Feng Xuming: Four Key Implications and Requirements for Implementing China's Dual Circulation Strategy

Originally published by Shuimu Financial Observation official WeChat account, translated by ACCEPT

The dual circulation strategy, in which domestic circulation is the mainstay while receiving support from international circulation, can be regarded as a revision of the international circulation development model of the 1980s.

During the early stages of reform and opening up in the 1980s, China's southeastern coastal areas relied on export processing industries. Both the raw materials and export markets were outside of China, so the country imported technologies and exported products in large volume during this time. China's southeastern coastal areas were integrated into the international economic cycle, and they fueled industrialization and economic development over the next three decades. During this time, the theory of international circulation was well-received by some economists and local governments.

China's current economic output is large, and it has become a “systemically important” major economy exerting spillover effects on the world economy. From the perspective of both the external environment and China's domestic circumstances, sole reliance on exports is not enough to power China's long-term sustainable economic development.

The dual circulation strategy does not mean moving toward a closed economy. Rather, this strategy has two implications. First, developing and enabling domestic circulation is crucial. Second, we must promote a high level of economic openness and participate more actively and effectively in international circulation. Of course, in the case of rare and extreme events in the external environment, both domestic and international circulation should have a bottom line.

Developing and enabling both domestic and international circulation is a systematic project which is much more complex than simply boosting domestic demand. This systematic project has at least four implications:

First, on the production side, capacities for technological innovation and core technologies should be improved by leveraging market-based instruments and China’s structural advantages. Meanwhile, the production mix must be adjusted according to the changing patterns of demand. The potential for economic development must be tapped, and various types of resources should be utilized more effectively when rebalancing supply and demand. In the coming years, we must boost the supply of public services for medicine, elder care, education, basic science, and urban and rural social governance.

Second, in distribution, the proportion of work remuneration in GDP, the per capita disposable income, and social mobility must be increased. After achieving the historic task of poverty alleviation this year and raising every citizen above the poverty line, we must continue to work to resolve the problem of relative poverty and prevent rising inequality in income distribution and property ownership. Additionally, we should strive to double the size of China's middle-income group from 400 million people to 800 million people during the execution of the next three Five Year Plans.

Third, in terms of circulation, both new and old infrastructure require maintenance to reduce costs. On one hand, big data, cloud computing, artificial intelligence, and Internet of Things (IoT) technology must be applied in transportation and logistics. On the other hand, traditional facilities including those of transportation, logistics, and communication must be strengthened. Townships and counties are at the furthest ends of the circulation network, and as such, the market and the government must join hands to increase their circulation.

Fourth, maintaining the balance between consumption and investment is essential. The role of consumption must be prioritized, and the consumption rate should be appropriately improved. Meanwhile, it is also necessary to prevent the risks which may result from a rapid decline in investment growth. As a developing country, China lags behind other developing countries in terms of major types of capital stock. There is still much room for investment in industrial capital, traditional basic infrastructure, new infrastructure, and human capital. Effective demand is currently sluggish and the output gap is negative, providing an opportunity to utilize overcapacity in labor, capital, and industry rather than letting them sit idle and depreciate.

The key to developing and enabling the economic cycle is improving the market-based allocation capacity of various factors.

First, it is necessary to break the urban-rural system and roll out integral urban-rural governance in household registration management, social security, and property rights to reduce resistance to the flow of people and households between urban and rural areas, different regions, and different industries. We must make efforts to address the fact that the rate of household registration lags behind urban migration patterns, and urbanization of family life is slower than the urbanization of labor.

Second, the pricing power of the financial market must be improved, and the weaknesses of the financial system should be addressed. On one hand, this will provide a financial guarantee for the industrial application of new science and technology, and on the other hand, it will promote the transformation of the industrial structure and the reorganization of businesses along with the reallocation of factor resources.

Third, we must effectively increase the residential land quota to match the influx of people into cities and resolve the mismatch between supply and demand in real estate. We should ease social anxiety related to skyrocketing housing prices and prevent these high prices from impacting the real economy. In first- and second-tier cities where young people struggle to buy houses, we must also improve the stability, accessibility, reliability, and livability of rental housing.

Fourth, we must develop a sound and rational way to determine the property rights of data factors and develop a data factor market. We should strive to be at the forefront of the world in standard-setting and system construction in the data factor market.