Aiming for mega-market

Manoj Joshi

Distinguished Fellow, Observer Research Foundation

In a remarkable coincidence, India and China, neighbours and adversaries, who began their journey as nation-states together in 1950, have begun talking about self-reliance at the same time. ‘Self-reliance’ means different things in Beijing and New Delhi, but just as analysts struggle to understand what Modi’s atmanirbharta means, so are they grappling with Xi’s concept of ‘dual circulation system’ or DCS, aimed at promoting atmanirbharta in China.

We know that Modi’s call on May 12 was triggered by Covid, even if we are not sure as to exactly what he is advocating. But the DCS announced at the politburo standing committee (PBSC) meeting two days later on May 14, has a longer history. The PBSC statement spoke of the need to deepen the supply side structural reform to give full play to the country’s super large market, and push domestic demand. It sought ‘a new development pattern in which domestic and international double cycles promote each other.’

How is this atmanirbharta,you may ask? In essence, DCS is an economic strategy that calls on China to continue to expand domestic production for exports (international cycle), even while shifting the economic momentum towards production for domestic consumption (internal cycle). China hopes to grow the domestic market and consumption, even while nudging the role of foreign markets and technology to a supporting role.

Beijing seems to have come to the same conclusion as many of its trade partners — that they are too vulnerable to the vagaries of the global trading system and need to hedge.

So, DCS is being promoted as a means of enhancing the resilience of its economy in a hostile global environment. Globalisation is in retreat and Covid has brought on a recession disrupting global trade, and at the same time, China’s supply chains face disordering in the face of US hostility. So, China is looking at ‘hedged integration’ where it takes advantage of global finance and technology where it can, but boosts domestic capabilities, and self-consciously, to reduce reliance on the global economy.

The new concept was explicated by The Economic Daily’s editorial board on August 19: In the economic cycle, “production is the starting point, consumption is the end point and circulation and distribution are the ‘bridges’ connecting the middle…we should focus on getting through the various links of domestic production, distribution, circulation and consumption and take satisfying domestic demand as the starting point and the landing point.” Giving ‘full play’ to the mega-market that is China is at the heart of the new strategy.

After Xi came to power, there was an increased emphasis on supply side structural reform through which China sharply reduced its capacity in several industries. Alongside, it undertook an aggressive campaign of financial de-risking and reducing its zooming debt. Like the supply side structural reforms, the DCS is seen as being driven by XI’s principal economic adviser, Vice Premier Liu He.

Politically, China has been emphasising the need to move the economy from the high growth to the high-quality path. This is linked to the importance of improving the quality of life of its people. At the 19th Congress in 2017, Xi Jinping had declared that the principal contradiction facing the Chinese people is the “contradiction between unbalanced and inadequate development and the people’s ever growing needs for a better life.” This principal contradiction, to use Chinese jargon, is driving current policies.

Self-sufficiency has been an intrinsic part of Chinese planning since the time the country began to flex its manufacturing muscles. The December 2005 national medium and long term science and technology development plan envisaged the country moving from an ability to copy foreign products to where it could do some value addition in the form of ‘indigenous innovation’ through R&D. Successive five-year plans have promoted this National Indigenous Innovation Capability (NIIC). Wherever possible, foreign technology has been replaced by a domestically developed one as a matter of policy.

The most successful and well-known instance of ‘indigenous innovation’ has been in the Internet. China simply blocked off foreign technology — Google, Amazon, Facebook, Twitter — and developed its own Baidu, WeChat, Alibaba and Weibo. In some areas, Chinese products turned out to be better than their western counterparts, the primary examples being Huawei’s 5G and TikTok.

China’s strength has been its ability to concentrate its resources in identified areas and in the past 30 years, it has defied naysayers and pulled economic rabbits out of the hat. Today, it confronts a veritable storm led by the world’s foremost economic and military power, whose principal aim is to deny China technology and trade that has powered its rise so far. Over the past two years, the US has carried out a global campaign to block the most advanced Chinese technology— that of 5G. It has placed broad restrictions on the import of US technology by Chinese companies and individuals, and it has imposed an array of tariffs on goods from China.

If the DCS succeeds, it will have a major impact on the world economy. Jude Blanchette and Andrew Polk have argued that even a small shift in China’s model will have a major impact on world trade. A more fuller shift towards what is called the German model, of high-end manufacturing with low input costs, could pose a challenge to the developed world as well. But, mind you, the DCS is not a turn away from the world economy. Indeed, it is aimed at deepening the linkages, but fixing China’s vulnerabilities.

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