How Xi Jinping’s economic pivot is China’s version of Trump’s decoupling

The proven benefits of opening up mean Beijing will not turn completely away from international engagement, but will focus on developing belt and road economies with its new ‘dual circulation’ strategy
However, China is one of a few economies with the critical mass to rely on its domestic economy for sustainable growth

David Dodwell

Published: 3:30am, 8 Aug 2020

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Over the past couple of weeks, mainland media have been all aflutter about President Xi Jinping’s new “dual circulation” strategy. This contrasts with the “great international circulation” that was built on export processing and shaped economic development from the 1990s, and the “domestic circulation” that underpinned Mao Zedong’s era of introverted xenophobia.

China Daily reported that Xi told business leaders at a symposium in late July that China “will unleash the full potential of its domestic demand, improve connectivity between the domestic and international markets and better use resources and the two markets to propel stronger and sustainable development”.

In short, China has decided to respond to the current perfect storm of adversities by reducing its reliance on global markets, focusing much harder on building demand from the domestic consumer market, and building technological self-reliance as fast as possible.

Perhaps unsurprisingly, similar initiatives are under way in the US and Europe, as many feel overreliant on Chinese products, ranging from car parts, 5G technology and medical equipment to rare earths and electric vehicle batteries, and are stirred by the Covid-19 pandemic to prioritise self-reliance.

I sense the timing of this formal unveiling of a new national economic strategy is probably not of Xi’s choosing. Let’s call it making a virtue out of a necessity, shaping an urgent and essential response to rising international protectionism, the US’ increasingly serious tech war against China and the recessionary effects of the pandemic.

In China, expect shorter supply chains as more stages of production are brought onshore, and a fierce focus on development of high-value-added stages of the value chain which have until now been left to hi-tech leaders in the US, Japan, South Korea and Taiwan.

Call it China’s reluctant version of “decoupling”, as it mirrors US and (less strident) European efforts to rein in the challenge from China. Expect more of China’s international trade to be focused on developing economies along the belt and road plan’s trade routes and a global economy divided into three. It is a strategy set for the long haul.

In truth, China’s inclination to self-reliance goes back centuries. Even Deng Xiaoping’s commitment four decades ago to open the economy and let in foreign “flies” was based on a wary pragmatic recognition that maintaining Mao’s autarchy would only lock the country’s long-suffering population in perpetual miserable poverty.

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The radical success of that opening-up policy, lifting hundreds of millions in China out of poverty, means Xi’s team remains fully committed to extensive engagement with the global economy. So don’t expect decoupling to be total, or to come quickly.

And despite Washington’s belligerent positioning, I recall Yukon Huang and Jeremy Smith from the Carnegie Endowment for International Peace writing in the Post in June: “US dependence on Asian manufacturing is both deeply rooted and [has been] remarkably stable over time.”

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But Xi’s team also recognises that China is one of just a handful of economies led by the US and the EU that have generated the critical mass – both in terms of its 1.4 billion population and middle-class consumer spending power – to be able to rely heavily on their domestic economy for sustainable growth and become what some have called “Galapagos kingdoms”, with their own distinct systems and standards that serve their domestic populations reasonably well, but cannot easily connect with other parts of the world.

Whatever US President Donald Trump’s posturing and the threat of decoupling, I do not believe the US, Europe or China relishes the idea of retreating into such “Galapagos kingdoms”. So “dual circulation” seems a more realistic, and palatable, likelihood.

Customers at a shopping mall in Shanghai on April 11. Photo: Xinhua

China’s key test as it develops its “dual circulation” economy will be to discover whether its consumer market (US$5.5 trillion in 2018) and its growing middle class consumer market (average urban household incomes were around US$6,000 last year) provide the critical mass to maintain strong economic growth even as international trade opportunities stagnate or slip.

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To imagine that this “dual circulation” concept has only recently been conceived is naive. As far back as 2010, Beijing officials realised foreign investors were “gifting” to China only the lowest-paid, least value-adding stages of their value chains with the aim of capturing low Chinese labour costs to keep consumer products and other industrial inputs as cheap as possible for American consumers.

Back then, Chinese officials recognised that they would only be able to develop their own strong domestic consumer market if they could develop their own consuming middle class – which would require higher salaries, and in turn more high-value-adding work done inside China. In response, they have been onshoring higher value-added roles as speedily as possible, and will continue.

Workers sew clothing for export at a garment factory in Donghai county, in east China’s Jiangsu province, in April 2019. The Chinese government has long been aware that foreign investors were moving only the least value-adding stages of their value chains to China. Photo: AP

Worrying about dependence on foreign hi-tech inputs has come more recently, and has certainly given fresh impetus to those who want China to reach the cutting edge in all technological areas that can be regarded as critical. We must regard this as an irreversible long-term consequence of the eccentric behaviour of the Trump administration.

Experts say China still lags significantly in a number of areas, but that recent treatment of Huawei and numerous other Chinese tech leaders makes it likely that Beijing will focus relentlessly on eventually ensuring tech self-reliance.

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I suspect this strategic “moment of truth” has arrived earlier than Xi would have liked, but that he is now hopeful that the domestic consumer market is large enough, and China’s companies have moved far enough up the value chain for high-value-added – and well-paid – jobs for its workforce, and sufficient technological prowess has been built to arm wrestle on a level playing field with most foreign challengers.

Employees work at the BYD electric car factory in Xian, Shaanxi province, China, in October 2019. China has worked hard to get its manufacturing to move up the value chain. Photo: EPA-EFE

Despite numerous threats and inducements from the Trump White House to persuade US companies to return home, the American Chamber in Beijing says just 2 per cent of surveyed members might consider leaving the China market.

More might be forced to adopt an “in China, for China” strategy despite the inefficiencies that would arise, but few appear willing to step out of the economy that has for the past two decades been the principle generator of global growth.

As Yukon Huang concluded: “Though the winds of change are surely blowing, a great deal of inertia exists to maintain something resembling the status quo in US-China relations, which ought to temper fears over the more apocalyptic scenarios.”

David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view

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