Dual circulation

The announcement at the May Politburo meeting, reinforced in subsequent public comments by President Xi, that China would adopt a dual circulation strategy was a signal that China’s leadership comprehends, and is prepared to respond to, these new realities.

The two “circulations” referred to are “international circulation” (essentially production for exports) and “internal circulation” (essentially production for domestic consumption). While China’s focus for the better part of the past three decades has been on international circulation, the dual circulation strategy will place a heightened emphasis on internal circulation – while not forsaking the export goose that has laid the golden eggs.

Although details on the new strategy have been extremely sparse, China is essentially seeking to maintain its ability to engage globally in trade, finance, and technology where and when it suits China’s interest, while at the same time strengthening domestic demand, production, and technological capabilities in order to create a hedge against disruptions in the global marketplace.

Under this policy, the rest of the world will no longer be the leading sector of the Chinese economy. China will become more self-reliant.

Easier said than done?

The fact that the strategy is being discussed at such high levels in the lead-up to the expected October release of China’s 14th five year plan likely portends that this new strategy will be a cornerstone of China’s economic policy for years to come. It remains to be seen, however, how successful the dual circulation strategy will ultimately be.

There are contradictions and challenges. The steps necessary to spur domestic demand (such as by raising wages), for example, will also undercut China’s export competitiveness. While the export growth model has delivered success thus far, the challenge now is to develop domestic demand for the next stage. But this will require a large and complex rebalancing that will necessarily spill over into the trade realm.