June 25, 2024 | Hinrich Foundation

China’s quest for asymmetric dominance in data centers

Control over data grants both commercial and strategic advantages. China is positioning itself to capitalize on this dynamic, investing in the physical infrastructures of a digital world and shaping regulations to encourage data to flow toward China. Its strategy invites conflict with the West.
June 25, 2024 | Hinrich Foundation

China’s quest for asymmetric dominance in data centers

Control over data grants both commercial and strategic advantages. China is positioning itself to capitalize on this dynamic, investing in the physical infrastructures of a digital world and shaping regulations to encourage data to flow toward China. Its strategy invites conflict with the West.

Excerpt

In a world where data is the new oil, data centers are the new refineries. As China takes advantage of this growing sector and investment theme, Chinese companies, supported by the Chinese government, have become major players in building the global data center layout, including those being invested in by the United States and other Western funds. China’s digital strategy generates opportunities for international investors as well as rapidly growing physical support for downstream digital development, but it also generates geopolitical risks that may undermine these economic opportunities.

The Chinese government’s approach necessitates scrutiny. If any one country disproportionately controls global data, it will claim outsize global power. Therefore, if any one country disproportionately controls the global layout of data center infrastructures, it will claim outsize global power. This reality will not be overlooked in the US and among its allies as they seek to respond to Beijing’s global ambitions to limit its own data exports while incentivizing partnerships that bring data within China’s borders. That in turn is likely to translate to restrictions on companies looking to do business with Chinese data center constructors, store their data in Chinese data centers, or even localize their own data in China.

This geopolitical risk is compounded by China’s framing of data challenges as national security challenges. Because of that framing, any restrictions on China’s digital activity or partnerships on the part of the US are likely to be treated as assaults on China’s security. This will prompt an escalation of tensions, where commercial actors are likely to be caught in between. So are third-party economies, including those in Southeast Asia, where the US and China compete for influence. As Beijing constructs a complex regulatory system for data and the infrastructures that support it, understanding this system is necessary for those investing in and around the Chinese data ecosystem, write Emily de la Bruyère and Nathan Picarsic of Horizon Advisory in this paper.

Emily de La Bruyère is a senior fellow at the Foundation for Defense of Democracies (FDD), and co-founder of Horizon Advisory, a strategic consultancy focused on the implications of China’s competitive approach to geopolitics. Nate Picarsic is a co-founder of Horizon Advisory, a leading geopolitical and supply chain intelligence provider.

Issues:

China Cyber