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BEIJING: In May, China’s central leadership proclaimed that it would “fully develop the advantages of [the country’s] super-large market and the potential of domestic demand to establish a new development pattern with dual national and international circulations that complement each other. “
The “dual circulation” has been the subject of intense debate inside and outside China since then.
Does the announcement indicate a fundamental shift in China’s growth paradigm or development strategy? Why was this new concept introduced and what policy changes will it entail?
A NEW PHASE AFTER ‘REFORM AND OPENING’
To answer these questions, one should briefly review China’s “reform and opening-up” process since it began in the late 1970s.
Towards the end of that decade, the key obstacle preventing China from taking off economically was a shortage of foreign exchange reserves.
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Policymakers faced what appeared to be a Catch-22: without foreign reserves, China could not revive its exports, and without decent export growth, it could not earn and accumulate the minimum necessary amount of reserves.
At the event, China was lucky.
The rise of the original equipment manufacturers (manufacturing inputs) sector in the 1970s gave China a window of opportunity to overcome the deadlock.
Original equipment manufacturing (OEM) began to flourish in the southeastern coastal regions of China in the late 1970s and early 1980s.
Despite little or no foreign exchange reserves, Chinese OEMs were able to import and process parts and components that were being outsourced by foreign companies.
These final products, with the added value contributed by Chinese companies, were then sold on international markets.
Tesla’s China-made Model 3 vehicles are seen during a delivery event at its factory in Shanghai, China, on January 7, 2020 (Photo: REUTERS / Aly Song)
The processing trade allowed China to take advantage of its comparative advantage in abundant and low-cost skilled labor.
Gradually, a feedback loop was established, from importing intermediate products to processing and export.
With each round, Chinese companies were able to accumulate more reserves. And this increase in foreign exchange allowed in turn the importation of more intermediate products for processing and export.
Through this virtuous import-export cycle, China built up foreign exchange reserves at an accelerated rate.
Large capital inflows, the result of China’s preferential policy on foreign direct investment, further strengthened this trend.
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THE NEXT STAGE AFTER EMBRACING INTERNATIONAL TRADE
In 1988, Chinese researcher Wang Jian coined the term “large international circulation” to describe China’s export-driven development strategy.
The strategy turned out to be an astonishing success.
In 1981, Chinese exports and imports totaled only $ 22.5 billion and $ 21.7 billion, respectively. In 2013, China’s total trade reached almost US $ 4.2 trillion, making it the world’s trade leader.
In those three decades, China’s GDP rose from 17th place in the world, just behind the Netherlands, to second, surpassing Japan in 2010. But export promotion strategies can become self-negative when an economy grows beyond a certain point. .
Reported export controls on Chinese chipmaker SMIC are the latest salvo in the battle between Washington and Beijing over the technology. (Photo: AFP / NICOLAS ASFOURI)
After 40 years of expansion under the large international circulation model, China is no longer a small economy and the global impact of its export drive is no longer insignificant.
In fact, since the turn of the century, the price of the products that China buys has tended to rise, while everything it sells has fallen in price.
Worse still, China’s relentless export push has triggered (justifiably or not) severe protectionist responses from importing countries.
China’s persistent trade and capital account surpluses have resulted in a persistent build-up of foreign exchange reserves, which reached $ 3 trillion in 2014, much more than is needed to ensure liquidity.
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Equally worrisome, despite the fact that China’s net foreign assets amount to more than $ 2 trillion, it has run investment income deficits for more than a decade.
RESOLVE CONTRADICTIONS
This suggests that there is something very wrong with China’s intertemporal and cross-border resource allocation.
For its part, the Chinese government has long known that the success of the grand international circulation strategy has created new problems.
In China’s 11th Five-Year Plan, published in early 2006, the authorities stated that: “China’s growth must be based on domestic demand, especially consumer demand.”
An employee works on a production line that makes steel structures at a factory in Huzhou, Zhejiang province, China, on May 17, 2020 (Photo: China Daily via REUTERS).
The engines of economic growth should shift from growth in investment and exports to balanced growth in consumption and investment, as well as balanced growth in domestic and external demand. “
But China’s economic shift had already started at this point, as evidenced by the fact that its trade-GDP and export-GDP ratios peaked in 2006 at 65% and 36%, respectively.
Between 2008 and 2018, net exports as a percentage of Chinese GDP fell from 10% to 1%. And in almost every year since 2009, the contribution of net exports to China’s GDP growth has been negative.
In light of these trends, it is clear that the introduction of a new concept, dual circulation, does not imply any fundamental change in China’s growth paradigm.
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Whatever happens, China will never turn its back on the rest of the world.
Still, the Trump administration’s policy of “untying” and sanctions has left China with no choice but to redouble its linkage of economic growth with domestic demand and support for domestic innovation, to ensure a solid position in supply chains. global value.
This imperative may explain why Chinese leaders have begun to emphasize dual circulation.
With its huge domestic market of 1.4 billion people and well-developed manufacturing capacity, China will survive under any label.
Yu Yongding is a former president of the China Society of World Economy and director of the Institute of World Economics and Politics of the Chinese Academy of Social Sciences, he was a member of the Monetary Policy Committee of the People’s Bank of China from 2004 to 2006.
