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The Dual Circulation Strategy

Oct 27, 2020
  • Wang Yuzhu

    Research Fellow, Institute for World Economy Studies, SIIS

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The “dual circulation” development pattern is a new concept that aims to cut China’s dependence on overseas markets by strengthening the dominant position of the domestic market in the international division of labor.

This pattern is proposed to address the question of how to better rely on the world to achieve better development. China’s economic development is built on the foundation of an open economy, and its future development is inseparable from the outside world. Putting “internal circulation” first is not meant to sever economic ties between China and the world but instead aims to strike a balance between China’s economy and the world economy and ensure the sustainable development of the former by improving the division of labor and cooperation with the outside world and establishing a sound internal market mechanism. 

I. Working harder to make overseas markets promote the domestic market to ensure the principal status of the domestic market and industry 

An important feature of China’s export-oriented economy is achieving industrialization in a short period of time through the rapid expansion of export industries. Modern industrialization is based on the global market, which renders the industrial system so fragile that the domestic economy is inevitably affected by external economic turmoil.

As early as the financial crisis in Southeast Asia, the shortcomings of this classic East Asian model of development were already evident. For an economy as large as China’s, the economic risks of dependency that results from such a division of labor are even more serious, especially because of the influence of inter-state political factors.

Putting internal circulation first can break China’s dependence on overseas markets that arises from the international division of labor and minimize the impact of external risks on China’s economy. China has long worked to cut its dependence on foreign trade by nothing more than reducing its export dependence through promoting domestic consumption. However, the growth of domestic consumption of end products cannot effectively lead to the consumption of surplus intermediate goods from the international division of labor.

All along, China has been dependent on Europe, the United States and Japan in the center-periphery division of labor. The “dual circulation” development pattern, which puts internal circulation first, means, in essence, to end China’s dependence on the existing division of labor system. This will make it possible for China to achieve independence and extend its international division of labor on the strength of its domestic market and key industries.

In emphasizing internal circulation, China wants to reduce the negative impact of the international market in the long run by increasing its dependence on its domestic industries and realizing a self-contained internal division of labor. The history of China’s economic development and reform shows that China has always had to rely on overseas markets to increase its dependence on its domestic market and industries.

At present, building a first-class business environment suitable for the development of international companies is still an important goal of government economic work across the country. China’s current efforts to increase its dependence on its domestic industries are still based on an open economy. The idea is to rely on opening up in more areas to absorb more foreign capital in advanced international technology and to develop distinctively Chinese competitive industries on the strength of the large markets in China. 

II. Shaping a more balanced and sustainable new international division of labor through the mutual promotion of internal and external circulation 

In developing an open economy, China is now working to establish a new international division of labor relationship based on its large domestic market and coordinated and orderly overseas markets. The dual circulation development pattern with internal circulation at the core will help to form a new international division of labor and complement and coordinate with the existing center-periphery development pattern worldwide. This will make the global industrial division of labor system more stable.

Since the 2008 global financial crisis, internal and external economic rebalancing has been at the heart of China’s adjustment to its relations with overseas markets. This rebalancing strategy has gradually shifted its focus from trade adjustment to industrial adjustment and has increasingly favored medium- and long-term solutions to balance domestic and overseas markets. The dual-circulation development pattern is designed to achieve development based primarily on the domestic market and on coordinated domestic and overseas markets. By bringing about a new international division of labor based on the domestic market, China will internalize its negative external economic shocks to the greatest extent possible.

The term “circulation” in the English context better reflects the logic of China’s reform — a reform for ensuring orderly circulation of production factors based on the theory of systemic development. Similar to living organisms, dual circulation is a system concept that reflects the sustainable circulation process of production, exchange and distribution in a market environment. The mutual reinforcement of internal and external circulation is the interactive process between internal circulation and the external environment and provides an important environment for effective internal circulation.

In the medium and long term, China still needs the continuous import of external production factors to put in place a bridging mechanism between domestic segmented industrial sectors and to unblock internal industrial circulation. Through institutional reform, it needs to minimize the barriers to the circulation of international and domestic production factors. This will strengthen the foundation for domestic industrial development.

In China’s export-oriented economy, because of the long-term absence of domestic leading industries, a relatively complete chain of industrial circulation has been formed between the domestic industrial sector and overseas markets. These domestic industrial sectors, which mainly rely on the international division of labor, lack effective circulation between themselves, and they compete with each other for industrial homogeneity, rather than complement each other. It is of particular note that under the influence of non-market factors such as local government intervention, they find it difficult to form a circulation system of division of labor and coordination.

In stressing the need to rely primarily on internal circulation and ensuring that internal and external circulation promote each other, China wants to unblock production links through the development of an internal market. This will help tap the potential of the internal market, and promote the circulation and rebalancing of internal and external factors of production, which will become the medium- and long-term solution to the problem of rebalancing the world economy. 

III. The main purpose of the internal circulation approach: further improve the domestic market mechanism 

The internal circulation system is designed to provide a medium- and long-term solution to the development imbalance in China’s export-oriented economy based on domestic institution building. Since China introduced the strategy of high-quality development, the concept of improving domestic industrial deconstruction based on developing market mechanisms has gained prominence.

Since the outbreak of COVID-19, the CPC Central Committee and the State Council have issued heavyweight policy documents, such as the Guidelines on Improving the System of Market-Based Allocation of Factors and the Guidelines on Accelerating Improvement to the Socialist Market Economy in the New Era. These documents aim at accelerating domestic industrial restructuring through a sound market mechanism.

In addition, in deepening the national strategy of Yangtze River Delta integration, the Chinese central government wants to deepen internal market integration by putting an end to the disintegration of regional and local markets, as it views developing a unified and orderly internal market as crucial for high-quality development.

China needs to help the international community gain a mature perception of China’s development and market-oriented reforms by ensuring it has stable expectations for medium- and long-term domestic policy reforms. Therefore, stressing the need to improve the domestic market mechanism is also an important policy response to international challenges in the medium and long run.

While COVID-19 continues to spread worldwide, and as protectionist policies have increased in major countries and regions, China has remained open in formulating its internal and external economic policies. Some believe that China will thus slip back to seclusion, which is clearly contrary to the political wisdom China has gained through reforms and underestimates the Chinese people’s support for the policy of opening up.

Moreover, stressing the need for China to rely more on its own industry does not imply that there are differences in rules or treatment between different types of business ownership. China’s market openness has always been so inclusive to foreign investors or foreign investment that they have so far been enjoying better-than-national treatment.

At present, the key to institutionalizing China’s domestic market lies in attracting more international investment by ensuring fairness for all market players. Detailed rules are now being worked out for implementing the Foreign Investment Law in various parts of China. Moreover, the reform continues to introduce mixed ownership. All this means that the differences in treatment between foreign investors and Chinese market players of different types of ownership are increasingly being eliminated.

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