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'Dual circulation' a way to deepen reform

SEP . 24 2020
Peking University, September 24, 2020: President Xi Jinping once again called for efforts to promote deeper-level reform and pursue higher-level opening up to provide strong impetus for establishing a new development pattern, reiterating the "dual circulation" is a new choice for China’s economy facing new challenges.


Of late, “internal circulation” has become a buzzword in China's policy circles. In a meeting with scholars on August 24, President Xi Jinping laid out the guidelines for China’s 14th Five-Year Plan (2021-25) saying China would follow the “dual circulation” development pattern centered on the domestic economy (or "internal circulation") and aimed at integrating the domestic economy with the global economy (or "external circulation"). This means more efforts will be made to boost domestic demand and build China’s technological capacity.

In 2010, China’s economy started transitioning toward a domestic demand-driven development model. As a result, the share of domestic consumption in GDP increased from 48 percent in 2010 to 55 percent in 2019. In recent years, consumption growth has accounted for more than 70 percent of China’s total growth, with the role of exports diminishing drastically. For instance, in the first decade of this century, exports growth contributed to one-third of China's overall growth. In recent years, however, the figure has dropped to just above 10 percent.

But how far can China boost domestic demand?

Over the past decade, the share of consumption in GDP has increased by 0.86 percentage points every year. On the flip side, the share of national savings has dropped by the same rate. If this rate continues for another decade, China's national savings rate would drop to the current level in the Republic of Korea, a country with per capita income more than half of the United States'. China's per capita income is now 26 percent of the US' (in real terms), and it wouldn’t be able to reach half of the US’ per capita income until the middle of the century.

Savings are important for technological upgrading as well as capital accumulation. And to realize the second centennial goal of becoming a great, modern and beautiful socialist country by 2049, China has to have a reasonably high savings rate.

Therefore, increasing "internal circulation" is not so much about increasing the share of domestic consumption. Perhaps the following three things are more important. First, it is important to increase the consumption of people in lower half of the income group.

According to the data collected by China Family Panel Studies, a longitudinal survey conducted by Peking University, in 2014, the richest 10 percent accounted for 38 percent of China’s total household income while the corresponding number for the lower 50 percent was 16 percent. The share of the lowest 10 percent income earners was a shameful 0.4 percent. And although income distribution has improved in recent years, the figures are unlikely to have changed much. So China needs to take measures to raise the income and consumption of the lower half of the income group.

Second, China should accelerate the urbanization process. Even if we take into account the migrant workers, China's urban population is only 60 percent of the total. This is a low rate compared with other countries with similar levels of per capita income. Accelerating urbanization will not only make the Chinese economy much more dynamic, but also increase domestic demand, because in general urban residents spend more than their rural counterparts with similar income levels.

And third, and perhaps the most important, China should increase the share of indigenous technologies — obviously in response to the US administration’s moves which suggest it is determined to punish China’s high-tech companies and other entities. The chip industry is likely to play a very important role in technological independence, as chips are the fundamental building blocks for future high-tech industries.

But will China's strategy of autonomous technologies succeed?

The answer is: yes, but with a high cost. The US' moves to isolate China from the global technology supply chains have dealt a blow to the Chinese economy. But this will not stop China’s rise. The country succeeded in increasing its key strategic military capacities in the 1959-1978 period when it was one of the poorest countries in the world. Today, with one of the highest rates of savings in the world and strong technological capability, it will be much easier for China to gain technological independence.

However, China's door to international technologies is not shut.

The US administration hasn't come up with a coherent strategy to deal with China, and its China policy has been widely criticized even within the US. We hope the US politicians will adopt a more rational policy toward China after the November election, so China and the US in the future could negotiate a rule-based technological system in which companies from both sides peacefully compete and cooperate with each other.

About the author


The author is Yao Yang, dean and professor of the National School of Development at Peking University. He is a member of the China Finance 40 Forum. His research interests include economic transition and development in China. He has published more than hundred research papers in international and domestic journals as well as several books on institutional economics and economic development in China. 

Photo Credit to: Shi Yu, 
National School of Development at Peking University 
Source: China Daily