China’s Plan for the Post-Pandemic World Order: The Dual Circulation Strategy

China’s Plan for the Post-Pandemic World Order: The Dual Circulation Strategy

On the 5th of February, 2021, China’s National People’s Congress passed the fourteenth five-year economic plan (14FYP) from 2021 to 2025. A core component of the 14FYP is the Dual Circulation Strategy (DCS). First set forth by President Xi Jinping during the Politburo Standing Committee Meeting of May 14th, 2020, the DCS is set to determine legislative, diplomatic and economic developments in China for the coming decade. Yet, the DCS is not well-defined. By looking into its origins, context, and objectives, this article will forecast the systemic changes to the Chinese economy introduced by the DCS. This article will argue that the DCS is nothing but a plan to advance China’s economic and political interests by strengthening its domestic market, achieving technological self-sufficiency, and promoting the adoption of its standards.

The Dual Circulation Strategy: Origin and Purpose

In the past few months, the DCS has become a buzzword within the top echelons of the Chinese Communist Party (CCP). What is known is that the DCS is supposed to reimagine and reform the Chinese economy and cope with a more hostile international environment and a more fragile economic outlook. The strategy redefines China’s place in the global economy by designating two separate and self-sufficient loops: the internal and international. 

The first of those two loops, the internal circulation (China’s domestic economy) is surrounded by the international loop (the global economy). The internal loop is supposed to be independent and complete, but not closed to the external one. The domestic market is expected to use the outer loop to increase its competitiveness and stimulate technological know-how. 

The lack of a clear definition is typical for high-level policies in China, the most prominent example being the Belt and Road Initiative, which took years to be satisfactorily understood and defined. Chinese decision-makers often make use of formulas and catchphrases to direct blueprints and long-term strategies. 

Nonetheless, in China’s top-down political and economic system, long-term strategies like the DCS are incredibly consequential. They constitute the framework where policies and regulations take place. As a result, understanding how the plan was originally introduced and conceived will allow for a foundational understanding of the policies and diplomatic actions we can expect from Beijing in the coming years. It is therefore essential to understand the political context and objectives of the DCS to comprehend its role in driving systemic changes towards self-sufficiency.  

The DCS was conceived amid China’s re-emergence from the pandemic’s most challenging months. The return to the ‘new normal’ took place in the context of a worsening economic and pandemic situation in the global economy. President Xi described the moment as an opportunity to take the initiative and face the difficulties ahead in a way that put China at the forefront of the post-pandemic global economic system. The DCS should be understood as a long term vision to achieve global economic primacy.

As discussed in a series of articles published on Qiushi, the Central Party School’s bi-monthly periodical, the DCS ostensibly solves three structural problems: Declining economic growth from weaker global demand for Chinese goods and services, high dependency on foreign technologies in strategic sectors (mainly semiconductors), and lack of monetary sovereignty due to the international dominance of the US dollar.

We can infer that the DCS will lead to policies and regulations that promote domestic demand to shield China from global economic downturns, encourage technological self-sufficiency, and boost the international adoption of Chinese standards in the face of economic pressure from the US.

Forecast: Self-Sufficiency with Chinese Characteristics 

We can expect domestic demand to be the foundation of the DCS for two reasons. First, private consumption currently accounts for just 39% of China GDP, compared to 55% of other major economies. This translates to overdependence on debt-fuelled infrastructure spending and exports, leaving China exposed to downturns in the global economy that threatens its long-term financial stability. Secondly, booming domestic consumption would make the Chinese market extremely attractive for multinational companies.

The second objective, technological self-sufficiency, is linked to the fact that China feels too dependent on imported technologies in strategic sectors, such as semiconductors. Amid the export bans implemented by the Trump administration and recently re-confirmed by President Biden, Beijing policymakers will use the DCS as a critical engine to boost domestic champions and technology know-how. In this perspective, the international circulation is supposed to interact with the internal loop to deepen it and increase its competitiveness. We can expect policies and regulations to encourage multinational companies to invest in Research and Development within China, as well as practices to force technology transfer from multinationals. 

We can also expect that by stimulating internal demand, China will strive to supplant the US and the EU as the world biggest consumer market in absolute and relative terms. Hence, international companies will be forced to comply with Chinese standards (especially for services and advanced technologies) to gain market access. In this regard, the key is the concept of “home-based globalization” (zhuchang quanqiuhua 主场全球化). It is therefore expected that the DCS is an all-encompassing framework to make sure that foreign companies, lured by the financial reward of gaining or maintaining access to the Chinese market, will promote Chinese standards and political priorities on a global scale. Threatened by consumer boycotts and arbitrary enforcement of administrative regulations, few companies will dare to take side on issues that Beijing deems sensitive rather opting for self-censorship.

Ultimately, the DCS is an attempt to take advantage of the pandemic to reimagine and redefine globalization; to create a new global economic order where China is not just the facilitator of the game as the world’s factory, but the host of globalisation. In sum, the DCS is a vision of a world where companies strive to operate in China (the biggest consumer market) and to this end are willing to toe Beijing’s political and commercial red lines. 

Categories: China, Economics

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