Withholding one of the world’s most powerful markets, China continues its effort to develop more self-reliance on its economy by implementing a dual circulation strategy (DCS) in hopes of better insulating itself from the general global economic status, according to a recent China Power report. The plan, however, has also been deemed a contradiction as the country continues seeking investment opportunities in other markets, and relying on others to fulfill local demands.
“Underlying many of Beijing’s concerns is a growing sense that further integration into the global economy is not the reliable engine of growth that it once was,” the report states.
The crucial role of DCS was outlined in China's economic 14th Five Year Plan in March 2021. The tactic consists of internal, domestic circulation and external, global circulation intended to sustain each other. Under this model, the internal (domestic) market would serve as the main driver of the country’s economic development.
The four main objectives of the strategy include reducing external demand by increasing domestic consumption, increasing China’s presence in high value-added products, encouraging economic self-sufficiency and diversifying supply chains, and rearranging investing budgets into different sectors.
The COVID-19 pandemic served as a main promoter of DCS as it severely impacted the country’s economy. According to official government statistics, China’s gross domestic product (GDP) dropped 6.8% in the first quarter of 2020, compared to the same period in 2019. Industrial output declined 8.5%, while retail sales trended downward to 19%.
Despite efforts to keep up with domestic demands, the drop has forced the country to rely on other nations for particular goods, especially microchips, energy and food amid a significantly accelerated demand for meat. Its livestock feed, corn and soybeans import count, on the contrary, soared from 10.4 million metric tons to 100.3 million metric tons from 2000 to 2020, making China the largest worldwide importer of legumes.
Much of its soybean supply comes from Brazil after tensions between China and the U.S. heightened, causing Chinese imports from U.S. soybean producers to decline from 32.9 billion metric tons to 16.6 million metric tons from 2017 to 2018. Since Brazil cannot meet the high demand for soybeans, China continues to partially rely on the U.S. to fulfill demands.
Similarly, despite making attempts to produce its own high technology products, the country is overly dependent on industry leaders in the United States, Taiwan, South Korea, Japan, Germany and the Netherlands. According to official customs data, in the first 10 months of 2021, China imported $349 billion worth of integrated circuits, which is a 23% increase over the same period in 2020, and a 42% jump over the first 10 months of 2019.
Pairing its dependency on other countries with the frequent regional instability in the Middle East and Africa, the main source of China’s oil has led supporters of the strategy to prioritize energy security and import diversification. Chinese officials now hope to identify other markets to purchase from.
As China works to become more self-sufficient, but also a global leader in various export market areas, such as high-value-added, high-technology products, it also faces delays in both regards as a result of the massive lockdowns, determined by the country’s no-covid policy. As a result, the country's exports have largely contributed to the 28% increase in its GDP, the highest recorded since 1997.
Another contributor to the country’s economic success is its foreign company investments, which mostly involve the energy and metal industries that make up a large part of the country’s $1.3 trillion investment sum. The figure has grown since China’s Belt and Road initiative was deployed in 2013, including a sudden increase of $94 billion, from $79 billion to $173 billion in 2017.
According to the China Power report, however, China's manufacturing goals and DCS are misaligned to the point of contradiction. The rise of the services sector has created a decline in the manufacturing sector and as such, has slowed China's demand for energy and raw materials. However, reversing this trend will increase China’s need for manufacturing inputs, thereby exposing the Chinese economy to supply chain bottlenecks and trade disagreements.
China’s application for admittance into the Trans-Pacific Partnership, submitted in September 2021, further supports the claims of contradiction. The move was made as the country attempts to position itself as the opposite of the U.S. The country recently announced its willingness to trade since the Trump Administration withdrew the United States from Trans-Pacific Partnership in 2017, leaving behind a void.
In order to fulfill its goals of becoming just as successful without the help of its peers, China must strengthen its manufacturing abilities, which would also benefit China’s "Made in China [MIC] 2025" initiative, which will require the ability to support production in 10 key industries, develop information technology, such as automated machine tools and robotics, the creation of aerospace and aeronautical equipment, maritime equipment and high-tech shipping, modern rail transport equipment, and new-energy vehicles and equipment. The supply of power, agricultural and biopharma/advanced medical products is also needed.
The report goes on to state that the long-term success of DCS will require China to impart fiscal tools, which it is lacking, to spur domestic consumption. The causes of blame include the lack of important fiscal infrastructures to disperse wealth from high-income to low-income households and welfare systems to protect low- and middle-income families during economic downturns. The report projects little advancement without the creation of appropriate fiscal measures that would promote the growth of the middle class and stimulate domestic consumption.
In light of the long-time success, Chinese officials will continue scoping out opportunities to make additional foreign direct investments, which they hope will attract foreigners to invest capital, innovation and know-how, to advance the finance, downstream manufacturing, transportation and infrastructure sectors. In the meantime, it will also continue diversifying and making its own investments and acquisitions of foreign companies related to energy, food, raw materials, and where possible, localize supply chains.
Local officials also will continue pursuing massive trade agreements like the Regional Comprehensive Economic Partnership (RCEP), initiated in November 2020. The trade agreement will increase China’s trade with 14 other Indo-Pacific countries, such as Australia, Japan, New Zealand and South Korea. The country is also considering Guinea as its latest source of iron ore, which would benefit the African nation by freeing it from Australia, which supplies them with 60% of China’s import of metals.