“Dual Circulation”, which is set to become the new economic framework for China’s medium and long-term development, has become one of the latest buzzwords in both the Chinese and international media. In this new series, Fung Business Intelligence will take a closer look at the latest policies, directions and areas of focus of “Dual Circulation”, and will be covering various topics relevant to the business community.

In this first issue, we seek to give our readers’ a general overview of what “Dual Circulation” actually means and the rationale behind it. In the future issues, we will be taking a look at various opportunities available to domestic and foreign businesses under “dual circulation”. Specifically, we will be looking at the government initiatives and policies that have recently been put in place to help export manufacturers overcome institutional barriers to sell in the domestic market, as well as policies to further open up the domestic market to foreign players, including the Hainan Free Trade Port, Greater Bay Area, etc.

 

What is “Dual Circulation”?

“Dual circulation” is a new model of development, aiming at forming a development layout that “focuses on the domestic market as the foothold of economic growth, whilst letting the domestic and international markets boost each other”

1. The concept has been elaborated and emphasized by President Xi Jinping in multiple occasions since the Politburo Standing Committee meeting in May and has been elevated into China’s new mid- and long-term development strategy

2. As its name suggests, “dual circulation” includes two circulations: 1) domestic circulation; and 2) international circulation. Taking into consideration the external and geopolitical environment, priority efforts will be focused on stimulating domestic demand and domestic drivers of growth to improve economic resiliency and self-sufficiency as a first step. Efforts will also be taken on deepening reform on the supply side through creating a unified and open domestic market and better matching capabilities and resources to the needs of the domestic market.

The strategy is not a closed-door policy. Government initiatives will work hand in hand with market forces to achieve an optimal balance between self-sufficiency (domestic circulation) and global cooperation (international circulation) to drive long-term sustainable growth. Policies targeted towards encouraging openness and strengthening engagement with global markets, as well as enhancing domestic economic growth, will be promoted.

 

The Background

The purpose of ‘dual circulation’ is to help China better position itself in the long run to withstand global uncertainty and an increasingly hostile external environment, characterized by a global economic downturn, rising protectionism, heightened geopolitical tensions, and a shrinking international market. In particular, the sharpening of geopolitical competition has caused a general retreat from globalization in the West. China has effectively entered a new paradigm in which it will have to deal with a global economic environment that is progressively less conducive to free trade, capital, and technology flows. To better address and manage these changes, China will more fully utilize resources to empower its domestic economy by stimulating domestic demand, upgrading consumption, and further investing in technology and innovation efforts. Notwithstanding the above, China remains a strong supporter of globalization and will continue to deepen its cooperation with foreign markets while opening up its own.

 

When was it announced?

“Dual circulation” was first brought up by Chinese leaders at the Politburo Standing Committee meeting in May and has been further emphasized and elaborated by President Xi and the Central government in multiple subsequent high-level meetings.

 

Dual circulation’ reflects evolution of China’s Economic Development Mode

Since China opened its door to the world more than four decades ago, China has thrived as a manufacturing powerhouse. In the 1980s, external demand was the main driver of China’s economic growth.  The “processing trade development model” (“兩頭在外，大進大出”) kickstarted the global supply chains. Export-oriented manufacturers, imported raw materials, components, and other intermediate inputs from international markets, processed them locally, and then exported the final products back to western markets. This development model achieved great success. Up till the mid-2000s, exports accounted for a large proportion of China’s GDP.

The Chinese government started to shift its export-oriented economy to one that is more domestically geared after the global financial crisis. Rising labour costs and the weakening of external economic conditions also meant that sustainable growth can no longer be achieved by an export-led model of growth alone. The Chinese government and policymakers have been encouraging the transition to move China from an investment and export-oriented based economy to a more balanced one driven by consumption, investment, and exports. In 2015, President Xi and the Chinese government introduced the supply-side structural reform (SSSR) to address the longer-term economic issues that China was facing at the time. A key component of the SSSR was to reduce excess industrial capacity on the supply side.

Following the outbreak of COVID-19 in December 2019, there has been a further weakening of global demand as global supply chains have been severely disrupted. Meanwhile, rising geopolitical tensions and protectionism/decoupling sentiments have led to a more inward facing economy, especially in the west.

On the other hand, China’s social-economic shift and its rising middle class continues to be a huge driver of growth for the domestic market. According to a recent report issued by China’s Development Research Centre under the State Council, China’s per capita GDP is predicted to reach US$14,000 by 2024, and China’s market will be bigger than that of the United States by 2025, with at least 560 million middle-income consumers.

In light of these circumstances, President Xi and the Chinese government announced the “dual circulation” strategy which will focus on fully utilizing domestic resources to empower the domestic economy. Meanwhile, China will not close its doors and will continue with its opening-up efforts and cooperation with global markets.

 

Proposed areas of focus / Policy direction of “Dual Circulation”

The “dual circulation” strategy is widely seen as the most important policy direction in the coming years and will likely serve as the policy framework of the upcoming 14th Five Year Plan (2021-25).

At present, the “dual circulation” strategy is still short on concrete details. President Xi, government officials and Chinese experts have proposed directions and recommendations to help facilitate both domestic and international circulation. Proposed areas of focus on the domestic circulation side include:
Meanwhile, the Chinese government has issued a few important regulations which are relevant to “Dual Circulation” this year. The policies reflect China’s determination to create a unified and open domestic market, as well as to further open up its market to foreign players. A brief summary of the key messages of the regulations can be found in Exhibit 5.

It is hoped that, by building up a more resilient and robust domestic economy, whilst simultaneously integrating itself with global markets, China will be able to better develop and leverage its core competencies, move up the value ladder, better position itself strategically for long-term sustainable growth, and play a key role in orchestrating global supply chains.

China’s ever-expanding consumption market presents huge opportunities for both domestic and foreign enterprises. In the next few issues, we will be taking a closer look at the transformation of China’s exporting industry, the challenges and issues export-oriented businesses face, and what the government has been doing to support export manufacturers to sell into the domestic market.