China must brace for ‘digital cold war' with US as battle for tech supremacy heats up

China needs to brace for a “digital cold war” with the United States as the two nations go head-to-head for dominance of the internet economy.

The warning from a top Chinese think tank analyst comes amid heightened technological rivalry between the world’s two largest economies and not long after Beijing unveiled a blueprint to ramp up China’s tech capabilities by 2025.

“The US has adopted a ‘small yard, high fence’ strategy to suppress China with a whole-of-government approach,” said Zhang Monan, chief researcher with the US-Europe Institute at the China Centre for International Economic Exchanges (CCIEE).

Washington is likely to impose stronger restrictions on sensitive American technology, adding to its tool kit of export blacklists, long-arm jurisdiction and investment security reviews, she said at a CCIEE virtual forum earlier this week.

At the same event, former Chinese finance vice-minister Zhu Guangyao also criticised Washington for trying to contain China’s digital advance.

He singled out the proposed Alliance for the Future of the Internet, a US-led initiative that seeks to gather like-minded countries to promote an open and secure internet, saying it would “divide the internet and build two systems”.

“This is not good for the global digital economy and even themselves in the end,” Zhu said.

The comments come just over a week after Beijing published a new digital economy five-year plan for 2021-25.

The plan endorsed a target for core industries in China’s digital economy to account for 10 per cent of gross domestic product by 2025, up from 7.8 per cent in 2020.

It also noted that “all major countries … are undertaking strategic planning and taking the initiative to create new competitive advantages to reshape the international landscape in the digital age”.

Beijing’s drive to grow its digital sector, gain technological independence and have a say in international rule making has ratcheted up concern among Western nations.

US President Joe Biden has said market democracies, not China, should write 21st-century rules around trade and technology.

Zhang said the US and the European Union have linked regulation of the digital economy with ideology, human rights and geopolitics. That meant it was not only “about economic or technological competition, but more a competition for rules and sovereignty”.

The digital economy would be the next battleground of strategic competition among powers, she said.

“The rapid changes brought about by hi-tech development, like artificial intelligence and quantum communication, have closely integrated some pure technical and economic problems with national security. China and the US must communicate on such issues,” Zhu said separately at a press briefing on Friday.

Following pandemic-driven supply chain disruptions, a global semiconductor shortage put the spotlight on the digital economy and its key hardware.

The Biden administration has pledged to boost engagement with Asian nations this year to keep China in check.

The US would accelerate efforts on economic ties, including setting digital and technological standards, said White House Indo-Pacific coordinator Kurt Campbell this week.

Zhang said the US might begin blocking shipments of computer chips and industrial software to China.

“Cutting off supply is indeed fatal to us,” she said, citing China’s dependence on imported semiconductors.

It was time to widen market access for digital services, including for trusted foreign internet companies and digital platforms, she said.

“Opening up is still an important foundation for maintaining the development of China’s digital economy,” she said.