Dual circulation strategy continues China’s push to open up
- Export promotion strategies can become self-negating when an economy grows past a certain point, and China is no longer a small economy
- Dual circulation does not imply any fundamental change in the growth paradigm, and China will not turn its back on the world no matter what happens
Does the announcement signal a fundamental shift in China’s growth paradigm or development strategy? Why was this new concept introduced, and what policy changes will it entail?
In that event, China was lucky. The rise of the original equipment manufacturer (OEM) sector in the 1970s gave China a window of opportunity to break through the deadlock. OEM manufacturing began to flourish in China’s southeast coastal regions during the late 1970s and early 1980s.
Despite little or no foreign exchange reserves, Chinese OEM firms were able to import and process parts and components that were being outsourced by foreign corporations. These final products, with the value added by Chinese firms, were then sold in international markets.
The processing trade allowed China to leverage its comparative advantage in abundant, low-cost skilled labour. Gradually, it established a feedback loop from importing intermediate products to processing to exports. With each round, Chinese firms were able to accumulate more reserves. This increase in foreign exchange in turn enabled the import of more intermediate products for processing and export.
The strategy turned out to be a stunning success. By 2013, China’s total trade reached nearly US$4.2 trillion. In those three decades, China’s GDP grew to be the second-largest in the world.
Export promotion strategies can become self-negating when an economy grows past a certain point, though. After 40 years of expansion under the great international circulation model, China is no longer a small economy and the global impact of its export drive is no longer negligible.
Equally worrying, despite the fact China’s net foreign assets stand at more than US$2 trillion, it has run investment-income deficits for more than a decade. This suggests there is something seriously wrong with China’s allocation of resources.
China’s economic shift had already started by this point, though, as shown by the fact its trade-to-GDP and export-to-GDP ratios peaked in 2006 at 65 per cent and 36 per cent, respectively. In almost every year since 2009, the contribution of net exports to China’s GDP growth has been negative.
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In light of these trends, it is clear the introduction of a new concept – dual circulation – does not imply any fundamental change in China’s growth paradigm. No matter what happens, China will never turn its back on the rest of the world.