China's Dual Circulation Strategy

Dual Circulation Strategy (DCS) as China’s latest economic strategy was announced by President Xi Jinping on 14 May’20 in the meeting of the Standing Committee of the Political Bureau of the CPC Central Committee. Since then, this strategy has found mention in almost all the key meetings / speeches of President Xi (including at the World Economic Forum, 24 Aug’20, Fifth Plenum to approve the 14^th Five Year Plan held during 26-29 Oct’20, key issues outlined in Central Economic Work Conference (CEWC) on 18 Dec’20). The Chinese media has been overusing the phrase to stress upon a new model of development in which internal and international circulation complement each other.

DCS has been elaborated as China’s reliance mainly on “internal circulation” - the domestic cycle of production, distribution, and consumption - for its development, supported by innovation and upgrades in the economy. President Xi has also said that “internal circulation” will be supported by “external circulation” and that China would “gradually form a new development model in which domestic circulation plays a dominant role”. No further details have been announced on the strategy so far, not even during the 5^th Plenum or explicitly in CEWC.

The difference between the old re-balancing strategy (from export driven to consumption led growth) and the new DCS (internal & international circulation) is that the former deals with growth being driven by domestic consumption in place of exports whereas the latter deals with producing in-house / self reliance and catering to both domestic demand & export. Further, DCS is also the new coined term for China’s old strategy for its long-held supply side structural reforms. China’s industrial overcapacity in sectors like steel (not aligning with consumers’ demand for high quality products), rising labour costs and higher debt burden of the corporate sector are the supply side distortions that China faces. The International circulation aspect of DCS is manifested through exporting overcapacity internationally and increased China’s market access in RCEP and OBOR countries. Further, post COVID19, China’s new ‘Health Silk Road’ dimension under OBOR is also expected to foster international aspect of DCS.

China has realised the need to circumvent US sanctions and deal with possible decoupling by relying on internal circulation or producing / manufacturing in-house as the mainstay of its growth. China’s 85% of domestic demand for Integrated Circuits (ICs), worth USD300billion, is met by the US. Securing domestic supply chains is, therefore, crucial under DCS. China has been progressing on its technology targets as self-reliance in technology is an important aspect of DCS, besides food and energy sectors. President Xi’s article dated 31 Oct’20 (published on 01 Nov’20) has described the creation of fully domestic supply chains as a matter of national security. The article emphasised that China needs “self-developed, controllable” supply chains, with at least one alternative source for vital products.

Transition towards DCS - China’s domestic economy faces challenges in the form of rising labour costs / unemployment / ageing society / bacterial & virus outbreaks. Under the DCS, President Xi aims to boost tech innovation and push Chinese firms up the global value chain, key to globalising China’s home-grown companies, boosting household incomes, and in turn, stimulating domestic demand. Success of urbanisation programme in integrating rural unemployed to the employed pool and stimulate demand will take time to push internal demand. Though China has a 1.4 billion consumer base (with 400 million middle income group), it’s ageing society is a time known limitation for driving domestic consumption.  Further, China’s debt of more than 318% of GDP in Q1’20 is expected to move up to 335% of GDP in the following months. To what extent debt fuelled growth (debt supporting domestic production) can continue and to what extent China can bail out its SoEs like Tsinghua Unigroup defaulting on USD2.5billion bonds will reflect upon the implementation of DCS. For international circulation, OBOR countries supporting DCS is to be watched out for as their economies are hit hard by COVID19. Scrutiny of Chinese high-tech investments by US, EU and Japan limits China’s technology self reliance in immediate term. However, China’s stated focused efforts point towards scientific and technological self-reliance as highlighted in 5^th Plenum and CEWC in future. Cooperation with USA is to be factored in as the pressures from USA have been mounting in terms of targeting companies on national security grounds.

REFERENCES

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