By Michael Lelyveld
As China struggles to restore economic growth, its official phrase-makers have been working overtime to rebrand the government’s strategy with a slogan that will sell at home and abroad.
Late last month, China’s new economic buzz-words made their first appearance in state media coverage of President Xi Jinping’s speech to corporate executives and entrepreneurs in Beijing on July 21.
Despite the pandemic slowdown that has slammed China’s export markets, Xi “ruled out the possibility of China closing its doors on other economies,” according to the English-language China Daily.
“Instead, he said, 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,” the paper reported.
Even before the COVID-19 crisis, the government had argued for years that domestic demand and consumer spending should drive economic expansion, taking over the role from export- led growth.
Now with demand facing slow recovery, the message is that the economy needs both domestic demand and foreign trade to succeed.
“Only when both the domestic and global markets function smoothly can the Chinese economy overcome the multiple challenges facing it,” China Daily said, giving rise to the new policy label — “dual circulation.”
Behind the vaguely-named title is an even more vaguely- constructed strategy that promises to do whatever is needed to achieve sustainable growth and “opening-up” reforms.
The newly-minted policies may be a prelude to the market reforms expected to figure in China’s forthcoming 14th Five- Year Plan for 2021-2025, which may be released in October.
Notably absent from the explanations of dual circulation, however, is a commitment to loosen the grip of state-owned enterprises (SOEs) on the economy.
On Aug. 10, Hao Peng, chairman of the State-owned Assets Supervision and Administration Commission (SASAC), told China Daily that most SOEs would achieve “sustained and rapid growth” in the second half of the year, although it was unclear how.
Hao cited an upcoming three-year “action plan” for SOEs aimed at making them “more flexible and better structured to generate fresh momentum.” But this appears to be part of a long-drawn effort to attract private capital and incorporate it into the state system.
“Xi has made it imperative to make the state sector bigger, stronger and better,” said one Chinese official quoted by The Wall Street Journal. “That will never change.”
The prosaic “dual circulation” formula seems unlikely to spark global enthusiasm, but it may sum up China’s limited options for reaching its economic growth goals.
On trade, China’s figures for July topped forecasts as exports jumped 7.2 percent in dollar terms, buoyed by COVID- 19 mask sales, but imports fell 1.4 percent, signaling continued weakness in demand.
In the first seven months, foreign trade of goods lost 1.7 percent in yuan terms, the official Xinhua news agency reported. With the pandemic dimming China’s markets, trade seemed unlikely to drive needed growth.
“China’s foreign trade companies will be faced with greater challenges during the second half due to waning external demand and rising anti-globalization sentiment, Xinhua reported in an interview with Commerce Minister Zhong Shan.
Despite a partial rebound, international investment has suffered from similar symptoms.
Foreign direct investment (FDI) in actual use rose 15.8 percent from a year earlier in July, but seven-month growth edged up only 0.5 percent, the Ministry of Commerce said.
China’s non-financial outbound direct investment (ODI) fell 2.1 percent in the first seven months of the year.
The government has hailed the improvement of second- quarter gross domestic product to 3.2 percent from the disastrous drop of negative 6.8 percent in the first three- month period. But the gain came only with continuing signs of weakness as retail sales of consumer goods fell 3.9 percent.
In the first seven months, retail sales of consumer goods were down 9.9 percent year-on-year, the National Bureau of Statistics (NBS) said.
The mixed prospects have left China’s leaders to pursue multiple paths to growth with its obscurely-named strategy, suggesting that trade and investment won’t be growing substantially any time soon.
“I think it’s … a new label for the new reality,” said Gary Hufbauer, senior fellow at the Peterson Institute for International Economics in Washington.
“China will do its best to increase trade and investment with countries other than the United States, but the pandemic plus widespread skepticism of Chinese investment will slow those efforts,” Hufbauer said.
At its core, the dual circulation policy is a balancing act, turning more intentionally inward while sending the message that China is not turning away from external opportunities.
In an analysis, Xinhua said China had pursued rapid growth through exports since the late 1970s.
“However, deficiencies have gradually emerged, such as excessive dependence on foreign trade, risks in economic security, restrictions in key technologies and pressure on industrial upgrading,” it said.
After decades of trade development, investment and employment, China can hardly afford to turn sharply or quickly in either direction.
But the rare reference to “deficiencies” reads like a complaint against its own outward-oriented policies and the consequences of conflict with the United States.
Economic strategists have promised a series of prescriptions to treat the growth problems and advance the dual circulation initiative, but most have yet to be reduced to details.
State media cited existing plans to develop southern Hainan Island as a free trade port and to expand reforms in China’s pilot free trade zones.
Repeated references to “opening-up” have been aimed at reassuring investors that the greater focus on domestic markets will not lead to decoupling from foreign interests.
“The strategy to take domestic circulation as the mainstay … does not mean closing doors to the outside world or active decoupling. On the contrary, it means further opening up to the outside world at a high level,” said BOC International economist Guan Tao, quoted by Xinhua.
On Aug. 9, People’s Bank of China (PBOC) Governor Yi Gang voiced support for greater foreign access to the financial sector and reductions in the “negative list” of off-limits sectors, but his remarks were limited to policy measures that had already been announced.
Equally unclear is the full meaning of Xi’s call for “better connectivity between domestic and foreign markets for more resilient and sustainable growth.”
In its simplest terms, Xinhua said, “China has to keep the industrial and supply chains running by creating demands at home for the products originally meant for exports.”
The concept implies competition between Chinese and foreign consumers for the goods that the country produces. But that may only come with continuing wage increases and higher labor costs, which have already dampened China’s export growth.