Russia.

3. Rapid Progress Toward Grid Modernization

When it comes to energy, production only tells part of the story. For power to be useful, it must be delivered reliably and affordably to end users. This is the task facing China’s rapidly growing electrical grid.

Much of China’s energy demands are concentrated in its densely urbanized east coast. This poses a challenge for China’s green transition goals, since its most quickly growing sources of renewable energy—solar and wind power—require large tracts of land. China’s newer renewable energy facilities are concentrated in western inland provinces, where land is more plentiful, but they suffer from wasted power and low rates of utilization. In the western region of Tibet, for instance, 27.5 percent of wind power and 32.2 percent of solar power went to waste in January and February 2025, far higher than the national averages of 6.2 percent and 6.1 percent, respectively.

▲ China’s Net Energy Balance by Province (2022)

China’s grid operators have sought to remedy this through massive grid infrastructure spending and redesigned grid architecture. A cornerstone of this effort is China’s ultra-high-voltage (UHV) grid network, which can deliver electricity over long distances and thereby alleviate supply-demand disconnects by transmitting energy produced in the west to consumers in the east.

China’s global leadership in UHV infrastructure is decades in the making. Planning for this network began as early as 2006, during China’s 11th Five-Year Plan. The newest UHV grid commenced construction in 2024 with a total investment of about RMB 35.3 billion ($4.8 billion). This will add to the 42 UHV projects already completed, but more work remains to achieve Beijing’s goal of country-wide grid integration and power market unification.

China’s efforts to upgrade its grid infrastructure are complemented by steps toward energy market liberalization. Prior waves of renewable energy investment benefited from price control policies that disincentivized coal-based production, but these measures were blamed for precipitating energy shortage crises in 2021 when it became unprofitable for coal-based producers to operate in certain parts of the country. The aftermath of this debacle accelerated calls for a unified, market-based pricing structure. Chinese regulators responded by launching significant market-oriented reforms in February 2025, which analysts predict will drive smarter battery investments and grid resource allocation.

Though China’s grid upgrading remains a work in progress, its efforts are outpacing those of the United States. Experts have called for investment in UHV infrastructure in the United States, but to date, no projects have been completed. U.S. grid designers face permitting and financing hurdles that dampen the appetite for UHV investments. One study cited a 17-year regulatory timeline before construction could begin.

The United States still leads China in some metrics of grid performance, such as frequency and duration of power outage events—a common metric for grid reliability. However, China has made rapid strides in recent years and is steadily closing the gap.

▲ China Is Catching Up to the United States in Electric Grid Reliability

Chinese policymakers are seeking to unify the country’s regional power grids into one unified grid that functions as a single integrated market. An NDRC Guiding Opinions document issued in 2022 outlines the steps of this process.

Market reforms are also key to China’s grid upgrading efforts:

• In February 2025, the NDRC announced a set of reforms that will eliminate feed-in tariffs for renewable energy, which have been in place for wind and solar power since 2009 and 2011, respectively. While active, these tariffs incentivized renewable energy projects by guaranteeing a higher rate of return for electricity sold.

• The new system will implement market-oriented pricing reforms, which may result in tighter balance sheets for future renewable energy projects, but is ultimately expected to raise the uptake of renewable-generated power.

All of these reforms depend on modern, efficient infrastructure, and China’s grid operators are rushing to keep pace. China’s largest grid operator, State Grid, announced plans to invest $88.7 billion into its grid infrastructure in 2025, following on from its spending of $70 billion in 2024 and similar investments in prior years.

4. Deep Reserves of Coal as a Fallback

Despite China’s efforts to transition to renewables and other non-fossil fuel sources, coal continues to play a leading role in its energy system. Coal supplied 56 percent of China’s primary energy in 2024, dramatically higher than the United States (8 percent). In fact, since 2011, China has consumed more coal than the rest of the world combined.

China is far more self-reliant in coal than in other fossil fuels, like oil and gas. It boasts about 13.3 percent of the world’s technically recoverable coal reserves, and it is by far the largest coal producer in the world. China does import some coal—mostly from Russia, Australia, Mongolia, and Indonesia—but the amount of imported coal accounts for only about 6.6 percent of China’s total energy consumption.

▲ Global Coal Consumption

Coal has become especially important in the wake of recent energy crises. Record-high coal prices due to coal shortages and state-enacted electricity price controls culminated in a severe electricity supply crisis in China in late 2021, impacting 20 provinces and leading to prolonged outages in some regions. In summer 2022, record temperatures and drought in the Yangtze River reduced the supply of hydroelectric power amid peak power demand, leading to power disruptions in southern provinces like Sichuan, which relies on hydropower for 80 percent of its electricity.

Following these crises, China doubled down on coal as a backup energy source, and it is rapidly expanding its coal-fired power capacity. As of April 2025, at least 311 coal-fired power plants were under construction in China with 204 gigawatts of combined capacity—nearly four times the combined level of coal-fired capacity under construction in the rest of the world. Just one Chinese province, Inner Mongolia, has more coal-fired power capacity than all but two countries (the United States and India) in the world in 2025.

▲ Global Coal-Fired Power Capacity

Burning coal may be China’s most dependable path to ultimate energy security, but it comes at a price. According to Carbon Atlas, 72 percent of China’s CO2 emissions came from coal in 2023, compared to 66.4 percent in India and 15.8 percent in the United States. Increased coal reliance may jeopardize China’s carbon emissions goals for 2030 and 2060, or at a minimum, make the deferred transition more costly.

Large emissions also translate into health costs. In 2021, household air pollution from burning solid fuels like coal and wood was attributed to an estimated 29.2 deaths per 100,000 people in China—over 415,000 people altogether, compared to about 16 people in total in the United States.

Moreover, coal-fired power generation adds to China’s water burden. China is one of the world’s most water-stressed countries, and coal plants consume large volumes of freshwater for cooling facilities, cleaning coal, and powering turbines in the form of steam.

Water-scarce northern and western regions, which often have a higher density of coal plants, face trade-offs in distributing water between energy and agricultural industries, the latter of which consumes a large portion of the country’s water. Chinese policymakers have pushed for the adoption of air-cooling technologies in coal plants since 2012, an effort that has reduced water consumption in energy generation but could negatively impact thermal efficiency and emission rates.

Despite the environmental and health costs, it is unlikely that China will back away from coal in the near term. China’s growing power needs will strain China’s power supply and impact industrial growth if demand is not met. For now, the government’s continued insistence on long-term coal contracts incentivizes many electricity buyers to choose coal over renewables. Some provinces are also particularly reliant on the coal industry for tax revenue and employment, making it politically challenging for local governments to rapidly shift toward renewables.

Chinese leaders, particularly under Xi, have paid close attention to environmental and air pollution problems. However, issues like misaligned promotion and tenure incentives and inefficient implementation strategies have created obstacles for the Chinese government to tackle environmental challenges, particularly in poorer regions and areas reliant on coal and heavy industries.

• China’s coal-based power generation strategy is somewhat at odds with its emissions goals, but rather than abandoning new coal-fired projects, it is seeking to make them marginally cleaner.

• A 2025 guideline released by China’s National Development and Reform Commission (NDRC) stated that China will continue to construct coal-fired power plants through 2027 to stabilize the power grid or back up peak demand.

The 2025 guideline adopted a previous 2024 guideline on adopting and converting coal-fired power capacity with lower carbon emission rates.

Conclusion

China’s current energy security situation is a mixed bag. On one hand, the country faces substantial near-term challenges. Beijing’s push to dominate global manufacturing is consuming an eye-watering amount of the world’s energy, and China’s limited domestic energy reserves have left it reliant on vulnerable foreign energy supplies to a level that is concerning for Chinese leaders.

On the other hand, China has marshaled a formidable set of strengths. Its dominance in renewable energy technologies and critical minerals, as well as its rapid grid modernization, puts it at the forefront of global efforts to transition to the energies of the future. Meanwhile, in the event of a crisis, China can lean on coal as a stopgap, although doing so comes at political and environmental costs. Ultimately, China’s energy security hinges on its ability to balance competing priorities. How Beijing navigates this path will have not only domestic consequences but also global implications for energy markets, climate action, and geopolitical competition.

How Do Financial Risks Threaten China’s Economic Security?

Chinese leader Xi Jinping has called for China to become a “financial superpower” (金融强国) rivaling established leaders like the United States, United Kingdom, and Japan. Yet, mounting geopolitical tensions and slowing economic growth at home have sparked concerns in Beijing about the country’s overall “financial security” (金融安全). China has made notable strides in recent years to shore up financial risks, but numerous challenges persist. This ChinaPower feature explores four key vulnerabilities and three strengths in China’s financial security. Taken together, they paint a cloudy picture of Beijing’s long-term prospects of becoming a global financial leader.

Vulnerabilities in China’s Financial Security

China faces four important vulnerabilities to its financial security, each of which is outlined and analyzed below. These vulnerabilities are closely inter-related: strain in one area can exacerbate problems in another area. These are not the only vulnerabilities facing China’s financial system, but they encompass the most pressing risks in the eyes of regulators and investors.

1. Exposure to foreign sanctions

2. High debt

3. Shallow financial markets

4. Weak oversight of financial firms

Vulnerability 1: Exposure to Foreign Sanctions

Beijing’s threat perceptions with respect to financial security have shifted as China’s domestic and international conditions have changed. One of the clearest indications of this is the political messaging coming from Xi Jinping himself. Analysis of an official database cataloging Xi’s “important speeches” offers revealing insights:

▲ Number of Reports on Financial Security (in Purple)

Xi has consistently stressed the issue of financial security during his tenure. Between 2013 and 2024, the phrase financial security appeared in at least 44 state media reports of his speeches, meetings, and other activities.

▲ Number of Reports on Financial Risks (in Red)

In addressing China’s financial security, he has frequently stressed mitigating financial risks that could jeopardize China’s economic development.

But the types of risk facing China are evolving.

▲ Number of Reports on Financial Crisis (in Green)

Historically, China’s attention has centered on building resilience to financial crises, like the 1997 Asian Financial Crisis and the 2008 Global Financial Crisis. However, Xi’s mentions of financial crisis have declined markedly with time.

The threat of financial crises has not gone away, but Beijing now also perceives new, worrying threats from abroad.

▲ Number of Reports on Sanctions (in Blue)

In recent years, Xi has more frequently warned of the threat of weaponized foreign sanctions amid increasing economic and technological competition with the United States and its allies.

Xi’s mentions of sanctions surged in 2022 as the West imposed sweeping sanctions on Russia in response to its invasion of Ukraine.

Today, Beijing worries it could be targeted next, and it is buttressing its economy in preparation.

Beijing’s worries over sanctions initially spiked during the first Trump administration, when Washington imposed sanctions on Chinese companies, including technology giants Huawei and ZTE. The Biden administration escalated efforts to sanction Chinese companies and targeted China with a suite of export controls on advanced technologies, especially semiconductors.

Such targeted U.S. sanctions are a significant concern for China, but they do not pose a systemic risk to China’s economic and financial security. However, more sweeping financial sanctions—such as those imposed on Russia by the United States and its allies since 2022—could cause much greater pain for China’s economy.

In response to Russia’s invasion of Ukraine, Washington and its allies imposed sweeping sanctions targeting major Russian banks, state-owned firms, and key individuals, including President Putin and oligarchs. These measures included freezing hundreds of billions of dollars in Russian central bank foreign reserves, removing Russian banks from the Society for Worldwide Interbank Financial Telecommunications (SWIFT) international payment system, and restricting exports of critical technologies to weaken Russia’s military and economic capabilities.

Imposing similar measures on China could inflict enormous pain on its economy. By cutting off access to dollars and dollar-based institutions, Chinese experts are worried that U.S.-led sanctions could jeopardize three major functions in China’s financial system: trade settlement, investment financing, and monetary policy operations.

U.S. sanctions could disrupt China’s trade flows by blocking cross-border payments. In 2024, China conducted $6 trillion of trade in goods with the rest of the world, roughly 71 percent of which was denominated in dollars and other foreign currencies. These transactions are facilitated by a series of dollar-based international institutions, most notably SWIFT, the Clearing House Interbank Payments System (CHIPS), and various intermediary banks financing the trade process. Sanctions that bar access to these institutions would significantly curtail the ability of Chinese importers and exporters to settle payments for goods.

In this scenario, some of China’s trading partners would likely attempt to utilize alternative payment infrastructure. Yet many of China’s high-value imports are manufactured exclusively by companies in the United States or allied regions and thus would be particularly difficult for China to replace. Sanctions would likely also block China’s exporters from reaching key overseas markets, undercutting their bottom lines.

▲ Share of China’s Trade Denominated in RMB

U.S.-led financial restrictions could also constrain China’s ability to raise capital and finance industry growth. China’s dollar-denominated debt owed to foreign lenders totaled just over $1 trillion as of June 2024, and it continues to raise funds through bond sales overseas. Chinese companies likewise raise money in foreign equity markets. Chinese firms listed on U.S. stock exchanges held a market capitalization of $1.1 trillion as of March 2025, and many more receive dollar-based venture capital funding and other forms of direct investment. U.S.-led sanctions could sever access to these avenues for raising capital.

Last, U.S.-led sanctions could destabilize Beijing’s monetary policy priorities. Massive reserves of U.S. dollars are essential to the ability of the People’s Bank of China (PBOC) to achieve its primary mandate to “maintain the stability of the value of the currency and thereby promote economic growth.” The exact value of dollar-based assets held by the PBOC is subject to debate, but a rough estimate suggests a ballpark figure of $1.6 trillion.

If Washington and its allies sought to exert pressure on Beijing, they could coordinate to freeze China’s dollar reserve assets held within their borders. This would quickly cause a shortage of dollars in China, leading to a drop in the value of the RMB, a shock in import prices, and challenges in meeting debt repayment obligations.

“We should … oppose interference in internal affairs, oppose unilateral sanctions and “long-arm jurisdiction”, and jointly create a peaceful and stable development environment.”

- Xi Jinping, 2020 BRICS Leaders’ Summit

Concerns about these threats have galvanized Beijing to accelerate efforts toward sanctions resilience. China has sharply criticized U.S. sanctions against China and Russia, describing them as acts of U.S. “long-arm jurisdiction” (长臂管辖). Beijing responded to initial U.S. sanctions by passing an Anti-Foreign Sanctions Law in 2021, which set up a legal framework for China to retaliate against sanctions. This framework was expanded in March 2024 to include a broader array of retaliatory measures, an indicator that Beijing is bracing for deepening geopolitical conflict with its international rivals.

More broadly, Chinese leaders are striving to develop alternative financial infrastructure to reduce reliance on Western-dominated systems, and they view RMB internationalization as a cornerstone of strengthening China’s geopolitical position vis-à-vis the United States. However, despite notable progress, China’s financial system continues to rely heavily on U.S. dollars and thereby remains vulnerable to the threat of sanctions.

• In 2021, China passed the Anti-Foreign Sanctions Law, building upon the pre-existing Foreign Trade Law and other legislation outlining safeguards and retaliatory measures against sanctions attempts. This was updated and expanded in March 2024.

• China has sought to reduce reliance on dollar-based payment infrastructure by establishing alternatives like the Cross-border Interbank Payment System (CIPS), which has grown to include 168 direct participants and 1461 indirect participants spread across every major geographic region.

• China has also been expanding its network of currency swap agreements, which are designed to improve RMB liquidity to partner economies experiencing financial crises. These efforts include agreements with 42 central banks or monetary authorities to date (discussed more below).

• China’s policymakers have discreetly shifted China’s some of central bank reserves to state-owned banks and simultaneously downsized its U.S. Treasury holdings, both of which have the effect of obscuring Beijing’s monetary policy maneuvering.

Vulnerability 2: High Debt

Rising debt levels are another key threat to China’s financial security. China’s economy is permeated by highly indebted firms, which is a drag on overall economic performance and jeopardizes Beijing’s “bottom line of no systemic financial risks” (不发生系统性金融风险的底线). China’s high debt levels also weaken its international competitiveness by dissuading risk-averse investors from entering Chinese markets, thereby undermining Beijing’s stated goal of global financial integration.

China’s financial regulators often discuss these concerns in terms of improving China’s “macro leverage ratio” (i.e. its debt-to-GDP ratio), which the 14th Five-Year Plan highlighted as a key dimension of financial security. China’s non-financial debt reached 292 percent of GDP in 2024, which is considerably higher than most other major economies, including the United States.

▲ China’s Rising Debt-to-GDP Ratio

On paper, this debt is typically divided into central government debt, local government debt, household debt, and debt from private non-financial firms. In practice, however, these debt burdens are closely linked. Local governments that lent to questionable real estate and infrastructure projects are struggling to recoup their investments amid China’s ongoing real estate sector slowdown, and a growing number of local government-related investment products have defaulted or been flagged with warnings.

Household debt is also exposed to turbulence in the real estate market, not least because 60 percent of household debt is in the form of residential mortgages. Taken together, this brittle network of non-performing debt creates risks of financial contagion and cascading crises.

China’s debt-related vulnerabilities are complicated by its exposure to geopolitical risk. Increased tariffs levied by President Trump in March 2025 will strain Chinese manufacturers operating on thin margins and likely push some into default.

Overseas trade in Chinese bonds is similarly exposed. The total size of China’s offshore bond market is estimated to sit at roughly $780 billion, which supplements the $579 billion worth of foreign holdings of onshore Chinese bonds. This market has historically served as a supplemental source of fundraising for local governments, one that would be cut off if U.S. investors were forced to dump Chinese assets.

Last, Beijing’s ability to address China’s debt is constrained by U.S. monetary policy. Under normal circumstances, Chinese policymakers could ease the burden of indebted firms by reducing the PBOC’s benchmark interest rates and thereby lowering the cost of firms’ interest payments. This is more difficult, however, when the U.S. Federal Reserve maintains high U.S. benchmark rates—as it did from 2022 to 2024—because lower PBOC rates prompt global investors to withdraw investments from Chinese markets and chase higher returns in the United States.

This threat of capital flight is illustrated in part by the widening gap in returns on U.S. versus Chinese 10-year government bonds. Now that the Fed has lowered rates, Beijing has gained more room for maneuverability to cut its own rates, but this trend could reverse if inflationary pressure returns to the United States.

▲ Diverging Interest Rates Prompt Capital Flight from China

China’s efforts to reduce debt—often referred to as a deleveraging campaign—was formally launched in 2016 and remains in full swing. It has used an assortment of tools to address unsustainable debt:

• Beijing has launched several rounds of stimulus to curb debt growth and help firms clean up their balance sheets. One recent package launched in November 2024 and included $1.4 trillion worth of debt alleviation measures. Several more interventions were announced at China’s 2025 Two Sessions meeting.

• Beijing has sought to address hidden debt through a series of regulatory reforms (discussed below), which sought to close regulatory gaps around peer-to-peer financing and other forms of invisible or unregulated lending.

• Xi has vowed to support indebted local governments by reforming the central-local government revenue-sharing system. Thus far, however, concrete measures have been limited.

• Beijing attempted to curtail real estate debt with its “three red lines” policy in 2020, which backfired when the ensuing collapse in the real estate market led to government bailouts of indebted property developers. The three red lines policy was relaxed in 2023, and the real estate sector’s looming debt remains unaddressed.

Vulnerability 3: Shallow Financial Markets

The third major vulnerability in China’s financial security is its lack of appealing RMB-denominated investment assets. Economists often describe China’s markets as “shallow,” meaning that they struggle to absorb incoming capital in a way that generates strong returns for investors. This hampers Beijing’s stated goals of attracting foreign investment and deepening global financial integration.

Xi Jinping signaled a renewed commitment to improving investor access to China in his address to the Boao Forum for Asia in 2018, the 40th anniversary of Deng Xiaoping’s pivotal Reform and Opening policy. Yet despite the ongoing commitment to financial opening (金融业开放), China’s presence in international financial markets remains small relative to the size of its economy.

Chinese-owned investments in foreign markets and foreign-owned assets in Chinese markets—respectively referred to as assets and liabilities in China’s international investment position—are a fraction of those of the United States and other financial powerhouses. In aggregate, China’s small international investment position reflects its limited integration with global financial markets.

▲ China’s Modest International Investment Position

China’s three largest financial markets face distinct challenges that limit investor interest:

• Banking is subject to hands-on state intervention that steers capital toward sectors prioritized by the central government. Foreign and domestic lenders alike face pressure to support state-affiliated firms, even though returns on these loans underperform returns on private-sector lending by as much as two percentage points.

• Equity markets, meanwhile, remain speculative and unpredictable. Despite attempts at regulatory intervention, China’s stock market performance is often untethered to the performance of its real economy, and its track record of volatility dissuades institutional investors from looking for stable sources of growth.

• Real estate was long viewed as one of the sole remaining safe havens for capital, given the lack of reliable returns on lending and equity investments. However, when China’s real estate bubble burst in 2021, would-be investors were left with few good options for investing latent savings.

▲ China’s Stocks Underperform Other Markets

Faced with few good domestic investment opportunities, Chinese investors have pursued investment opportunities abroad. To avoid the destabilizing effects of capital flight, Beijing maintains capital controls that limit the free flow of money in and out of China’s borders. Capital controls leave openings for some outbound investment into global markets, but Chinese investors must navigate complex investment mechanisms and cat-and-mouse regulatory enforcement.

Foreign investors, on the other hand, are deterred from entering Chinese markets due to the risk that resources cannot be withdrawn if their investments turn sour. These concerns are augmented by heightened geopolitical risk, which investors fear could lead to further tightening of investment restrictions.

The net effect is a barrier to China’s global financial integration and a threat to its long-term financial vitality. The shallowness of China’s markets stands in sharp contrast to the United States. The U.S. financial sector’s near-limitless ability to absorb capital from other countries is a consequence of its abundance of worthwhile investment opportunities. The United States remains a perennially appealing investment destination because investors know they can receive a strong rate of return.

▲ China Lags the U.S. in Inbound Investment

One upside of China’s capital controls and other barriers to financial integration is that they significantly insulate China’s financial system from external shocks. This was demonstrated during the 2008 financial crisis, which damaged the Chinese financial system less than other financial hubs. The trade-off between insulation and integration continues to confront Chinese policymakers, and heightened geopolitical risk complicates this calculus.

After a precipitous drop in foreign investment during the COVID-19 pandemic, Chinese regulators have announced efforts to attract foreign investors, though these steps remain modest.

• In April 2024, the State Council published new guidance on capital market regulation, calling for more conservative approaches to stock listings and strengthened supervisory approaches.

• In June 2024, Chinese regulators subsequently tightened reporting requirements around stock market listings to tamp down on IPO speculation and improve transparency.

• In September 2024, Shanghai and Beijing moved to relax capital controls and facilitate easier cross-border flows of funds.

• China’s leadership has promised deeper reforms in 2025, but international observers remain skeptical.

Vulnerability 4: Weak Oversight of Financial Firms

China’s last major financial vulnerability is weak regulatory oversight, particularly in its management of firm-level financial risk. China’s financial system is distinguished by a strong state presence in firm management and capital allocation. In other words, the state has a strong say in what gets funded. Chinese policymakers use state-owned banks and investment funds to steer financial resources toward priority industries, which Beijing believes will foster long-term growth.

The downside is that these priority sectors tend to underperform in the short term. Because these firms are shielded from market logic (i.e. propped up by state support), they require scrupulous regulatory oversight to ensure their financial resources are not being mismanaged.

Xi Jinping and other officials have repeatedly emphasized the need for stronger firm-level financial governance. The narrowing gap between private and state-backed firm performance suggests these efforts have yielded some success. Nevertheless, regulatory challenges have continued to evolve as the financial landscape grows more complex, and financial planners have struggled to rise to this challenge.

▲ Private Firms Tend to Outperform State-Backed Firms

Part of China’s regulatory failures stem from low state capacity. China’s financial regulators are often stretched thin, and many report inadequate resources and poor pay. These conditions make regulatory bureaucrats vulnerable to being bought off by companies seeking political favors or lighter regulation.

The result is endemic corruption and regulatory capture in the state-owned sector, which surpasses every other sector besides village committees in terms of corruption cases. Xi Jinping’s flagship anti-corruption campaign has attempted to curtail the problem by threatening (and implementing) harsh punitive measures, but some scholars argue that the challenge will persist until the underlying structural issues are solved.

▲ China’s Corruption Crackdown Continues

The issue of low state capacity also relates to ongoing coordination challenges. In the past decade, non-traditional financial business models—like those of the now-curtailed peer-to-peer lending sector—dodged regulatory oversight by growing within the gaps of China’s mosaic of central and local regulatory agencies.

Beijing has attempted to address this problem through several iterations of regulatory reform. The cost of these frequent regulatory reshuffles is an exacerbated sense of policy unpredictability. In an uncertain policy landscape, businesses are reluctant to invest in new ventures, particularly given Beijing’s track record of unexpectedly censuring whole industries at a time.

Together, these factors weaken the competitiveness of China’s financial sector in the global landscape. Foreign investors complain that they face a disadvantage against state-owned firms, which receive cheaper credit and a preferential regulatory environment. Political uncertainty chills inbound investments by limiting foreign firms’ ability to forecast costs and benefits. Finally, high-profile arrests of corporate executives have soured China’s reputation as a good place to do business, and existing leaders must take great care to avoid falling afoul of regulators.

China has restructured its financial regulatory apparatus repeatedly in recent years, though its reforms have not necessarily led to deeper liberalization.

• In 2018, Beijing consolidated the China Banking Regulatory Commission and the China Insurance Regulatory Commission into the China Banking and Insurance Regulatory Commission and reshuffled the regulatory purview of the PBOC and other organs.

• Beijing restructured this system again in 2023, further consolidating authority into the National Financial Regulatory Administration and establishing the Central Financial Commission within the CCP.

• State regulators have also taken steps to reform the management of state-owned enterprises (SOEs) to improve returns on investors. Thus far, these efforts appear to have led to improvements in SOE stock performance.

Strengths in China’s Financial Security

Despite the challenges discussed above, Beijing’s financial policymakers wield a few distinct advantages that bolster the long-term prospects for China’s financial system. Chinese policymakers have long emphasized that the “financial sector should serve the real economy,” which involves tangible goods and services. Indeed, the strongest arguments for China’s financial vitality stem not from any inherent qualities of its financial institutions but rather in the durability of its underlying economic system. China’s massive manufacturing sector, vast consumer markets, and global technology leadership all fuel the engine of growth that underpins financial resilience.

In addition to these external sources of strength, China’s financial system also possesses three key internal advantages, each of which is analyzed below:

1. Extensive trade ties

2. A growing role in multilateral governance

3. Innovative tools for macroeconomic regulation

Strength 1: Extensive Trade Ties

China’s financial system benefits from its extensive trade ties. Trade has played a pivotal role in China’s economic rise and is enshrined in the 14th five-year plan as one pillar of China’s “dual circulation” strategy (国内国际双循环), which outlines an integrated economic approach to pursuing domestic and foreign market opportunities. These trade ties form a bedrock on which China can influence global financial systems.

Chinese officials point to the benefits of trade ties for accelerating financial initiatives like RMB internationalization, which in turn secures and strengthens China’s financial position in a geopolitical context. Though recent rhetoric from Beijing has sought to emphasize the domestic pillar of China’s dual circulation policy, its trade network remains integral to China’s overall economic and financial posture.

China’s trade network spans the globe. In 2023, 44 countries listed China as their top overall trading partner by trade in goods, and 110 countries listed China as one of their top three sources of imports. In 2024, the combined value of China’s total goods imports and exports reached $6 trillion, returning to a healthy 5 percent year-over-year growth after an uneven performance during the COVID-19 pandemic.

▲ China’s Global Trade Leadership

Beijing leverages China’s trade network to accelerate its push for RMB internationalization. These efforts are most clearly seen in China’s imports of oil, gas, critical minerals, and other commodities. The Shanghai Petroleum and Natural Gas Exchange, Shanghai International Energy Exchange, and Ganzhou Rare Metal Exchange are three trade hubs launched in recent years that each facilitate RMB-denominated trade. As a result of these efforts, China conducted 28.8 percent of its goods trade in RMB in 2024, a 2.7 percentage point increase from 2023.

The growth of RMB-denominated trade and financial institutions is not merely a matter of coercion on Beijing’s part. RMB-based financing provides some trade partners with meaningful benefits over dollar-based financing. When U.S. interest rates are high (as in the past few years), dollars become scarce, and dollar-based trade financing grows more expensive. RMB-based trade can help developing economies conserve their dollars during such periods of scarcity.

In addition to boosting RMB internationalization, China’s trade ties provide a deterrent against the most aggressive forms of Western sanctions. The United States and its allies continue to rely deeply on trade with China, so imposing sweeping sanctions on China would result in immense blowback for them.

Relatedly, if Western countries impose sanctions on China, China’s trade relationships with non-Western countries would provide avenues for continued economic growth. Countries within BRICS+ and China’s Belt and Road Initiative—which conceivably might not follow U.S.-led sanctions—could be willing to provide China with export markets and commodity sources even amidst a sanctions regime.

It is worth mentioning that China’s extensive trade relationships do come with downsides, particularly when its trade practices are perceived to distort domestic economies. Washington has made no secret of its frustration with China’s alleged manufacturing overcapacity, but less often discussed are parallel dynamics playing out across developing economies around the world. Beijing has shown some signs that it is listening to these complaints, but without more decisive action, more of China’s trade ties risk turning into diplomatic liabilities.

China has cultivated its trade network through a combination of bilateral and plurilateral initiatives.

• The Belt and Road Initiative (BRI) is China’s flagship platform for international development engagement. It has been used to establish infrastructure for commodity extraction and transport as well as markets for exports of Chinese manufactured goods.

• BRI is a platform for other, more targeted initiatives such as the Digital Silk Road, which promotes technology-related trade and investment.

• The Regional Comprehensive Economic Partnership (RCEP) is a plurilateral trade agreement signed by China and 14 other countries across the Indo-Pacific region.

• China has a total of 22 free trade agreements that reach 29 countries; 10 more free trade agreements are under negotiation.

• These large-scale initiatives are complemented by more targeted platforms for specific trade, such as China’s network of commodity exchanges.

Strength 2: A Growing Role in Multilateral Governance

China’s trade ties lend heft to Beijing’s efforts to shape multilateral financial governance, which continue to gain traction. Xi Jinping articulated China’s vision for financial governance reform at the Kazan BRICS summit in October 2024 and again at the Rio de Janeiro G20 summit in November 2024. In both addresses, Xi expressed frustration about China’s disproportionately small voice (relative to the size of the economy) in established multilateral institutions like the International Monetary Fund (IMF) and the World Trade Organization (WTO).

Xi’s two-pronged approach for greater influence over financial governance includes reforming existing institutions and expanding the scope and remit of alternative institutions like the BRICS consortium. These efforts closely intersect with the RMB internationalization drive discussed above but also encompass a range of other mechanisms.

First, Chinese policymakers have been steadily working to establish bilateral currency swap agreements with central banks in partner countries. These agreements provide access to RMB during periods of financial turbulence, allowing the PBOC to function as an international lender of last resort.

Interest in RMB currency swaps has increased in recent years as dollar scarcity has created liquidity issues for many smaller economies. As of October 2024, China has signed currency swap agreements with 42 countries, with a total capacity of 3.8 trillion RMB (excluding Hong Kong and Macau). These efforts complement the RMB-based trade financing initiatives discussed above, particularly in countries with which the United States has been more reluctant to establish parallel dollar-based swap lines.

▲ China’s Growing Network of Currency Swap Agreements

Second, Beijing has pressed for a greater role in other financial governance architecture, including financial early warning systems, reserve currency pooling agreements, and trade dispute settlement mechanisms. China’s progress on these initiatives has been uneven, but the growing ranks of countries joining China’s multilateral financial institutions point to the global appetite for alternative approaches to financial governance. The recently expanded BRICS consortium serves as Beijing’s preferred launch point for new financial architecture like the BRICS Pay cross-border payment settlement initiative.

At the same time, Beijing is pushing for a more prominent voice in established global financial governance institutions like the IMF, the World Bank, and the WTO. These efforts have begun to bear fruit in the form of higher voting shares and greater presence in leadership positions, but Chinese leaders argue that they remain under-represented in these institutions.Last, China’s role as a regional financial leader is spurred by its significant development finance activity. Beijing conducts development finance diplomacy bilaterally through the BRI and multilaterally through organizations like the Asian Infrastructure Investment Bank (AIIB) and the Shanghai-based New Development Bank (NDB). China’s role in these institutions boosts its regional financial integration and helps it shape development priorities.

Often, these priorities emphasize infrastructure investment. By steering development capital toward infrastructure projects—as opposed to health or education projects, for instance—Chinese policy leaders create new markets for China’s massive industrial base. The role of overseas infrastructure projects rose in importance during the 2010s as China’s industrial base ran out of useful domestic infrastructure projects in which to invest. That said, the future of China’s development finance has been called into question amidst falling investment counts and mounting diplomatic pushback.

▲ China’s Overseas Development Finance Spending

• In 2024, BRICS expanded from its original constituent countries—Brazil, Russia, India, China, and later South Africa—to include Egypt, Ethiopia, Iran and the United Arab Emirates. Saudi Arabia has not yet responded to an invitation to join, and Argentina was invited but declined. This wave of expansion leaves open the door for more additional to BRICS’ ranks in the coming years.

• China has continued efforts to expand its network of currency swap agreements, designed to boost international use of the RMB. China now has currency swap agreements with 42 countries.

• China is supporting the development of the BRICS Cross-Border Payments Initiative (BCBPI), also known as BRICS Pay, as an alternative to SWIFT for managing cross-border payments. Other initiatives, like the nascent BRICS Interbank Cooperation Mechanism, are in the early days of planning.

Strength 3: Innovative Tools for Macroeconomic Regulation

China’s efforts at firm-level regulation have been stymied by corruption and misaligned incentives, as discussed above, but its track record of stable governance is actually somewhat stronger. In particular, Beijing has pioneered novel tools for managing what economists refer to as macroprudential supervision (宏观审慎监管). Chinese financial regulators learned hard lessons in the wake of the 2015-16 stock market crash, which many argue was exacerbated by poor policy choices. Since then, China’s financial system has not exactly flourished, but it has avoided a repeat of systemic financial crisis.

Beijing’s process of iterative regulatory learning has yielded a more extensive set of tools for managing financial and monetary activity. The use of state-owned banks for monetary policy objectives is one such example. Observers have noted that in recent years, China’s state-owned banks have filled roles traditionally performed by a central bank, including stabilizing exchange rates, controlling credit volumes, and serving as lenders of last resort.

These unorthodox policy tools are only possible in China’s unique state-led model of financial regulation. Early evidence suggests that these innovations augment state financial capacity and improve monetary policy efficacy, though they create oversight liabilities as well. In any case, such novel financial levers have stymied Western analysts’ standard approaches to monetary surveillance and prompted calls for revised accounting methods.

Beijing maintains strong control over private and semi-private lending institutions as well. This can invite the corruption-related regulatory challenges discussed earlier, but the upshot is that private sector capital can be quickly rallied to quell crises. Since 2015, Beijing has called upon its so-called “national team” of wealth management funds (illustrated below) to buy up stocks during periods of turbulence. This strategy of enlisting quasi-public firms to support macroprudential goals is often in tension with firm-level regulation, and Chinese regulators will doubtless continue to wrestle with the appropriate balance as they continue to pursue financial reform.

▲ Key Players in China’s “National Team”

Beijing increasingly uses its tight control over China’s financial institutions to direct them to support China’s macroeconomic goals. These unorthodox policy interventions would be difficult or impossible in the United States or other liberalized economies.

• Since 2015, Chinese financial planners have made use of a “national team” of state-backed banks and investment firms to step in and buy stocks during periods of turbulence. The most recent evidence of national team intervention was in December 2024.

• Evidence also indicates Beijing has called on state-owned banks to prop up the value of the yuan by buying yuan and selling dollars during periods of depreciation, essentially using commercial banks to offload one of the central bank’s core mandates.

• Beijing has also issued guidance to commercial banks to reduce the interest rates for loans to other banks, in an attempt to stimulate growth by expanding credit across the economy.

Conclusion

Overall, the vulnerabilities in China’s financial security position outweigh its strengths. This assessment is reflected in China’s uneven financial performance and faltering progress toward global financial integration. As such, it is unlikely that China’s financial system will prove an equal competitor to that of the United States, Europe, or Japan in the near future.

Many of China’s financial security shortcomings relate to its faltering progress toward financial liberalization. Beijing’s rhetorical praise for pursuing financial openness creates an odd juxtaposition with its policy track record, which still prefers state priorities and top-down directives. China’s policymakers attempt to square this circle with a signature two-track financial system, which carves out a space for market-based international competition while retaining a prominent role for state-owned firms. Yet foreign investors interpret Beijing’s regulatory mixed signals as an attempt to have its cake and eat it too.

Nevertheless, China’s financial system does possess significant latent strengths that draw from the scale and vitality of its economy. Chinese policymakers continue to shore up financial vulnerabilities and have recently signaled their commitment toward rebalancing the domestic economy and boosting consumption. In addition, Beijing continues to expand commercial ties with partners abroad, especially with developing economies that are frustrated with the established U.S.-led financial system and seeking alternative institutions. It remains to be seen whether these strengths will translate into sustainable growth in China’s financial sector.

Authors: Brian Hart, Bonny Lin, Hugh Grant-Chapman, Leon Li, Truly Tinsley, Peter Dazheng Huang, Claire Tiunn