The ‘Dual Circulation’ strategy which China launched last year relies on an appealing concept: two economic circuits, a domestic one focused on consumption and an international one focused on exports, operating in a perfectly balanced manner for a sustainable performance. One could not borrow a better model from biology. *
National taglines are an important government policy marketing tool and China is quite fond of them. Remember ‘Let A Hundred Of Flowers Bloom’ (1956) promoted to encourage the criticism of the Communist party; ‘The Great Leap Forward’ (1958) to foster the creation of large rural communes; or, just a decade ago, ‘The Chinese Dream’ (2012) as an umbrella for many modern ambitions.
Judging by the commentaries from economists, diplomats, and politicians, ‘dual circulation’ is subject to significant interpretation: Is there any significant deviation from the existing policies towards consumption and away from investment implemented since the mid-noughties? If a turn inward, how sharp? I have read everything and its contrary about the matter (sources below).
Confusion may have been sowed on purpose as China’s political leadership adopts a pragmatic and flexible approach to government policies. The slogan does allow for everything and its contrary too from a policy perspective. But many observers note that China was completely wrong-footed by the virulence with which the U.S. engaged in trade negotiations in 2018, with no perspective of a change under a potential Democratic administration. In that context, the most reasonable interpretation of the dual circulation strategy indicates a defensive move inward: Pushed into a corner, China has decided to embrace it.
The renewed emphasis on domestic demand and technological self-reliance is fraught with challenges, which is perhaps why any attempt to implement this policy to date has largely failed: The barriers to entry to high technologies have been raised over decades of R&D investments; the entrepreneurial spirit required to lower them demands a greater role for the private sector; more consumer spending means more income for workers and reduced global competitiveness; and more income for workers means more power to the people through financial democracy. Suddenly, what China has achieved over the last forty years looks like the easy bit.
With a GDP per person a sixth of that of the U.S., China’s economic potential remains exceptional, including for industrial technologies firms. Besides, its leadership should not be underestimated as discussed recently in ‘China Chess’. Yet, I struggle to see how China can achieve a rebalancing between its internal and external circuits without adopting many of the fundamental aspects of the political and market systems prevailing in developed economies. Considering these growing internal contradictions, the new national slogan behind the 2021-2025 plan might have as well been called ‘Squaring the Circle’.
China’s economy, an essential driver for Value stocks enjoyed over the last decades, is subject to growing uncertainty associated with an inexorable deceleration. This trend is contributing to the stock market bifurcation between Growth/Quality stocks and Value plays discussed previously. As argued in ‘The Great Industrial Split’ (2019), there are vast strategic implications for industrial tech companies.
* In biology, dual circulation refers to the two separate circuits for the blood: a pulmonary circuit between the heart and the lungs where the blood is oxygenated and carried back to the heart; and a systemic circuit between the heart and the other organs where the blood, once oxygenated, is transported around the body. Both circuits are equally important and work in tandem for a healthy life. A potential analogy which has yet to be referred to.
Readings (to the extent not embedded in the text)
The Atlantic, ‘The Undoing of China’s Economic Miracle’, Jan 2021
China Leadership Monitor, ‘China’s Fateful Inward Turn’, Dec 2020 (comprehensive background)
The Japan Times, ‘What China’s ‘dual circulation’ strategy means for the world’, Nov 2020
The Economist, ‘China’s dual circulation strategy means relying less on foreigners’, Nov 2020
Think China, George Yeo, Singapore’s former Foreign Minister, ‘Reflections’, Oct 2020
Project Syndicate, ‘Making sense of China’s New Plan’, Sep 2020
Project Syndicate, ‘Decoding China’s Dual Circulation Strategy’, Sep 2020
FT Alphaville, ‘The problems with China’s Dual Circulation economic model’, Aug 2020
FT Martin Wolf, ‘What trade wars tell us’ (must read) based on the book ‘Trade Wars are Class Wars’, Jun 2020