Chinese Models

Heading for home

Beijing touts a new strategy for the economy: relying less on others


Xi Jinping: ‘dual circulation’ plan

Over the past 40 years of economic reforms, Chinese planners have sometimes summed up the country’s development model with four characters: liangtou zaiwai (两头在外).

Translating literally as “two heads, located abroad”, the meaning conveyed how the manufacturing process started and finished overseas – with the import of components and other raw materials, and the export of finished goods.

That’s how ‘the world’s factory’ came into being, despite the lack of a local supply chain and very limited capital and knowhow.

Instead, generations of young workers served as foot soldiers for the globalisation process as factories leveraged an army of cheap but diligent labour to seize a huge slice of international trade.

Over the past few months Chinese leaders have been flaunting a fundamentally different strategy. How it pans out could decide whether China replaces the United States as the world’s biggest economy in the years to come.

What is the new approach?

The term “dual circulation” has cropped up in policy documents and state propaganda efforts with increasing frequency as the central government tries to reboot the economy after the Covid-19 outbreak.

The first major mention came on May 14, when Chinese leader Xi Jinping chaired a meeting of the seven-member Standing Committee of the Politburo to discuss ways to boost the industrial supply chain. Participants stressed the importance of exploiting the “advantages of China’s super-large market” to create a “new development pattern”, in which domestic and foreign markets boosted one another in a “dual circulation”, Xinhua reported.

In fact, the new policy is skewed heavily towards “internal circulation” ­– i.e. driving activity within China’s vast domestic economy – even if policymakers have been at pains to avoid the impression that they are less concerned about “external circulation” – i.e. those overseas export markets still badly hampered by the pandemic.

In another meeting of the Politburo at the end of last month, there was further mention of a growth model based on a “dual circulation” approach, but with the domestic market as the mainstay.

Xinhua hit home with the same message shortly afterwards, reporting that “dual circulation” growth – centred on the Chinese market’s self-sufficiency – would be part of the 14th Five-Year Plan.

The new blueprint will run from next year to 2025, although Xinhua noted that the plan will come with a 15-year “long-term vision” that sets the course for 2035, when China’s “socialist modernisation” is expected to be “basically achieved”.

Why is China making a shift now?

The proposals for the 14th Five-Year Plan and the targets for 2035 will be assessed during the Communist Party’s Fifth Plenum in October. “Since many problems we face are long- and medium-term, resolving them is like fighting a protracted war,” Xinhua explained.

The state news agency highlighted difficult challenges like disruptions from the pandemic and the global economic slowdown. But most observers believe the military metaphor was a message that China is bracing itself for a protracted tech and trade tussle with the United States.

In an editorial published last week, the Global Times made it more plain that the policy shift is a response to “bullying and hegemony”, and an effort to deflect Washington’s trade protectionism and technology blockade. And in another commentary, the newspaper even reminded its readers that it is 82 years since Mao Zedong wrote ‘On Protracted War’, his thoughts on how the Chinese would prevail against Japanese invasion.

In another front-page op-ed published last week, the Economic Daily took up the same theme, talking about how “protectionism” and “unilateralism” were features of the new world order. In these circumstances, China needed to adopt a new strategy to avoid its economy being hit “on both heads”, it said.

So the plan is focused on boosting domestic consumption?

While a full decoupling of the world’s two largest economies is unlikely, the recalibration is consolidating a more inward shift prompted by the global financial crisis in 2008, which exposed the vulnerability of China’s export-dependent model, Reuters says.

Xi Jinping said as much in further comments on the new direction, noting that the Chinese economy has already been changing to one “where internal circulation plays the main role”.

“In the future, the distinctive feature of the domestic market guiding the national economy will become even more obvious,” he said.

In 2009 Beijing came up with a series of initiatives to boost domestic consumption, which formed a key plank of the 12th Five-Year Plan, running from 2011 to 2015. But as the Hong Kong Economic Times comments, this is the first time that planners have prioritised the domestic economy over the international market. Previously local governments were still encouraged to import foreign goods as long as they could stoke economic activity at home. Now the newspaper thinks that “internal circulation” is likely to require that more of the production chain is based in China – and ideally, all of it (although the experience of the semiconductor sector highlights how this is easier said than done).

A new direction – veering more towards autarky – has been set, at least. “This could create more jobs at home. And the ‘nutrients’ generated from extra incomes will feed through to domestic industries again, forming a truly internal economic cycle,” the Hong Kong newspaper claims.

Is this a new form of economic isolation?

A commentary in the People’s Daily argued against this view, insisting emphatically that prioritising the domestic market as the mainstay for the economy is “absolutely not an operation behind closed doors”.

Other state media outlets have suggested (a little paradoxically) that the essence of the new policy is actually more ‘opening up’ and fuller interaction with foreign markets – or at least with the markets willing to do business with China.

Government agencies have tried to send the same message. The People’s Bank of China said earlier this month it would be promoting the internationalisation of the renminbi more “proactively and soundly”, while the China Securities Regulatory Commission is promising to do more to open up the capital markets to foreign investors.

Although a complete separation from the US market is difficult to envisage, some local economists believe a near-term ‘partial’ decoupling is almost inevitable. In order to offset the impact the Chinese will have to turn away from the US and its main allies in favour of closer partnerships with European and Asian economies (particularly those in ASEAN), the Global Times believes. Commercial cooperation under the Belt and Road Initiative will also be “vigorously enforced”, the newspaper added.

How will the policy work?

What the new approach means for international trade is unclear. Even minor changes in trading patterns could have huge effects, because of China’s outsized role in international commerce.

Back at home, senior officials haven’t said much about what the policy means in practice either. Besides a new round of spending on “new infrastructure” (see WiC488) intended to make the economy more competitive and more self-reliant, Beijing is also expected to confirm new policies designed to raise income levels for workers in a bid to enhance domestic spending power.

Other commentators wonder whether this kind of overhaul is going to work. Michael Pettis, a long-time analyst of Chinese economic policy, is one of those unconvinced, telling the Financial Times this week that the government will have to divert much more money to households for the policy to succeed. But this, in turn, is going to make Chinese exports less competitive, he warns, unleashing a new set of economic, social and political strains for the government.

The Chinese leadership has been talking about a larger role for domestic consumption in the economy since Wen Jiabao, the then premier, first made it a focal point in 2007, Pettis says. But consumption as a share of GDP remains “extraordinarily low”, and only two percentage points higher last year than it was in 2007, he says.

Changing that would be truly transformative. “For Chinese consumption to be broadly in line with that of other developing countries, ordinary households must recover at least 10-15 percentage points of GDP at the expense of businesses, the wealthy, or the government. This means rebalancing involves a massive shift of wealth — and with it, political power — to ordinary people. This will not be easy,” Pettis predicts.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.