The first details about China’s new “dual circulation” economic strategy are emerging.
Beijing will deny it, but its new plan is another nail in the coffin of multilateralism, and yet more evidence of the desire of the great powers to put the needs of their own market above everyone and everything else.
“It’s protectionism, plain and simple,” says Alicia Garcia-Herrero, chief economist for Asia Pacific at Natixis.
The new model will be unveiled next month at a meeting of the Chinese Communist Party’s central committee.
All the signs suggest China will set out medium-term plans to be more internally reliant while remaining an export powerhouse. In short, it’s a brash and bold attempt by Asia’s largest economy to get the best of both worlds.
Some analysts scoff at the new dual-circulation model. They say Beijing is tying itself in knots to formulate a strategy that it can claim to have invented itself, rather than plucked from a foreign playbook or textbook.
Two tenets
Yet it is it underpinned by two fairly simple and fundamental tenets.
First, it wants to radically reduce its dependence on imports – particularly in areas such as advanced manufacturing. That’s bad news for Japan, South Korea and Germany – indeed any country that exports high-end, high-value intermediate goods to China.
Second, it wants to become self-sufficient in areas where it is deficient – specifically in areas such as artificial intelligence and advanced semiconductors.
When the US commerce department placed Huawei and leading China’s AI firms on a list that stops them buying advanced software and semiconductors from American firms, it caught the country’s leaders flat-footed.
The Centre for International Governance Innovation, a Canada-based think tank, said
in a March 2020 report that Beijing still “has a long way to go to reduce the huge technology gap that separates it from the United States”.
Its dual-circulation policy is designed to bridge that gap – though this will not happen overnight, or even in a handful of years.
Some liken it to the rebalancing strategy China adopted after the global financial crisis (GFC), which staved off recession by boosting domestic demand and consumption.
But those comparisons are wide of the mark, and for two reasons.
First, China’s post-2008 rebalancing worked by sucking in imports to meet the needs of a bigger, richer consumer base. This time around, it wants to reverse the flow, by making the kind of advanced goods its consumers and producers covet, and which will transform the country into – it hopes – a wealthy and advanced economy.
Second, it reflects Beijing’s acceptance that it is at (commercial) war with the US.
This is a US-created shock, and China is reacting by protecting itself
Alicia Garcia-Herrero, Natixis
“The GFC was an external shock. This is a US-created shock, and China is reacting by protecting itself,” says Natixis’ Garcia-Herrero.
She describes the new strategy as “not a capricious move by the Chinese leadership but [as] a hedging response to the changing nature of Beijing’s relations with the US as the leading global power”.
Over a few short years, relations between the two great powers have devolved from deep engagement to decoupling.
China’s grand new plan is being introduced at the worst possible time. In its latest World Economic Outlook, published in June, the IMF tipped the US economy to shrink by 8% year-on-year in 2020, with the UK and the euro area both shrinking by 10.2%.
Yet China has bucked the trend. Its economy grew 3.2% year-on-year in the second quarter. Export growth accelerated in August, rising 9.5% year-on-year, to $235 billion, even as import growth fell 2.1%. Exports to the US jumped 20% in August, despite tariff hikes imposed by president Donald Trump.
“China’s exports are increasing even as the world collapses,” says Garcia-Herrero. “China is not in a hole, but it is still introducing a new economic plan that hurts the world and benefits itself as much as possible.”
Beijing doesn’t want to shut itself off from the world – it still needs basic inputs such as soybeans and iron ore. But its aim is clear – to ensure that it controls who it buys from, how and in what quantities.
Perfect symmetry
Can China pull it off? The dual-circulation model is “much easier to talk about than to pull off”, notes Michael Pettis, professor of finance at Peking University’s Guanghua School of Management.
It requires a perfect symmetry of external circulation (more exports) and internal circulation (more production, distribution and consumption of home-made goods). But to do so, China needs to kick-start household consumption and find a way to massively boost incomes, neither of which will be easy.
The consumption share of GDP rose by just 2 percentage points between 2007-2019. It is set to decline this year as a direct result of Beijing’s production-fuelled response to the pandemic.
Neither is it clear that leading powers, be they exporters such as Germany or Japan, or a bellicose US, be it under the aegis of a Democratic or Republican White House, will let Beijing get away with it.
“This isn’t going to be popular, particularly at a time when the world is gasping for demand” for its products, says Pettis. “It will only lead to more trade conflicts.”
