China announced last week its new strategy to cope with a less accommodating international environment, so-called dual circulation, under which it will pursue growth in both its domestic and foreign trade sectors, but with the priority on the domestic market. According to the latest gathering of the Communist Party’s Politburo, this will be the direction for China’s economic policies in coming years, if not decades. The message is clear: China has to rely more on itself to sustain economic growth. China will cut its reliance on overseas markets to keep its factories humming, and it will develop its own technologies so that the United States, or any other country, cannot easily threaten the economy with embargoes or sanctions. Circulation in this case refers to the cycle of production and consumption. When China adopted the idea of “great international circulation” in the early 1990s, it meant China would pursue an export-oriented growth model – picture a migrant worker walking into a Taiwanese-owned factory in a coastal city, assembling components from Japan or South Korea into finished products destined for the US market. The project of turning China’s population, or the bulk of it, into modern consumers will require deep-rooted, and at times, painful structural reforms of the political economy system Domestic circulation, on the other hand, means the migrant worker would be working in a Chinese factory, assembling locally-made components into a product that is tailored for the domestic market. The self-reliance mindset, especially when the external environment turns hostile, is deeply rooted in the ruling Chinese Communist Party. The spirit of zi li geng sheng, or relying on one’s self to win battles and to pursue development, has been hailed by generations of Chinese leaders starting from Mao Zedong. The “great domestic circulation”, to Chinese ears, is more or less a new expression of that spirit. It also makes economic sense as the potential is clearly there. China has 1.4 billion people, the largest consumer market in the world. However, it is much easier to announce a strategy than to make it successful. The project of turning China’s population, or the bulk of it, into modern consumers will require deep-rooted, and at times, painful structural reforms of the political economy system. The hoped-for domestic circulation will not exist without sustainable consumer spending power, and that will not occur until China dismantles its state-led debt-fuelled model While China’s economic development in the last four decades has lifted the living standards of almost all social groups, the country’s wealth distribution is increasingly titling towards the state, instead of the people. Social welfare programmes, such as education, health care and pension coverage, remain skeletal. In addition, China’s wealth gap is among the widest in the world. In rich China, consumer demand for imported wines and luxury handbags seems unlimited, with the quality of life matching that in London and New York. In poor China, which covers a much wider portion of the population, people still struggle to make ends meet. The hoped-for domestic circulation will not exist without sustainable consumer spending power, and that will not occur until China dismantles its state-led debt-fuelled model. That is the real challenge for China’s economic future.