China will likely become the world’s largest economy in a few years and it is preparing itself for major shifts in international trade.
In a world rocked by the coronavirus pandemic and tensions with the U.S., the Chinese government has come out with yet another batch of policy terms to bolster its own economy, this time under the vague umbrella of “dual circulation.” The phrase refers broadly to two circles of economic activity — internal and external — with greater emphasis than before on business at home.
The jury is out on whether “dual circulation” reflects a major change in Beijing’s economic policy, or how new the concept is at all.
But notably, the high-level political talk comes just months before authorities plan to release China’s economic blueprint for the next half decade — the 14th five-year plan.
For example, economists at ICBC International, the Hong Kong-based subsidiary of the giant state-owned Chinese bank, have put out a series of notes in the last few weeks on “dual circulation.” One of the reports discussed the implications of the Chinese policy for the next round of globalization.
The authors used two charts. The first showed an international economy focused on the U.S. as a global demand hub.
The second painted a world divided into three parts — Europe, North America and Asia — which would interact with each other on a regional scale. China and its “internal circulation” stood at the center of Asia.
“The ‘dual circulation’ policy demonstrates China’s recognition that it won’t be able to rely on trade as much for the next two decades, as it did for the previous two,” Stephen Olson, research fellow at the nonprofit Hinrich Foundation, said in an email last week.
He also noted that: “The pursuit of deep economic integration with China is increasingly seen in the US as a strategic mistake, which worked out extremely well for China, but considerably less well for the US.”
From the perspective of Yan Se, chief economist at Founder Securities, greater policy emphasis on the Chinese market is partly a reminder to local governments about the work they must do to improve the domestic environment. He expects further policy support will come for foreign investment into China, and cross-border e-commerce. That’s according to a CNBC translation of his Chinese statement.
As the Chinese market has grown and the challenges of cross-border trade have increased, more foreign companies are adopting a “in China, for China” strategy. Beijing has welcomed the investment and made significant efforts to keep the businesses in the country despite geopolitical tensions.
In July, China recorded 12.2% growth in foreign direct investment from a year ago to $9.05 billion, according to the Ministry of Commerce. That marked a fourth-straight month of increase since the height of the coronavirus outbreak in early February.
In contrast, global foreign direct investment flows are expected to fall 30% amid the pandemic, according to a report in May from the Organization for Economic Cooperation and Development.
For all the talk of boosting domestic consumption, what Beijing envisions is not necessarily what will happen, particularly in the next several months.
“Consumption will not be the economic driver this year or next year for sure. It will be investment and exports,” Dan Wang, Shanghai-based chief economist at Hang Seng China, said in a phone interview last week. “To increase consumption or its contribution to growth, China will have to do some major reform in its income distribution, and a big difficulty in doing that is the state-owned enterprise reform.”
But longer term, the pressure is accelerating for China to make that shift toward relying more on its own market.
Reference: CNBC
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