China’s ‘dual circulation’ plan is bad news for others’ exports

Alicia Garcia Herrero, Natixis Asia Pacific Chief Economist, Bruegel Senior Fellow

Minds in Beijing are focusing increasingly on the upcoming meeting of the Chinese Communist Party Central Committee next month.

High on the body’s agenda will be sketching out a new official five-year plan for Asia’s largest economy. A freshly coined buzzword looks set to play a leading role in these discussions: “dual circulation.”

The new term has won a featured place in speeches and state media reports since May even though its precise meaning has been left rather ambiguous.

“Circulation” itself here refers to the production and consumption of goods and services. The first “circulation” in the “dual” formulation is about maintaining integration with the rest of the world. The second “circulation,” in the consensus view of economic observers, centers on increased reliance on domestic demand and reducing economic dependence on the rest of the world.

What matters for China’s foreign partners is that the arrival of the dual circulation strategy looks set to mark a drive to reduce dependence on imports, particularly of high-end manufacturing equipment and inputs.

While this would come in reaction to the U.S. push to decouple global supply chains, Beijing’s initiative is bound to raise new concerns with Japan, South Korea, Germany and others who have been profiting from exporting intermediate goods to Chinese companies looking to upgrade their output.

Talk of the dual circulation strategy first emerged in reports from a May meeting of the Communist Party Politburo. With preparations now starting on what will be the People’s Republic’s 14th five-year plan, planners are undoubtedly at work developing the concept so that it can be operationalized with specific performance targets for the years 2021 to 2025.

At first glance, it sounds similar to the grand strategy of rebalancing which Beijing applied in its response to the global financial crisis. When China introduced rebalancing, which then served as the intellectual underpinning of the 12th five-year plan, the world still looked open to China and multilateralism was in vogue. This is no longer a reality today…