The Significance of Beijing's 'Dual Circulation' strategy


Research Fellow and Centre Coordinator East Asia Centre The Manohar Parrikar Institute for Defence Studies and Analyses, New Delhi Dr. Jagannath Panda

A key agenda of the meetings of the National People's Congress (NPC) and the Chinese People's Political Consultative Conference (CPPCC) –known as the ‘Two Sessions' (Lianghui) – was the unveiling of the official roadmap for Beijing's 14th Five Year Plan1. These sessions endorsed China's goals to achieve its target of becoming a ‘modern socialist power in the economic, technological and other fields' by 20352. The objectives already resonate amidst China's better handling of the pandemic as compared to other major economies3, coupled with a spike in its industrial recovery4, growth in foreign reserves hitting a near five-year high in 20205, and a reported record surge in exports6, witnessing a rekindled global demand.
Yet, the Chinese economy faces an altered and complex environment underpinned by the growing demand to make the supply chain networks less dependent on China, rising tensions between Washington and Beijing, and the COVID-19 pandemic giving rise to the pressing need to address policy disturbances that have resulted in a decade-long slowdown in China's economic growth7. Xi's implementation of a “dual circulation strategy8 (hereon, DCS)” – focusing on reinforced domestic consumption (the “great domestic circulation”) in the face of an uncooperative external environment, while ensuring China's economic openness to the world (“the great international circulation”) – concentrates on alleviating these very challenges9. In a post-pandemic period, how will such a strategy shape China's economic future, and what are its potential limitations in its evolving economic architecture?
The DCS first surfaced in 2020 when Xi called for creating a “new development pattern10” that would allow the homegrown markets to become the “mainstay” and ensure the foreign and domestic markets to support each other by facilitating national economic circulation. The main goal of the DCS is to begin limiting the significance of overseas markets in China's economic growth calculus by bolstering the dominant position of domestic companies in the international arena in a bid to offset its longstanding dependence on the outer world and fight its growth slowdown11. The DCS would capitalize on China's expansive domestic market of 1.4 billion consumers and seek to improve China's manufacturing capacity, and at the same time, enhance its trade in services. By focusing on domestic consumption and demand at home, China would also try to narrow the wealth gap12 and reduce market distortion13 by distributing land, labour, and economic resources to greater productive areas and ensure free flow of labour through the loosening of the hukou household system.
Scholars have been divided in their assessments of what DCS means for China's future. Some in the U.S.14 and Europe15 have seen DCS as a way via which China wants to decrease its overseas economic dependency and instead turn itself into a domestic-market oriented economy. Such an overture is a cause of alarm for the U.S., which has been taking advantage of the COVID-19 induced breakdown of global supply chains to raise a far-cry for economic decoupling from China. The U.S.-China trade and tech war, as well as the call for diversification of supply chain networks, have exposed China's vulnerabilities as it relies heavily on exports; for instance, relying on the U.S. for high-tech products such as semiconductors. However, should the DCS be implemented with a planned focus of turning Chinese consumer and production bases inwards, stimulating domestic innovation to bolster domestic supply chains, such decoupling will no longer serve Washington's purposes and hence not operate as a geo-economic power tool.
Furthermore, despite obstacles to its implementation and initial success rates, the DCS is expected to be largely managed successfully in China16, notwithstanding it remains a paradigm shift from Beijing's reform and opening-up policies under Deng Xiaoping. Concurrently, scholarship remains divided on whether this is the case, with some arguing that DCS would serve as an extension to China's conventional economic model of development, supported by Beijing's gradual shift away from export and investment-driven models to domestic and demand-driven ones17. Moreover, since 2013, the Chinese government has focused on reducing inequalities between its rural and urban population18. Xi's recent claim of “complete victory” in elimination of poverty in China19, as well as the 14th Five Year Plan's continued focus on further progress in alleviation of poverty also find resonance with the DCS' structure of building an urbanized production and consumer base20
Xi's broader goal is to take charge of the emerging economic narrative –spearheaded by the U.S. amidst economic decoupling threats, manufacturing ‘exodus' of companies from Beijing and U.S.-China trade war –to prevent damage to the Chinese financial structure and desired economic goals21. The U.S.' focus on limiting China's economic and technological development, coupled with the harsh fiscal impacts of the pandemic on economies worldwide, have anyway made looking inwards a natural choice for China. Hence, despite its beneficial acceptance of the globalized world order, China's emphasis is now on building its domestic markets. For instance, largely in response to U.S. restrictions on imports of items from China22, including a ban on tech goliath Huawei, China passed the Export Control Law (ECL)23 in October 2020. This marked the country's first comprehensive export control legislation, allowing Beijing to limit or block shipments to international companies altogether, citing national security reasons.
In an extension to this, the technological war between China and the U.S. has resulted in the U.S. Department of Commerce banning U.S. export of high-tech components to China24. Via the DCS, building indigenous technology in critical areas such as high-precision chips and semiconductors will be a top priority for China. In fact, the DCS builds on and accelerates China's domestic and international plans, such as the ‘Made in China 2025', focusing on the implementation of domestic and indigenous innovation to gear China towards greater self-reliance and resilience. It, at the same time, synergizes with other Chinese initiatives of the 'Digital Silk Road', as well as the ‘China Standards 2035' strategy, seeking to put out a blueprint for setting global standards for modern technologies and push China towards the path to leadership in the areas of high-tech innovation and modernization. These, on the whole, aim to bolster China's national power, where dual circulation is likely to take the center stage. And, while the cost of production will be higher domestically, it will be balanced in China's strategic calculations by an equal loss of market and hampered innovation capacity for the U.S.25.
Nonetheless, while the DCS appears to be appealing at the moment, it would still have to go through significant challenges before achieving China's primary economic targets. Beijing would need to ensure fundamental reforms in its growth model and wealth-distribution system to modify its growth engine from focusing on state-led investment and exports to consumer spending based on domestic consumption. Such a structural shift might be painstaking to achieve. Further, in continuation of China's open economic outlook, Beijing will still have to convince its global trade partners of its feasibility26. It would need to assure that DCS does not mean that Beijing is looking to isolate itself; globalization remains central to China's economic benefits. Hence, Xi's decision to “favorably consider27” joining the Japan-led Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) – expressed immediately post conclusion of the Regional Comprehensive Economic Partnership Agreement (RCEP) – would also draw on DCS parallels. CPTPP and RCEP highlight China's continued assertions on opening-up and focusing on reform in its economic policies. As the new U.S. President Joe Biden is expected to lead U.S.' return to the CPTPP, for Xi, China's entry into the same must supersede that of Washington so as to ensure that stricter entry rules are not imposed for Beijing, and the latter could have leverage in the multilateral decision-making28. The Chinese government is hence meaning to fortify the free-trade framework, and to this end, DCS advances essential changes of its homegrown economic framework while reinforcing the monetary foundation both domestically and internationally. Such an outlook would ideally be supported by Japan and Europe, especially given their focus on free trade29.
As Beijing prepares for the celebrating 100 years of the Chinese Communist Party (CCP), the DCS remains in tandem with Xi's announcement to celebrate the achievement of the first centennial goal of building a “moderately prosperous society in all respects30” by 2021, marked by the CCP's anniversary. The second centennial –marking 100 years of the People's Republic of China in 2049 - becomes the next focus of Chinese policy maneuvering to “build a modern socialist country”, where the DCS would play a crucial role. China, via dual circulation, will bring in more foreign investment by increasing domestic consumption, focusing on rebuilding its Belt and Road Initiative (BRI) post-COVID-19 induced delays and taking advantage of the Asia-led free trade deals like RCEP and CPTPP to attain its national goals. However, while China will have to build its economic resilience via DCS, the world will also need to adjust its engagement with Beijing in lieu of its focus on domestic needs. 
Dr. Jagannath Panda is a Research Fellow and Centre Coordinator for East Asia at the Manohar Parrikar Institute for Defence Studies and Analyses (MP-IDSA), New Delhi. He is the Series Editor for “Routledge Studies on Think Asia”. Dr. Panda tweets at: @jppjagannath1 
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