China spells out Dos and Don'ts for "Dual Circulation"
Ever since first publically appearing in a CPC Central Committee Politburo meeting in May 2020, dual circulation has become a guiding strategy for economic development in China.
Recently, two senior finance officials bylined essays in the People’s Daily to offer the party’s latest thoughts and visions of the strategy going ahead. This newsletter provides a translation of the two pieces.
On domestic circulation, the official listed challenges facing China and called for
▲ Better balancing of expanding domestic demand and deepening of supply-side structural reform
▲ Improving technology independence
▲ Modernizing China’s industrial system
▲ Forging a unified domestic market
On international circulation, the official warned against
▲ An enclosed domestic singular circulation
▲ Passively absorbed into an international circulation
▲ A low-quality international circulation
Boosting the dynamism and reliability of domestic circulation is necessary for accelerating the creation of a new development pattern
Zhu Dantao, Director, Second Economic Bureau, The General Office of the Central Committee for Financial and Economic Affairs
Accelerating the establishment of a new development pattern is a strategic decision made by CPC Central Committee to realize the Second Centenary Goal and ensure both development and security. The domestic circulation, which plays a major role in the new development pattern, is of great significance to boost the momentum of development and grasp the initiative. In recent years, positive progress has been made in enhancing domestic circulation. However, it is important to note that there are still many obstacles in our work to bolster the domestic market. We should follow President Xi’s instructions on strengthening the dynamism and reliability of the domestic circulation to optimize policies and further smooth domestic economic cycle.
Bolstering the dynamic and reliability of domestic circulation dicates better balancing of expanding domestic demand and deepening of supply-side structural reform
Supply and demand are two integral parts of economic development. Dynamic balance and healthy interactions between the two ends are main logic of keeping economic circulation unobstructed. China has effectively responded to 1998 Asian financial crisis and 2008 global financial crisis by expanding domestic demand. As China’s economy had reached a new norm and now facing a complex situation of “Three overlapping layers”①, we have implemented supply-side structural reform since 2015, correcting supply-demand imbalances.
In recent years, due to the impact of COVID-19, Chinese economy has been faced with triple pressures from shrinking demand, supply shocks and weakening expectations. That means insufficient aggregate demand has been the prominent problem of economic performance, unreasonable income distribution system has restricted growth of consumption, and private investment is expected to grow unsteadily and slowly. At the same time, the supply of products cannot meet the diversified demands of market. Therefore, over expansion of demand will only lead to overcapacity.
For now and the years to come, we must combine expanding domestic demand with deepening supply-side structural reform, creating a dynamic balance at a higher level, in which demand drives supply and supply creates demand. On the one hand, we should expand high-quality demand, form a complete domestic demand system, and strive to expand demand supported by income and investment demand with reasonable returns. That means we should establish long-lasting mechanism that promotes consumption and stimulate the vitality of private investment. On the other hand, we should continue to deepen supply-side structural reform, promote scientific and technological innovation and institutional innovation, so as to meet existing demand with independent, controllable and high-quality supply, and create new demand.
①San Qi Die Jia: to deal simultaneously with the slowdown in economic growth, making complex structural adjustments, and absorbing the effects of the previous economic stimulus policies.
Realize Self-Reliance in Science and Technology to prevent “chokeholds“ is crucial to improving the dynamic and reliability of domestic circulation.
Innovation is at the heart of China’s modernization drive. For a major developing country like China, self-reliance in science and technology is not only a question of development but also a matter of survival.
Science and technology have always been an arena for competition among major powers. In recent years, the escalated conflicts in core technology industry between China and U.S. has intensified, laying bare China’s insufficient innovation capacity and efficiency. The main obstacles are 1. absense of core technology and know how; 2. inadaquete and ill-structured R&I input that undermine orginality; 3. Research institutions insulate themselves from the market and produce papers of little actual use; 4. Businesses yet to become the main driver of innovation, overemphizing on business model innovation while overlooking tech innovation; 5. A tech-industry-finance tri-sector cycle is yet to emerge, restraining return on tech investment.
Addressing those problems has become a top priority. The obstacles that we must overcome are lacking of innovation and high-level self-reliance in scientific and technology, and the stranglehold some countries have tightened on China's development of core technologies. To tackle those problems, we should fully take advantage of our whole-of-country capabilities as supported by China’s market economy with socialist characteristics, give more investment in basic research, build up our country’s strategic scientific and technological strengths and ensure better allocation of innovation-related resources to achieve breakthroughs in core technologies in key fields. We should ensure the leading role of enterprises in scientific and technological innovation, and promote closer business-led collaboration between industries, universities, and research institutes to develop innovation-oriented enterprises with sustained competitiveness. We must rely on talents to pioneer and to propel development, and create an enabling environment for talents to work and start their own businesses, attracting the brightest minds from all over. We need to speed up the development of a high-quality education system, stimulate students’ creativity and strengthen their practical ability in order to enable education to better serve innovation.
Speed up the establishment of modernized industrial system is necessary for improving the dynamic and reliability of domestic circulation
The foundations of a well oiled domestic circulation are the establishment of modernized industrial system and integration of all sectors in national economy. The key to developing modernized industrial system is to ensure that the system is independent, under control, safe, reliable, competitive, adaptive to advanced technology and offers enhanced manufacturing capability and quality service, supporting efficient production and high-level national income.
At present, China’s industrial chain still lies in the middle and low end of the international division of labor. In general, 1. China’s industrial chain is large in scale but short in competitiveness; diverse in variety but limited in participation of the supply chain, complete in terms of sectors but falling short of the higher end; 2. China’s industrial chain is quite weak, with basic parts, basic material, basic processing skill, basic industrial technology exposed to the risk of severing supply chains and decoupling; 3. China’s industrial chain is under outflowing pressure, namely, returning of the medium-high end of industry chain to developed countries and the diversion of the medium-low end to developing countries; 4. China’s industrial chain is repetitive and chaotic investment in emerging industries; 5. Large enterprises are not strong enough to lead industrial development and set standards while SMEs are weak in competitiveness and upgrading ability and enterprises that use special and sophisticated technologies to produce novel and unique products are quite few.
In the future, we should modernize the industrial system in an all-round way. 1. We will consolidate our leading position in industries where we excel, promote the integrated development of advanced manufacturing and modern service industries, and focus on moving the manufacturing sector toward higher-end, smarter, and greener production. 2. We should boost emerging strategic industries such as integrated circuits, lathe machines, new energy and biopharmaceuticals. 3. We should invest in industries of the future, such as quantum computing, aerospace technology, brain science and brain-like intelligence. 4. We need to develop digital economy, build internationally competitive digital industry clusters.
Accelerate the forming of a national unified market and break up localized circulation
Domestic circulation is for the whole country. It means that we should build a national unified market and prevent local self-circulation and barriers between provinces, cities, and counties. Only in this way, can we further expand trade scope, explore the depth and breadth of market, deepen the division of labor, and increase economic efficiency, unleash the growth potential of China’s economy.
In reality, some local governments are concerned that if they integrate into domestic market, local revenes and local economic resources may sapped by developed regions. As a result, 1. some local governments manipulate government purchasing process and invent countless schemes to protect local businesses. 2. In some regions, cutthroat competition frequently appears when attracting investment and shell companies are conjured up to cheat subsidies; 3. There is an absence of cross-region development coordination mechanism so that resources cannot be allocated across the country to achieve greatest efficiency; 4. Human resources, land and captial flow in single direction from rural to urban regions, while the flow in opposite direction face institutional obstacles. These various types of local circulation are harmful to both regional and national economy.
In the future, 1. We will strengthen economic ties between urban and rural areas, smooth economic circulation between urban and rural areas, and promote integrated urban and rural development; 2. We will promote deeper integration of the strategies for coordinated regional development, major regional strategies, and functional zoning strategies and optimize the distribution of major productive capacity; 3.We will formulate indiscrimitory unified market access requirements, rules of competition and the supervision and law enforcement systems to stimulate vitality of business entities; 4.We must get rid of regional blockades and trade monopolies to allow free movement and efficient allocation of goods and production factors across the country.
China has the world’s largest industrial system and complete industrial supporting capacity, with strong ability of technological innovation and industrial production. As the further industrialization and urbanization, the huge Chinese market has unlimited potential and the country has the conditions and capabilities to promote sustainable economic increase relying on domestic industrial division and domestic demand. We should maintain strategic focus and strengthen systematic perspective to overcome obstacles that restrict domestic circulation by implementing reform. We need to give full play to the role of entrepreneurs and fully mobilize the initiative of all sectors to smooth the circulation of all production elements and promote coordinated development. We will reinforce the mainstay of domestic circulation and continuously increase attraction and driving force for the international circulation to open up new prospects for high-quality development.
Improving the quality and the level of international circulation is a must to build a new development pattern
Zhao Peng, Director, Fifth Economic Bureau, General Office of the Central Committee for Financial and Economic Affairs
赵 鹏 中央财经委员会办公室经济五局局长
Building a "dual circulation" development pattern is a major medium and long-term development strategy proposed by General Secretary Xi Jinping at the meeting of the Central Committee for Financial and Economic Affairs in April 2020②. It has global guiding significance for promoting high-quality development and building a modern socialist country in an all-around way.
The international economic cycle, like the domestic one, is an important and indispensable part of the new development pattern, and the two are closely linked to form an organic whole. The 20th Party Congress proposed " boosting the dynamism and reliability of the domestic circulation while boosting the quality and scale of the international circulation." We must fully and accurately grasp the intrinsic link between the two and accelerate the construction of a new development pattern in the new journey of the new era.
② The phrase first appeared publically in May 2020 but was first coined in a speech by Xi at the 7th meeting of the Central Committee for Financial and Economic Affairs in April 2020, which was not made publically available immediately after the meeting. Qiushi later published the April speech in November 2020.
Build an open dual circulation, avoid closed single domestic circulation
Under the conditions of a market economy, the market size determines the degree of labor division, and the degre of labor division determines the level of productivity and income. The most fundamental feature distinguishing a modern economy from a pre-modern one is the organization of production, resource utilization, and exchange of commodities in an ever-expanding market scope, which in turn futher deepens the labor division and improves efficiency. The wider range a country develops markets and utilizes resources in, the stronger its economy will be and the higher its income level will be.
Modern world history's experiences and lessons repeatedly show that closeness leads to backwardness and openness brings prosperity. Countries that have successfully modernized have all achieved sustained economic growth and rising per capita income levels by leveraging their comparative advantages and actively participating in international circulation. From our own development experience, actively participating in the international circulation is a decisive factor for the miraculous long-term rapid economic development since the reform and opening up. It is the basis on which we must firmly participate and continuously improve the international economic cycle.
China's economy has been deeply integrated into the world economy, with close industrial and market linkages with countries worldwide. The domestic and international demand markets are interdependent and mutually promote each other. Emphasizing the leading role of the domestic economic circulation is not to abandon or weaken the international economic circulation, but to give full play to China's economic advantages as a large country, and to better integrate and develop the dual circulation.
Since the international financial crisis in 2008, the worldwide trend of anti-globalization has risen. Unilateralism and protectionism have risen significantly, and economic globalization has encountered a counter-current. Especially in recent years, under the influence of the pandemic and geopolitical factors, global problems have intensified. And the world has entered a new period of turbulent change. However, we must see that the international division of labor and trade still benefits the economic development of all countries, and economic globalization is still the general direction to develop the productivity of the modern world. The potential of global trade and division of labor is far from depleted, and there is still broad space for countries to achieve joint development through the international division of labor and trade.
China's development cannot be separated from the world, and vice versa. Some countries are undermining the established international economic order for their own interests. They try to use their powerful status to decouple or sever supply chains, and build up high fences in their small economic yard, trying to kick China out of the global market and industrial system, and shape "globalization without China." This is contrary to the direction of historical progress and the objective laws of economic development, and is impossible to achieve.
In the face of the complicated international environment, we must adhere to opening up to the outside world and constinously improve the quality and scale of the international circulation. In the new development pattern, the domestic economic circulation is the basis and plays the leading role, and participation in the international economic circulation indispensible to participate in globalization and the international industrial labor division.
Facing obstacles in international circulation, we promote the formation of a macro and well functioning domestic economic circulation. Strengthening the leading role of the domestic economic cycle is conducive to stabilizing domestic economy and enhancing economic resilience. On the other hand, it can better drive and vigorate the international economic circulation, provide more market opportunities for other countries, attract high-quality global resources to China, meet domestic demand and enhancing industrial and technological development, bolstering advantages in international economic cooperation and competition, and making the dual cycles mutually beneficial and complementary.
The dual circulation does not compromise opening up, but rather promotes it. Looking ahead, the scale of China's import and export, foreign capital utilization and foreign investment will continue to expand, and its position in the international economy will continue to rise.
Better balance openness and security, avoid passively being absorbed into the international circulation
With the changes in the international environment and the continuous development of our economy, the role of China in the global economic system is undergoing profound changes. China will inevitable encounter various challenges and will be compelled to adjust the way of participating in the international circulation.
In the face of the new challenges and uncertaintie, we must balance development and security, and avoid passive falling into an international circulation that is characterized as dependent solely on external demand, overly reliante on external technology and resources, and lacking security risk prevention and control mechanisms.
The market is a scarce resource worldwide. As a super-sized country, China has a large domestic market that many countries do not have, which is the material basis of the "dual circulation" and is the unique advantage for China to proactively shape the international circulation now.
Currently, China's economy accounts for more than 18% of the global total and contributes around 30% to global economic growth. China ranks first in the world in terms of trade of goods and services, and is a major trading partner of more than 140 countries and regions. With more than 1.4 billion people, China accounts for nearly one-fifth of the world's population, more than the combined population of existing developed countries. China's GDP per capita is close to the threshold of high-income countries. The overall advancement of more than 1.4 billion Chinese into a modern society means replicating a market almost the size of the existing developed countries combined, with vast business opportunities.
The combination of a massive domestic market and an open international market has brought many significant advantages to China's economic development. Among them, the most prominent advantages are the scale economy, innovation, development, and the ability to resist shocks. Relying on these advantages, China has formed the world's largest and most complete manufacturing system, a strong supply capacity to meet diversified international and domestic needs, an industrial ecology rich in creative vitality, and a relatively stable macroeconomic environment. This provides a solid foundation for Chinese enterprises to participate in international labor division and competition, and creates a highly favorable industrial and market environment for enterprises worldwide to invest in China.
We should fully play our comparative advantages and actively shape a high-level international circulation. Once the domestic cycle has a strong domestic demand market, self-sustaining and self-improving science and technology, complete and sound industries, and strong resource supplies, we will be capable of withstanding the impact of various extreme situations. In this way, we can also expand the opening up, become more confident when participating in international cooperation and competition, be more capable of restraining various protectionist and unilateralist behaviors, and better promote international circulation. A well functioning international circulation will bring more high-quality resources and more diversified and stable market demand to the domestic circulation, promote the improvement of the market mechanism, and facilitate the development and growth of a modern domestic economic system.
Over the past three years, China's economy has grown steadily despite the considerable impact of protectionism and the pandemic on the global economy and trade. China's foreign trade has still grown significantly, with total imports and exports growing more than 10% at an average annual rate and exports at 11.6%. This shows that as long as we proactively respond to changes, adopt the right strategies and play to our own strengths, we can overcome the impact of various adverse factors and proactively shape the international circulation to promote domestic economic development and common global prosperity.
We must adhere to the right direction of economic globalization, continuously make new friends, work with all peaceful and progressive forces to promote building an open world economy, and maintain a diversified and stable international economic pattern and trade relations. We will actively participate in the reform and construction of the global governance system, adhere to true multilateralism, actively form and maintain various international economic and trade rules, oppose the exclusive small circles and camps of specific countries, and promote the WTO, APEC and other multilateral mechanisms to play a better role. Promote the high-quality development of the "One Belt, One Road", consolidate and strengthen the economic relations with developing countries and neighboring countries, and promote common prosperity and development. Promote the diversification and stabilization of overseas markets and supply chain systems, and improve the resilience and stability of the international cycle. Strengthen the construction of international circulation support systems in the fields of standards, laws, logistics, etc., and gradually promote RMB internationalization.
We must firmly defend our legitimate rights and interests in foreign trade and economic cooperation and oppose all forms of protectionism, unilateralism and bullying. Actively use internationally accepted economic and trade rules and dispute settlement mechanisms to safeguard business entities' legitimate rights and interests, including foreign-funded enterprises, in China. We should focus on overall and dynamic security, and comprehensively improve our ability to maintain national security under the opening up. Build up proper institutional arrangements for security reviews, anti-monopoly investigations and other internationally accepted arrangements. Scientifically set the level of openness to adapt to security protection capabilities, and promote the opening measures in a steady and orderly manner. Enhance the stability and security of international circulation, and effectively protect national sovereignty, security and development interests.
Promote high-level openness, and prevent low-level expansion in the international cycle
China has experienced a period of continuous and rapid expansion of foreign trade in previous years, which has played a great role in economic development and improving people's livelihood. But there were also problems such as sloppy expansion, low-price vicious competition, excessive consumption of resources and environment, and an excessive trade surplus. To build a new development pattern, we need to promote a high level of openness, steadily expand system-based openness such as the rules, regulations, management, and standards, and effectively enhance the quality and efficiency of China's participation in the international circulation.
We need to become a major trading country with high standards and better integrate ourselves in the global division of labor. Expand the worldwide network of high-standard free trade zones, actively seek joining CPTPP and DEPA, and take the initiative to deepen domestic reforms in related fields by relevant rules, regulations, management, and standards. Upgrade the trade in goods, innovate the trade in services, and vigorously develop digital trade. Improve the branding, quality and distribution channels of export products, make greater efforts to develop international markets, stabilize the scale of foreign trade and optimize trade structure.
We must actively create a market-oriented, law-based, and internationalized first-class business environment, and make greater efforts to attract and make good use of foreign investment. Further expand market access, reasonably reduce the negative list of foreign investment, and increase the opening up of the modern service industry. Fully implement national treatment for foreign-funded enterprises, promote fair competition, and protect the rights and interests of foreign investment and business in accordance with the law. Provide services for foreign-funded enterprises that accurately respond to their concerns, solve practical problems, provide maximum convenience for foreign investors to engage in trade and investment negotiations in China, and take effective measures to stabilize and retain enterprises that are pressured to leave China. Actively land landmark foreign investment projects, and pay more attention to attracting small and medium-sized foreign investment enterprises to invest in China.
We should optimize opening-up of various regions, upgrade pilot free trade zones, and promote balanced and sustainable development of the domestic, and regional economy with the international circulation. Consolidate the pioneering position of opening up in the eastern coastal areas, improve the level of opening up the central, western and northeastern regions, accelerate the construction of new land-sea trade corridors in the west, and create a number of regional development hubs serving a high level of international circulation. Take advantage of the pilot free trade zone, Hainan free trade port, various development zones and free trade zones, and other open platforms. Under the premise of security, we should actively explore the rules, regulations, management and standards of the pilot high-standard economic and trade agreements, and continuously improve the quality and level of international trade and investment cooperation.
Note: This is an unofficial translation of the PD pieces and is for your reference only. Please refer to orginal article for the most precise meaning.