In May, President Xi Jinping announced China’s new economic strategy for the years ahead — the dual circulation plan. The plan is based on a two-pronged approach to economic growth. Its main aim is to strengthen internal circulation, by boosting the domestic consumer economy, which has struggled to become a key driver of growth for many years. This is complemented by maintaining international circulation, in terms of China’s presence in the export market.
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Although this plan may appear shiny and new, details that are emerging suggest that it is simply a revamp of the rebalancing strategy that China has battled with for many years. As long ago as 2004, Chinese officials were stressing the importance of fundamentally changing the structure of the Chinese economy, and they had targeted high-tech industries even before that. The wish is to transition away from overreliance on unsustainable export- and investment-led growth, and shift focus to developing the domestic economy. Although this strategy has been prominent in China for many years, Fathom Consulting has long maintained that China has had a half-hearted approach to rebalancing. Even official statistics reveal that consumption as a share of GDP is lagging behind investment. This is illustrated in the chart below and suggests that progress has been limited. This is supported by trade data, which offer an alternative to the dubious headline measures of the consumer economy. These show that consumer imports as a share of total imports have fallen — despite the rebalancing pledge.
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On the surface, the announcement of the new blueprint, the dual circulation strategy, suggests that China is willing to begin the difficult process of rebalancing again. The main question is, will this latest drive yield different results and stand the test of time? One could argue that China has a greater motive this time round. The country is facing an increasingly hostile international environment, as geopolitical tensions heighten with a variety of economic partners. It is possible that China will commit to supporting the domestic consumer economy, in order to reduce its vulnerability to a breakdown in support from the international community.
Regardless of this motive, we believe this is unlikely. Despite the announcement of the blueprint, there is evidence that suggests that China has been doubling down on the old drivers of growth since early 2019. This has intensified in recent months as the country navigates the economic fallout from the COVID-19 pandemic. The People’s Bank of China has cut the reserve requirement ratio to encourage banks to lend, and has also reclassified non-performing loans, suggesting there is a greater appetite for bad debt. With this extra stimulus, the producer economy has been showing signs of strength. However, this has left the consumer economy, which China wishes to expand, lagging behind. This is true not just relative to China’s producer economy, but also relative to the economies of other countries, such as the UK, which have seen a far more pronounced recovery in the consumer environment.
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Currently, very few details have emerged surrounding the policy changes that will be implemented to promote this dual circulation strategy. It is anticipated these will be made public when China releases its new five-year plan in October. This is expected to have the dual circulation strategy at its heart. Until these details emerge, we can only speculate about China’s commitment to its new strategy. What we do know, however, is that, ultimately, rebalancing is hard.
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