Xi steps up focus on domestic market as relations with US unravel by Bloomberg

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(Bloomberg) –

Next month, China’s top leaders will present their economic strategy for the next five years, which will include a new ambition to increase domestic consumption and manufacture more critical technologies at home with the aim of shielding the world‘s second-largest economy from geopolitical tensions. swirling.

Described as a “dual circulation” strategy in President Xi Jinping’s recent speeches, the plan aims to ensure that a more self-reliant national economy serves as China’s main engine of growth, complemented by technology and foreign investment. . While details are so far scarce and much of the political ambition is already shaping up in one form or another, the speeches indicate the importance of this new policy.

President Donald Trump’s aggressive efforts to curb the spread of Chinese companies and limit their access to American technology are accelerating this inward shift. This is a policy change that can impact the movement of goods and services around the world if it results in a concerted effort to replace imports, which could deepen the schism with the United States.

“The idea of ​​’dual circulation’ came in part as a reaction to the continued efforts of the United States to try to decouple China from the global economy, and in part as a result of the Covid-19 pandemic,” he said. said Shang-Jin Wei, China expert at Columbia Business School in New York and former chief economist at the Asian Development Bank.

There have been some glimpses of what the politics might mean. In July, Xi called for stronger domestic car brands and developing key technologies at the domestic level, but also urged foreign leaders to stay in China and invest more. In a speech last week, he said China needs stronger innovation and “breakthroughs in key and basic technologies as soon as possible.”

Learn from Xi

On Tuesday, the People’s Daily posted a commentary on the importance of learning from the speech, stressing its importance in the leadership’s plans for China’s development.

Slogans invented by top leaders are often theoretical and vague at first, but become concrete policies over time. ‘Supply reform’ was first mentioned in November 2015 with little explanation, but has subsequently manifested itself in reforms such as financial deleveraging and drastic reductions in excess capacity in the economy. ‘steel and coal.

Read more: Xi speeds up China’s domestic economic hub amid more hostile world

The meeting to review the draft plan comes after five difficult years for the Chinese economy, beset by the aftermath of a stock market bubble and currency devaluation, trade war and the Covid-19 pandemic, which pushed her into an unprecedented contraction. Now, Beijing’s leaders must try to chart a growth path that limits the ability of the United States to do more harm to China but does not alienate other nations.

“Xi is not actually suggesting that China is withdrawing from the world stage,” wrote Gilliam Collinsworth Hamilton, Chinese analyst at Gavekal Dragonomics, in a report. “On the contrary, the slogan of ‘dual circulation’ is an attempt to go both ways: for China to have more control over its long-term growth without losing its role as a hub of the world economy.”

Pushing consumers to generate more growth has been a fundamental policy for over a decade and has seen some success, with consumption averaging 64% of gross domestic product in 2016-2019, up from 54% in the previous five years. .

What Bloomberg Economists Are Saying …

China’s domestic economy has the extent of domestic circulation to support growth, and there is considerable leeway to improve it. At the same time, a riskier and more fragmented global system will inevitably trigger efforts to ensure security of access to essential inputs, especially in high-tech sectors. However, China is not seeking to withdraw from the global economy.

Chang Shu, Chief Economist for Asia

However, the fallout from the pandemic and the resulting contraction highlighted weakness in consumption, with retail sales declining for the first seven months of the year as people buy less due to lockdowns and loss of income or jobs. This means that the main engines of growth in 2020 have reverted to stimulus public spending, investment and exports.

Previous blowback

It’s unclear what other countries will think of this new plan once the details become clearer. In his August speech, Xi stressed that the policy change is not about “isolated internal circulation,” but rather an open structure that will involve greater connection with the world system.

However, the previous “Made in China 2025” industrial policy raised alarm bells in Japan, Germany, the United States and elsewhere, where it looked like a plan for China to undermine and replace industries from other nations. . This plan faded from official discourse once it became a target in trade tensions with the United States, but the underlying goal of developing local technology to ensure China’s self-sufficiency remains.

By carefully wrapping a number of existing policy goals, the “ dual flow ” throws them into a framework that combines national dynamism with greater resilience to external shocks, according to Eswar Prasad, who once led the China team. from the International Monetary Fund and is now at Cornell University. .

“This ties in with nationalist aspirations to become less dependent on external sources for demand, technology and funding,” said Prasad.

© 2020 Bloomberg L.P.

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