Shanghai, China, March 2017

The message coming into my inbox was somewhat ominous—“Can you help me? We are suffering!”

The note came from an old South Korean friend and former client, JJ. Having left the business world for politics, JJ was now an advisor to one of South Korea’s leading presidential candidates. Facing national elections in just a few weeks, he frantically looked for a way to restore Sino-South Korean relations—critical for South Korea’s economy. Earlier that month, South Korea had installed Terminal High Altitude Area Defense (THAAD), an anti-ballistic missile defense system developed by the Americans. China was not happy.

In the face of China’s wrath, JJ wanted help in dealing with THAAD and its ramifications.

Ostensibly intended as a shield against North Korea, THAAD would enable Seoul to shoot down any short, medium and intermediate range ballistic missiles that North Korea decided to launch towards the south. Yet China took umbrage at THAAD’s deployment. Enraged at the deployment, Beijing let its ire be known, both through traditional diplomatic channels, shrill op-eds, and editorials in state-owned media outlets like Global Times and the People’s Daily that called for “expanding [China’s] nuclear arsenal” (Global Times) or even offering a “military response.” (People’s Daily)

China’s biggest weapon in the dispute was its state “wallet”. The government instituted crippling economic punishments in the hope that South Korea would halt THAAD’s deployment. As the Chinese government blocked K-Pop and South Korean movie stars from touring China, Chinese consumers redoubled the nation’s efforts, boycotting Korean brands. Chinese tourists visiting South Korea dropped 40 percent year on year in March, decimating the nation’s retail sector. To JJ’s dismay, China’s economic punishments were only just beginning.

I asked JJ what I could do to help. I thought he would ask me to brief his candidate on China’s political situation. Perhaps even ask my firm that I founded in 2005, The China Market Research Group (CMR) to develop a marketing campaign to restore South Korean brands in the eyes of Chinese consumers.

JJ’s immediate response took me by complete surprise. He requested that I arrange a backroom meeting between Chinese President Xi Jinping and his South Korean presidential candidate. The economic pain launched by China had cut to the bone of Korean society. He and his candidate were desperate to alleviate tension and restore Sino-South Korean ties. “Please,” he messaged.

Intrigued to see if I could play a bridge role between the two countries to reduce tension, I contacted connections in Beijing to see whether a meeting between President Xi and JJ’s South Korean presidential candidate could be arranged. The response took 24 hours, but was firm: no meetings with South Korea until THAAD was halted. No wiggle room whatsoever. China’s economic punishment was not about to let up.

The Wallet as a Winning Strategy

Upon its emergence as an economic superpower, China has created and refined a new form of statecraft. Using its hefty state wallet to both punish and reward, China is able to politically maneuver countries with economic manipulation. Applying carrots to those who comply with China’s political demands, and sticks to those who don’t, China has increasingly relied on its financial ability to bend both countries and now companies to its shifting political will. Those who cross China politically—as South Korea did in its deployment of THAAD—will soon experience a barrage of economic losses, bolstered by government blocks and regulations, Chinese state-owned media attacks and boycotting Chinese consumers. Yet as we will see in Chapters 1 and 2, China is also generous to those who stay on Beijing’s good side. Nations adhering to China’s political demands and underlying motivations, as well as politically well-connected companies specifically, are lavishly compensated. Doling out long-term low interest loans and infrastructural aid, China keeps its friends close and rewards erstwhile enemies who decide to gravitate toward the eastern superpower.

Economic statecraft is a concept familiar to many. But China’s sophisticated use of carrots and sticks to influence political outcomes is unprecedented on the world stage. Historically, Western countries have used a variety of tools—including economic sanctions and blockades—to punish conventional enemies. Similarly, generous economic rewards—as were witnessed under the U.S. Marshall Plan or Japan’s low interest loans starting in the 1960s to Southeast Asian countries—have attracted nations reliant on Western aid. But China’s coordination of carrots and sticks diverges from the West’s in two critical ways.

In addition to the force of China’s wallet—combining regulatory power, media and the compliance of a billion consumers, China does not discriminate between ‘allies’ and ‘enemies.’ It may economically cripple nations one day with an economic hammer, lathering them with profits and flattery the next. Depending on who obstructs and who enables China’s political objectives, anyone could get a carrot and anyone a stick.

For those accustomed to the Western convention of alliances and enmity, China’s indiscriminate use of economic statecraft may seem reckless, or merely baffling. Wouldn’t China be throwing a wedge in diplomatic efforts every time it punished an ally, dismantling any foundation of trust? How would it go about enticing enemies to submit to its political will, even with decadent rewards?

Such questions require a deeper understanding of China’s relationships abroad.

China’s Hot, Medium and Cold Partners

To inform an appreciation of China’s global worldview, I have developed the following framework that allows the mapping of different countries as they relate to China—both in terms of their dealings with China at the state level and with regard to how they are perceived by Chinese consumers. This framework is relevant from about 2007 onward, the period in which China became viewed by other nations as a rival with the U.S. for economic superpower status. Within the framework’s classification, there are three primary categories in which countries have positioned themselves—these I have defined Hot Partner, Warm Partner and Cold Partner. None of these are distinctly broken down as ally or enemy. It is essential to note that China does not have true allies nor does it really have true enemies by definitions of American realist and neorealist schools of thought. In lieu of these more rigid camps, China seeks to maximize gains in each relationship as long as countries avoid threatening its notion of sovereignty and the one-China principle.

There exists much grey area when dealing with China, but countries that orbit near Category 1 Hot Partner have benefitted vastly from such close ties, reaping gains often unnoticed by outside observers. New Zealand, for example, falls comfortably into this category, occupying a special niche of China’s affection as one of the first western nations to open up diplomatic relations and recognize the legitimacy of China’s Community Party. Also, the first western nation to open a free trade zone with China in April 2008, New Zealand profits from China’s economic loyalty, largely in exchange for its own perceived loyalty to the government. However, Hot Partners aside from New Zealand tend to be poorer nations like Pakistan, Cambodia, Laos, or Ethiopia that Chinese consumers do not trust for quality control, showing little excitement for their brands and do not particularly want to visit as tourists aside from a few exceptions like Cambodia. In these cases, most economic ties are forged by the government and driven by state-owned enterprises rather than by everyday consumers. Countries in this category also run the risk of losing independence because so much of their economies are based on political ties to China.

The second category, Warm Partner is where most of the political volatility takes place. Unsurprisingly, countries falling into this category are most likely to experience China’s carrot and stick approach. Given the higher volatility of markets in this category, Warm Partner countries have the greatest appeal for hedge funds as it is much more possible to bet against prevailing wisdom that Warn Partner countries will remain close to or fall against China. With this in mind, companies operating in these nations must constantly be on the lookout for political changes, supplementing efforts with special, long-term attempts to show they are friends of China. If they fail to establish a sufficient reputation of loyalty, they run the risk of being singled out for protest if their home countries do something to cross China’s interests, as we shall see in Chapter 2 with the effects on South Korean brands Lotte, KIA and Orion. Countries that fall into this category do benefit from China’s economic rise, but also have been able to stake out relatively independent political positions unlike Hot Partner countries.

The third category Cold Partner countries still have trade with China, but relations tend not to be warm. Wary of a rising China, many countries in this category share close ties with America and/or Taiwan. Needless to say, Cold Partner countries like Mexico and India are not looked upon favorably either by the Chinese state or China’s numerous consumers, and as a result are losing out on Chinese FDI, tourist dollars and the opportunity to sell into China. Some Cold Partner countries like Japan do have much trade with China and have products loved by Chinese but the amount of trade would be higher if there were better political relations.

In assessing one’s approach to China, one must take stock of countries shifting between categories. Particularly in recent years, countries have altered their dealings with China, requiring policy-makers and businesses alike to evaluate the implications of these shifts. For example, the United Kingdom—under Prime Minister Theresa May and her predecessor David Cameron—has moved up to the second category of Warm Partner now benefiting from London’s position as a clearinghouse for RMB transactions. The same can be said of Canada, which moved from Cold Partner under Prime Minister Stephen Harper (2006–2015), to Warm Partner under Prime Minister Justin Trudeau (2015–). Wisely using his father Pierre Trudeau’s strong relationship with China—a tie enjoyed during Pierre’s tenure as Prime Minister from 1980–1984—the younger Prime Minister Trudeau has been successful in jumpstarting economic ties.

As we have seen already, South Korea has perhaps undergone the most dramatic shifts between Cold Partner and Hot Partner with regard to both China and America. Other nations like Japan, Singapore and the Philippines also swing from Warm to Cold and back again depending on political winds.

But perhaps the most important question we need to be answering is that of China’s ambition itself. Does China want to become the world’s principal superpower, rising to replace the American-led system that has dominated world dynamics since the end of World War II? Historically, war breaks loose when an up-and-coming power competes with the dominant hegemon for influence. This has happened from time immemorial. Demonstrated by Graham Allison with the Thucydides Trap, war is inevitable unless the two competing powers agree and act upon specific moves to alleviate tension. Nations engage in a perpetual state of mutual distrust, arming themselves often to the point at which war is inevitable. (Simply glance back at the buildup of arms that resulted in the horrors of the 20th century.) Yet despite the fear mongering by pundits, it is clear that China does not want to replace the world system, a reality we must internalize in order to avoid the deadly Thucydides Trap.

Not only does China show no interest in global hegemony and an overturn of the current system, but it also feels hesitant with regard to becoming a global superpower. Yes, China desires a more qualitative say and higher degree of clout in current institutions like the World Bank and the International Monetary Fund (IMF). But China is trying to influence and lead these organizations rather than trying to upend or stop their power. At the same time, given traditional Western powers’ disproportionate influential grip on these intergovernmental organizations, China seeks the creation of new, Chinese-led institutions that will act more favorably toward countries typically regarded second class given their exclusion from an Anglo, European colonial power structure. China has thus established the One Belt One Road initiative as well as the Asian Infrastructure Investment Bank (AIIB), which we will analyze more closely in Chapters 1–3. It is important to note, however, that these new initiatives and institutions are not targeted at the displacement of the World Bank, IMF or even the Asian Development Bank, but are rather intended to supplement and cooperate with them.

In terms of China’s political ties, it is also important to consider that China is not necessarily seeking allies. This notion is critical to understand given the prevailing naïveté of American foreign policy analysts whose imposition of assumptions—based on the traditional western alliance system—leads them to conclude that China cannot project power because it does not have any allies. This is a poor interpretation of the situation. Rather, China attempts to be friendly with its neighbors, concurrently acknowledging that it can never share a close alliance akin to that shared by the U.S. with Canada or by France with the United Kingdom. It instead tries to place countries in Category 1 Hot Partner or Category 2 Warm Partner.

Why can’t China engage in alliances in the same way younger western countries do? One primary reason involves a linguistic and cultural divide of historically monumental dimensions between China and its neighbors—let alone the divide between China and a Western civilization with whom it came into contact after millennia of its own evolution. Apart from this gap, modern China is still operating atop thousands of years of relationships—relationships mediated for most of history by a vastly different geopolitical landscape. Most countries, tribes and kingdoms, from modern day Vietnam to Korea, were essentially vassal states functioning within distinct government systems.

Take China and Vietnam’s relationship, for example. It is difficult—if not virtually impossible—for the two modern nations to ignore millennia of tension and become ‘true allies’ despite their physical proximity and amount of economic trade. Many street names in Vietnam’s biggest cities memorialize martyrs who fought against Chinese encroachment during imperial times for example. Many Vietnamese today remain wary of Chinese intentions and do not want to lose political independence. Yet American policy-makers readily and naively group the two together as Communist states with a shared Confucian heritage, a classification oblivious to the ideology’s weak link in the face of history.

China does not seek firm, conventional alliances with other nations. A civilization all its own, it can never be true friends, so it instead seeks to be friendly, using economic punishments and military threats when necessary to maintain its position.

China’s Hot, Warm and Cold categories thus form a critical framework for understanding both China’s political and economic dealings abroad. Without strict camps of allies and enemies, nations and businesses seeking to profit from the Chinese market must keep abreast of Beijing’s political aims. China’s underlying motivations, as well as its mid- and long-term initiatives, will be key informants as to where one must stand in order to profit from China’s powerful growth engine.