Article 1 October 5, 2021
What is behind China’s dual circulation strategy
In October 2020, the Communist Party of China (CPC) unveiled and confirmed the 14th Five-Year Plan and the Long-Range Objectives Through the Year 2035. It sets social and economic development goals for the next 5 to 15 years aiming to build a modern socialist power by 2035. Among the major steps listed in the document is a strategy that has already gained widespread attention – the “dual circulation model”, where the domestic, internal circulation (domestic consumer market) would play a main role in driving growth, though the external circulation (foreign trade) would also be boosted.
The text here below is from Natixis Asia Research Report “What is behind China’s dual circulation strategy”, which was originally published by China Leadership Monitor (September 13, 2021).
The dual circulation strategy might initially appear to be a buzzword, but it actually has very important implications both for China and the world. If we move beyond the obvious, namely, the boost in both domestic and external demand, the dual circulation strategy is really about self-reliance in response to a more hostile external environment.
In other words, China is turning closer to an economic model on the import side but not on the export side, as a way to ensure that China’s technological progress will be able to continue independently of US intentions. An important and positive consequence of China’s moving up the ladder through a technological upgrading is that it will be able to dominate export markets in more sectors (particularly high-end sectors).
This is very different from the old rebalancing strategy that Chinese policy-makers introduced in response beginning from to the global financial crisis. The push for a consumption-based model at that time represented a call for more, rather than fewer, imports, as is the case for the dual circulation strategy.
One could argue that the rebalancing strategy was in line with China’s external environment at that time, namely, engagement with the superpower, the US. The dual circulation strategy is the result of China’s new “Weltanshau,” namely a much more hostile world with the hegemon trying to contain China’s rise.
It is important to note that China’s push for self-sufficiency is not only a problem for the rest of the world, particularly the major exporters of high-end goods, but also for China itself. The reason is that China’s own quest for decoupling will require huge financial resources, with all the related inefficiencies. The size of the inefficiencies will depend on how far China is from the technological frontiers and what China can do to shorten that distance. Acquisitions of foreign companies in areas where China suffers from the most important bottlenecks can clearly help, as in the case of semiconductors, but that route seems increasingly difficult as the developed economies step up scrutiny of Chinese acquisitions.
As China continues to close its economy through the mantra of self-reliance, it will find it increasingly difficult to maintain a competitive edge. This could result in China eventually losing its international competitiveness. Within that context, China’s Belt and Road Strategy can be seen as an important complementary policy to the dual circulation policy. By building transport infrastructure in a hub-and-spoke mode, China is basically ensuring that economies linked through such an infrastructure will increasingly depend on China for imports. If the world ends up with two ecosystems, China will count as one, as it develops its technology to cover all its needs and as it develops its own standards, as conceived by China’s manufacturing 2035.
In sum, the dual circulation strategy is a crucial policy that clearly reflects China’s view of the world and its place in it. China is seeking to become a fully integrated market with no need for help from the rest of the world, though still benefiting from export markets. If the US pushes for decoupling and takes its allies along, China can always rely on its own allies along the Belt and Road. As regards global imbalances, the dual circulation strategy might result in another trade surplus for China as imports would be controlled so to reduce excessive dependence on the rest of the world, but exports will be further promoted as a way to monetize China’s efforts to move up the ladder.
In other words, the new dual circulation policy can basically be understood as an important substitution strategy that keeps foreign markets open for Chinese goods. Therefore, the dual circulation strategy should not be dismissed as a buzzword. Rather, its implementation will entail major consequences.
Alicia GARCIA HERRERO
Chief Economist Asia Pacific
Global Markets Research
Corporate & Investment Banking
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