‘Dual circulation’ to spur high-quality development
A man shops at a supermarket in Beijing, on Mar. 29, 2021. China boasts a huge domestic market with diverse consumer demands, laying a strong foundation for internal circulation. Photo: Chen Mirong/CSST
Since the reform and opening up, the Chinese economy has sustained high growth at an average rate of 9.5% for more than four decades, creating a global economic miracle. The Chinese economy is typically an open one. Domestic and international resources and markets have played a significant role in its development.
In this context, the Chinese government has formulated a new strategy to accelerate the establishment of a “dual circulation” economic development pattern, which takes the domestic market as the mainstay while letting internal and external markets reinforce each other. The 14th Five-Year Plan (2021–2025) for National Economic and Social Development and the Long-Range Objectives Through the Year 2035 urged national efforts to strengthen domestic circulation’s dominant role and enhance its efficiency through international circulation to realize the mutual promotion of these two economic cycles.
Given domestic and international economic changes, attention should be paid to handling the relationship between internal and external circulations in order to advance high-quality development of the Chinese economy. It is vital to dialectically integrate the two cycles into the new push to build China into a modern socialist country in all aspects. In the new economic development pattern, domestic circulation should function as the driver and international circulation as the propellant to ensure the two cycles complement each other, thereby spurring high-quality economic growth.
Sound base for internal circulation
The Chinese central government has encouraged heavy reliance on the domestic market for the sake of economic growth. As China has embarked on a new journey to fully build a modern socialist country, a good foundation has been established for internal circulation.
From the perspective of demand, China boasts a huge domestic market with diverse consumer demands. The size of the economy has been growing continuously. In 2000, the economic aggregate reached a new high of 10 trillion yuan. Even under the impact of COVID-19, the economic aggregate exceeded 100 trillion yuan, making China the only major economy to achieve positive growth around the globe.
Over the past 20 years, China’s economic size has seen a tenfold expansion. According to annual average exchange rates based on current price estimates, China’s GDP amounted to approximately $14.7 trillion in 2020, ranking second in the world and accounting for roughly 17% of the global economy. The GDP per capita moved above $10,000, which retained China’s position in the ranks of medium-high income countries. China also currently has the largest middle-income group in the world.
Final consumption expenditures contributed about 60% to economic growth from 2013 to 2019 on average. From 2011 to 2019, the final consumption rate averaged 53%, and still managed to reach 54.3% despite the coronavirus epidemic.
On the supply side, China has the most complete and largest-scale industrial production system, with 41 industrial divisions, 207 groups, and 666 classes of products and services. It is the only country in the world that ticks all the industrial category boxes under the United Nations’ industrial classification standard.
The output of more than 220 kinds of industrial products is leading global rankings, and the added value of the manufacturing sector has been in the first place globally for 11 years consecutively. In 2020, the total grain output reached a record high, retaining the top position in the world. China’s talent team consists of more than 170 million highly educated professionals from various fields, and their research and development abilities are continuously improving.
It is safe to say that the vast Chinese domestic market has laid a solid groundwork for building the new economic development pattern, setting the stage for realizing high-quality growth by expanding domestic demands.
New scenarios in external circulation
Since the 1990s, the degree of economic globalization has been increasing, and regional economic integration has fueled the trend. At the same time, decreasing international transportation and travel costs, as well as rapidly developing information and communication technologies, have objectively expedited economic globalization. As a result, the global production network has become unusually complicated, while global value chains have been constantly divided in depth and breadth.
With the division of global value chains, the global production network has transformed varieties of raw materials and intermediate inputs from all over the world into final products for consumers. The network can be depicted in three dimensions: a value chain split, the geographical distribution of added value, and value chain governance led by multinationals.
Although the global production network can reduce costs and improve efficiency, it is weak to some extent, and its weakness might be magnified by external shocks from uncertainties.
Previously, natural disasters temporally disrupted the operation of some enterprises and industries in the global value chain system. For example, extreme weather events like hurricanes in the Gulf of Mexico cut off global energy supplies several times. In 2011, a flood in Thailand and a violent earthquake in northeastern Japan not only caused the global semiconductor production network to crash, but also exerted severe impacts on global automobile and electronics manufacturing industries.
Due to the COVID-19 pandemic, in addition to rising trade protectionism and a backlash against globalization, the global production network is facing shocks of unprecedented strength, scope, and continuity. Particularly after the 2008 international financial crisis, the network as part of external circulation has clear new tendencies.
First, using the World Input-Output Tables, existing studies of the value added to trade indicate that value chains are mostly regional, rather than global. The regional feature is more prominent in East Asia and North America. The degree of division in value chains and the geographical distribution of added value hinge on whether the production network is global or regional.
Moreover, the development of key technologies in the new industrial revolution will further reshape the “smiling curve.” Robotics, artificial intelligence, supply chain digitalization, and additive manufacturing, or 3D printing, are major elements of the new industrial revolution. Such digital technologies as the Internet of Things and big data highlight the importance of intangible assets in value chains. Upstream research, development, and innovation, coupled with downstream marketing, information, and news, are moving added value towards the two ends of the smiling curve.
In addition, the speed and degree to which the global production network can be reconstructed depends largely on the international trade and investment policy environment. Escalating trade protectionism in international trade and investment, and the fragmentation of economic cooperation, have put extra pressures on the global production network. Although digitalization is inclusive enough to allow suppliers from developing countries to blend into the network, it will also widen gaps in added value between developing and developed economies, posing more challenges to value chain upgrade and catch-up.
Economic globalization’s historical experience has revealed that new scenarios in the global economy will reconstruct and reshape more factor resources across the world, which will present new opportunities to the accelerated development of “good countries and enterprises.” Under such circumstances, it is urgent to actively engage in international economic cooperation and competition, attract global resource factors, participate in division of global industry and innovation, and boost the Chinese economy’s competitiveness in the world.
Promoting high-level opening-up
During the 14th Five-Year Plan period, efforts should be devoted to building the new economic development pattern and smoothing the national economy’s circulation, so as to facilitate China’s socioeconomic development. Chinese leadership has on many occasions emphasized that dual circulation is by no means a closed domestic loop, but an open domestic and international dual circulation. Advancing dual circulation necessitates persistent opening-up on a larger scale, in wider areas, and on deeper levels. To contribute to the new economic development pattern and high-level opening-up, the following policy suggestions are put forward.
First it is necessary to implement institutional opening-up. For a long time, China carried out differentiated opening-up policies in different stages, regions, and fields, achieving high economic growth by offering policy preferences to gather resources and production factors. Such policy mechanisms were determined by actual national conditions and developmental stages.
As the Chinese economy has entered a new phase, it is imperative to rectify malpractices, such as distorted competition, caused by policy-based opening-up. More importantly, China has the correct conditions for institutional opening-up through rules, regulation, standards, and management.
Second, importance should be attached to increasing international competitiveness in foreign trade. As a major global merchandise trader, China should step up efforts to build up its strength in trade as the external environment and factor endowments change constantly. It is crucial to promote the joint development of trade partners and establish a commonly prosperous world economy by galvanizing the domestic economy through the international market and factors, thus cementing the base for building a community with a shared future for humanity.
Furthermore, high-quality “bringing in” and high-level “going out” should be reinforced. Promoting two-way investments to intensify deep interaction with the world economy is an objective requirement for building the new economic development pattern. In addition, efforts are needed to push ahead with the construction of high-level international economic and trade rules, contributing Chinese wisdom and proposals to global governance systems.
Zhang Tianding is a professor from the Economics and Management School at Wuhan University.
Edited by CHEN MIRONG