Since the President of China, Xi Jinping, first proposed the concept of a ‘dual circulation’ economic model in May of this year, analysts concerned with the Chinese economy have struggled to understand what the Chinese leadership really meant.
For decades, China’s opening up policy propelled its growth. Its export-oriented model fuelled unprecedented and remarkable economic expansion. However, rising geopolitical tensions in the global power arena are prompting a shift in strategy. The new jargon is ‘dual circulation’. It aims to boost the economy’s internal circulations, making domestic production the main source of growth with external injections from foreign investments and exporting trade.
Does this indicate a fundamental shift in China’s growth model and economic strategy? Does this mean that China will initiate a more inward-looking strategy and shut its doors to the outside world?
To answer these questions, we must briefly go through the history of the market reform initiated by China in the late 1970s. When this market reform began, China’s manufacturing sector was dilapidated, and foreign exchange was basically non-existent. To accumulate more foreign capital, China introduced favourable policies, including tax exemptions and land subsidies, to lure foreign investment. Hundreds of thousands of foreign businesses were attracted by China’s huge market size and great potential, setting up factories along the coastal lines. Meanwhile, as the pace of globalization accelerated, Western companies increasingly shifted their production abroad to save costs, bringing millions of jobs to the ‘Central Kingdom’. With its young and relatively cheap labour force, China successfully capitalized on its population and globalization dividends, lifting more than one billion people out of extreme poverty.
The international circulation driven by the market reforms achieved remarkable success. Immediately after the market reform started 40 years ago, China’s exports and imports were only worth USD 22.5 billion and USD 21.7 billion, respectively. In 2019, those numbers ballooned to USD 2.5 trillion and 2.03 trillion respectively. Since 2013, China overtook the United States as the top trader in the world and became the largest trading partner of more than 120 countries. Over these four decades, China’s gross domestic product (GDP) ranking in the world has increased from number 17 to number 2 in US-dollar terms and the country ranked first in purchasing power parity in 2014.
However, when an economy grows beyond a certain point, an export promotion strategy may be counterproductive. As China is no longer a miniscule economy, its massive production capability in the global trading system is highly significant. For example, there is a consensus among economists and bankers that when Chinese officials release data on the latest housing prices index, Australian dollar fluctuates accordingly. As China accounts for more than 80% of all Australian iron ore exports, a minor demand change in Chinese real estate market can have a huge impact on the Australian economy. In fact, since 2000, the prices of almost all products imported by China (e.g. iron ore/energy) have been on the rise due to the country’s unquenchable demand, while the selling prices of its exports (e.g. electronics/textiles) have been on the decline due to the rapid expansion of supply from China.
Worse still, China’s astronomical export numbers have triggered boycotts owing to strong trade protectionism from exporting countries. Trade conflicts with the United states have been in the headlines for four years, and discomfort from the EU brought the EU–China investment agreement to a standstill. The coronavirus crisis further clouds China’s lacklustre export sector now that the economies of its many trading partners have shrunk drastically.
However, China’s growth no longer relies on exports alone and the dual circulation actually started much earlier than President Xi’s announcement in 2020, clearly indicated by the exports-to-GDP ratio reaching its plateau at 65% in 2006. From 2008 to 2018, the net exports-to-GDP ratio dropped from 10% to 1%, leaving consumption and investment the major engines for the economic growth.
Even so, pressure from the Trump administration’s ‘decoupling’ rhetoric and brinkmanship left China no choice but to ramp up its efforts to shift the focus to domestic demand, encourage domestic innovation and make self-sustaining domestic technologies. The so-called ‘new cold war’ might explain why President Xi began to accentuate the importance of dual circulation: no matter what the perceptions of the rest of the world might be of China, the country can survive on its domestic market and developed manufacturing capability with its large population of 1.4 billion. In light of these recent trends, the new jargon of dual circulation may not produce a radical change in China’s growth philosophy.