The jury is out on whether “dual circulation” reflects a major change in Beijing’s economic policy, or how new the concept is at all.
But notably, the high-level political talk comes just months before authorities plan to release China’s economic blueprint for the next half decade — the 14th five-year plan.
Increased public discussion in the last few weeks has also helped crystallize some of the implications for global trade.
For example, economists at ICBC International, the Hong Kong-based subsidiary of the giant state-owned Chinese bank, have put out a series of notes in the last few weeks on “dual circulation.” One of the reports discussed the implications of the Chinese policy for the next round of globalization.
The authors used two charts. The first showed an international economy focused on the U.S. as a global demand hub.
The second painted a world divided into three parts — Europe, North America and Asia — which would interact with each other on a regional scale. China and its “internal circulation” stood at the center of Asia.
Prior round of globalization: ‘The world is flat’
New round of globalization: ‘Multi-modal structure’
Source: ICBC International, CNBC translation of Chinese text
“The ‘dual circulation’ policy demonstrates China’s recognition that it won’t be able to rely on trade as much for the next two decades, as it did for the previous two,” Stephen Olson, research fellow at the nonprofit Hinrich Foundation, said in an email last week.
He also noted that: “The pursuit of deep economic integration with China is increasingly seen in the US as a strategic mistake, which worked out extremely well for China, but considerably less well for the US.”
Already, tit-for-tat tariffs in China’s trade dispute with the U.S. over the last two years has reduced the flow of goods between the two countries.
On an individual country basis, the U.S. is still China’s largest destination for exports. But last year, amid escalating trade tensions, North America ceded the spot for top trading partner to the European Union, according to China Customs data accessed through the Wind Information database.
This year, the 10 countries that make up the Association of Southeast Asian Nations (ASEAN) became China’s largest trading partner, the data showed.
“My country’s position in the world economy will continue to rise, our ties with the global economy will become closer, and the market opportunity we offer to other countries will broaden, and (we will) become a massive gravitational field for attracting international goods and key resources,” Chinese President Xi Jinping said in a speech last week, while hearing suggestions for China’s upcoming five-year plan. That’s according to a CNBC translation of the Chinese text carried by state media.
China’s many domestic challenges
At home, China has its own litany of problems to deal with. Some of them are new, such as torrential floods in the southern part of the country this year that followed the shock of the coronavirus outbreak. Other long-standing issues have only become more pronounced, such as high reliance on debt for growth and an environment that favors state-owned enterprises to privately run businesses. The private sector generates most of the jobs in the country.
From the perspective of Yan Se, chief economist at Founder Securities, greater policy emphasis on the Chinese market is partly a reminder to local governments about the work they must do to improve the domestic environment. He expects further policy support will come for foreign investment into China, and cross-border e-commerce. That’s according to a CNBC translation of his Chinese statement.
As the Chinese market has grown and the challenges of cross-border trade have increased, more foreign companies are adopting a “in China, for China” strategy. Beijing has welcomed the investment and made significant efforts to keep the businesses in the country despite geopolitical tensions.
In July, China recorded 12.2% growth in foreign direct investment from a year ago to $9.05 billion, according to the Ministry of Commerce. That marked a fourth-straight month of increase since the height of the coronavirus outbreak in early February.
In contrast, global foreign direct investment flows are expected to fall 30% amid the pandemic, according to a report in May from the Organization for Economic Cooperation and Development.
“Capital is king. If you offer more … certainty than other (countries) there will be people coming to invest,” Bruce Pang, head of macro and strategy research at China Renaissance, said in a phone interview, according to a CNBC translation of his Mandarin-language remarks.
To Pang, these trends in foreign investment and changes in Chinese exports were already happening, and have only accelerated since the coronavirus outbreak.
Authorities and companies are also trying to help Chinese businesses shift their focus to the domestic market.
“Turning China’s exports inward in reality is a good thing, so our economy can develop stably and grow,” Xu Hongcai, deputy director of the Economics Policy Commission at the China Association of Policy Science, said in a phone interview last week, according to a CNBC translation of his Mandarin-language remarks. “This is good for the rest of the world.”
Potentially painful transition
For all the talk of boosting domestic consumption, what Beijing envisions is not necessarily what will happen, particularly in the next several months.
Right now, “(domestic) demand is recovering, but it is difficult for much of the demand to recover to what it was prior to the epidemic,” Xu said. “The overall demand has declined because there are substitutes. … So people need to find other kinds of jobs, and so this period of transition is more painful.”
After gross domestic product contracted by 6.8% in the first quarter, the surprise 3.2% increase in the second quarter was supported by an increase in investment, particularly for real estate. Retail sales still declined 1.1% in July, as growth in online shopping was not enough to offset the overall drop.
“Consumption will not be the economic driver this year or next year for sure. It will be investment and exports,” Dan Wang, Shanghai-based chief economist at Hang Seng China, said in a phone interview last week. “To increase consumption or its contribution to growth, China will have to do some major reform in its income distribution, and a big difficulty in doing that is the state-owned enterprise reform.”
But longer term, the pressure is accelerating for China to make that shift toward relying more on its own market.
One of the reasons China is pursing “dual circulation” is that since the country is growing in global prominence, whatever it does will have a significant effect as other countries reassess how dependent they want to be on the Asian giant, Wang said.
“I think this phrase is mainly addressing the risk from the U.S.,” she said, “and China wants to make sure it still holds a central role in the global supply chain.”