Home >Opinion >Views >We should keep a close watch of China’s dual circulation strategy

The global economy is expected to rebalance in the coming decade. Most public attention in India right now is focused on what major economies are doing to contain China. There is far less attention on what China plans to do in response. This is something that Indian policy debates will have to also take into account.

The Chinese leadership is meeting this week to decide its policy agenda for the next five years. There are two important economic initiatives that deserve close attention. First, China has already rolled out an ambitious Made In China programme. Second, the Chinese politburo had in May accepted a new strategy called the “dual circulation strategy". How these two pan out will have profound implications for the rest of the world, including India.

Made In China is an ambitious programme to ensure that it dominates production in 10 select sectors, such as artificial intelligence, robotics, new materials, electric vehicles, high-end medical equipment and next-generation transport technologies. Many of these are the building blocks of the Fourth Industrial Revolution. China plans to use credit subsidies, public sector enterprises and intellectual property acquisitions to ensure that it achieves 70% self-sufficiency in these areas by 2025, and global dominance by 2049. It is worth noting that it is targeting the next wave of industries rather than trying to protect failing enterprises of the past.

Consider China’s dual circulation strategy. The two circulations are economic exchange within China and economic exchange with the rest of the world, or domestic reliance versus global integration. China wants to shift its balance from the latter to the former, in all likelihood, as it watches the growing international moves to make supply chains less dependent on one country. Two of the key goals of this dual circulation strategy are moving bank lending from services to high-end manufacturing, as well as restricting funds to real estate, and cutting dependence on food and energy imported from the rest of the world.

The Chinese leadership clearly sees the rebalancing of global supply chains as an irreversible trend. The two big shifts in its economic strategy show that the second largest economy in the world is trying to become less dependent on others, largely for geopolitical reasons, just as the rest of the world is trying to reduce its China exposure. These moves should also be seen against the backdrop of massive economic change over the past 15 years.

The size of the Chinese economy has grown from $2.3 trillion in 2005 to $14.4 trillion in 2019, with average income going up from $1,751 to $10,286 over the same period. Economic growth has nearly halved as China’s labour force peaked and it moved closer to the global technology frontier. A rise in its investment rate, combined with a fall in the savings rate, has shrunk its current account surplus as a percentage of gross domestic product (GDP). Most importantly, its trade/GDP ratio has plunged from 62.21% in 2005 to 35.68% in 2019.

There are three important lessons from the expected shifts in Chinese economic strategy.

First, China is telling the world that it is no longer concerned with just the rate of economic expansion, but also the structure of its economy, not just how much is produced, but also what is produced. For many years now, it has been trying to increase domestic demand as a driver of economic growth. The recent moves complement other supply-side interventions to reduce overcapacity in some industries such as metals. It is worth seeing if such structural thinking makes a comeback in other countries as well.

Second, it is trying to build capabilities in emerging industries through domestic industrial policy rather than using the banking system to keep weak enterprises in older industries alive. And there is no indication yet that higher import tariffs are a central part of its strategy. The ability of governments to pick winning sectors is weak, but what China does needs to be closely watched. Its choice of industries to dominate in the coming years suggests that its friction with the US is a technology war as much as a trade war.

Third, any country aiming for a higher reliance on its domestic market necessarily needs to increase the share of wages in its economy. The ability to build a mass consumption base is crucially dependent on higher wages across the economy. A further drop in savings could also further reduce China’s current account surplus—and possibly the excess capital needed to fund its strategic infrastructure building in countries located close to India?

The Chinese move to focus on more sophisticated industrial production could hasten its exit from more labour-intensive manufacturing industries, a process that had already begun as wages began to increase.

India has been a laggard in attracting these industries, but there is still time to take advantage of a big move of labour-intensive manufacturing out of China. Two parallel shifts are expected to take place over the next decade: Deglobalization as well as a shift of supply chains out of China. The former will reduce the Indian export market while the latter will expand it.

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