Double circulation in China: an inventory

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EconoGraphics

October 24, 2022

Double circulation in China: an inventory

By
Hung Tran

In his opening speech at the 20th National Congress of the Communist Party of China (CPC), President Xi Jinping reaffirmed that “high-quality development is a top priority in building a modern socialist country… achieving common prosperity… (by) implementing the dual circulation policy”. .” Most notably, the concept of dual circulation has been added to the CCP’s constitution.

Faced with a difficult international environment and hostile efforts by the United States to restrict China’s access to high technology and its products, China has adopted a dual circulation strategy to make its economy more balanced and resilient. Dual circulation means reducing the role of foreign trade in driving China’s economy while improving the quality of trade. This includes diversifying trade away from reliance on the United States and Europe to reduce China’s vulnerability to political pressures from the West. At the same time, it also means improving supply chains within China and promoting the role of private consumption and services in the Chinese economy to reduce its dependence on investment in fixed assets, which showed diminishing returns.

The dual circulation strategy was formalized by consolidating various previous policy initiatives aimed at rebalancing the Chinese economy. This policy has been recommended by international financial institutions such as the International Monetary Fund and the World Bank. This article assesses the effects of Chinese efforts over the past decade.

Progress can be seen more visibly on the international side of dual circulation than on the domestic side. However, progress appears to have stalled in recent years, complicated by the Covid-19 pandemic and China’s rigid zero Covid policy. Both have caused significant economic disruption, depressing growth in 2022 in addition to the fallout from the debt crisis in the real estate sector. Developments in the coming years will determine whether the rebalancing of the Chinese economy can resume when the effects of the pandemic abate and, more importantly, whether such rebalancing can generate the “quality growth” that Xi Jinping is aiming for.

The international aspect of dual circulation

On the international side of dual circulation, the pandemic has darkened the picture in recent years after earlier impressive progress. The share of traded goods (exports plus imports) in GDP, having fallen significantly from a peak of 64% in 2006 to a low of 34% in 2020, has made China more open to trade than the United States (to 27.6 %), but much less than the European Union (EU — at 93.3%). However, the share of trade increased to 37% of GDP in 2021 and has remained strong so far in 2022.

On the other hand, the diversification of trade went as planned. Trade volume with countries participating in the Belt and Road Initiative (BRI) has increased significantly to reach RMB 11.6 trillion ($1.6 trillion) in 2021 (from RMB 8 trillion ($1). 100 billion dollars) in 2014). This almost doubles the volume of trade between China and the countries of the Association of Southeast Asian Nations, to 878 billion dollars. These countries participate in the BRI to varying degrees, so the comparison highlights the trading relationship with two overlapping blocks of countries. More importantly, these two relationships far exceed trade with the EU at $695 billion and the United States at $657 billion. The resulting ranking of trading partners gives China some leeway in the face of economic pressures, including sanctions, from the West, by increasing trade with the rest of the world.

China has captured more value-added activities through trade by increasing the share of its value-added in foreign countries’ exports while reducing their value-added in Chinese exports, thereby improving the quality of its trade with the world.

China has also taken steps to diversify its sources of supply for key inputs it needs to import, including oil, gas and grain (buying more from allied Russia); iron ore (increased investment in Guinea and Cameroon) and bauxite (increased investment in Guinea and Ghana). These efforts are aimed at reducing China’s dependence on oil from the unstable Middle East and iron ore from Australia, which China deems politically unreliable.

The domestic section of the dual circulation

Domestically, the pandemic has reversed the growth of private consumption and services as a percentage of GDP. From a low of 34.6% of GDP in 2010, private consumption increased to a peak of 39.1% in 2019, falling back to 37.8% in 2020. It recovered somewhat, reaching 38.5% in 2021, but will likely decrease again in 2019. 2022 due to the sequelae of the Omicron variant infection. The share of services in GDP increased from 44.3% in 2011 to a peak of 54.5% in 2020, to fall back to 53.3% in 2021.

By comparison, the investment-to-GDP ratio rose slightly to 43% in 2021 from 42.9% in 2020. It is likely to rise again as China stepped up investment in fixed assets to support faltering growth so far this year. Over the past decade, this ratio fell from a high of 47% in 2011 to a low of 42.6% in 2016, and then fluctuated between 42.6% and 44% (in 2018). Private investment has slowed down a bit so far this year, but still accounts for 56.9% of overall investment, continuing to exceed 55% since 2012.

While the gap in favor of investment over private consumption has narrowed from 8.4 percentage points to 4.5 percentage points over the past decade, it has narrowed in recent years . This reflects the difficulties in reversing the relative GDP shares of these two key sectors, which is a key objective of the dual circulation strategy.

Conclusion

Overall, the dual circulation represents a rational effort to rebalance the Chinese economy by reducing its reliance on net exports and fixed asset investment, which have become unsustainable to drive growth. It has made some progress in this direction. However, it will take time – especially after the pandemic is over – to see if and how this strategy can support “quality growth” for China in the face of strong international headwinds; structural barriers such as population aging and decline and declining productivity growth; and Xi Jinping’s emphasis on ensuring common prosperity and “holistic security” for the country.


Hung Tran is a nonresident senior fellow at the Atlantic Council, former executive director general of the Institute of International Finance, and former deputy director of the International Monetary Fund.

Further reading

Image: Bridge in Hong Kong and Container Cargo freight ship

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