What China’s pivot towards economic self-sufficiency means

As global headwinds grow, China has turned its attention inward to focus on domestically driven economic growth
This will come at the expense of efficiency and accelerate deglobalisation, but it’s a price Beijing is willing to pay

Hao Zhou

Published: 10:00pm, 4 Aug 2020

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When Chinese Vice-Premier Liu He first talked about the concept of “dual circulation” in his keynote speech at the Lujiazui Forum in mid-June, few had any idea what he was referring to. “A new dual-cycle pattern, which is dominated by the domestic economic cycle and facilitated by the cycle between China and overseas countries, is taking shape,” Liu said.

Last week, as China’s top decision-making body, the Politburo, wrapped up the country’s half-year economic review and laid out the blueprint for the next few decades, Chinese policymakers vowed to accelerate the formation of this so-called dual circulation, with emphasis on technological innovation and the manufacturing sector.

Those familiar with the Chinese political system would be aware that a new term appearing on the top-level agenda probably signals a change of strategy.

To make more credit available for technology and industrial upgrading, the authorities have reiterated their resolve to curb property speculation. In the past two decades, the housing sector has attracted many investors seeking capital gains, crowding out financing for manufacturers and small firms.

Since the financial deleveraging campaign that started in 2017, the government has taken a tougher line on the property sector and on shadow banking, suggesting a policy shift towards a more sustainable growth path, away from reliance on the property sector.

A tightening of property rules is already under way. After housing prices rebounded sharply in Shenzhen, the city government announced in mid-July that anyone with a residency permit for the city – previously all that was needed to buy Shenzhen property – would now have to provide proof of income tax or social security payment history for three consecutive years in the city to be eligible.

It is widely expected that more such property curbs will soon be imposed on other cities where housing prices are also rapidly rising. Many were surprised by the property curbs, with the post-Covid-19 recovery not yet on a solid footing – but they reflect how urgently the authorities want to change the economic growth track.

China has shifted to a more domestically driven growth mode, which seems inevitable as the external headwinds get stronger.

The most recent example is the controversy over TikTok, with China’s ByteDance offering to divest its stake in the app to save it from a US ban. The US has been investigating potential national security risks because of the Chinese company’s control of the app.

While it remains unclear whether TikTok will be taken over by an American firm or be closed forever, the case has become a warning to Chinese companies looking to expand overseas, particularly in North America.

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In the meantime, the disputes between China and its Asian neighbours are also escalating. For example, China’s relationship with India soured after the severe border stand-off, and it seems the situation is only temporarily under control. Some Chinese technology companies have also been pulling out of India after the government banned Chinese apps.

For China, the external environment is likely to get worse before it can get better. There is no end in sight, whether President Donald Trump is elected for another four years or his rival Joe Biden moves into the White House.

For when it comes to foreign policy towards China, Republicans and Democrats agree that the aim is to prevent China’s political, economic and military rise by every means. China’s trade conflict with the US will only noticeably worsen China’s growth prospects for years to come.

By now, China, too, would have realised that the prospects of emerging victorious in this conflict are limited. This is because China’s negotiating position is much weaker, given its significantly lower imports from the US, which could potentially be hit with taxes. Last year, the value of China’s exports to the US was five times higher than its imports.

And with the execution of the phase one trade deal far behind schedule, the US could use its tariff weapon at any point.

Therefore, China has moved to an approach of making the country less dependent on foreign trade and focusing on the domestic economy. As a result, China will become more autarkic. Accordingly, the government is strongly encouraging exporters to develop the domestic market as well.

At the same time, China is modernising its technologies and rationalising its domestic supply chains to become more independent of foreign production. However, this strategy towards greater self-sufficiency is at the expense of efficiency, as it does not take advantage of the international division of labour.

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But the Chinese government is obviously willing to accept these efficiency losses, although they will slow down economic growth in the longer term.

All told, the emphasis on “dual circulation” is a natural policy change given the new global dynamics, suggesting that China is gradually turning inward, further strengthening the deglobalisation trend. At the end of the day, China’s massive domestic consumption will be the most important driver in this policy move.

To ensure that domestic consumption expands, the labour market will be critical; hence, the authorities will exercise all means to secure more jobs for the Chinese people.

Hao Zhou is senior emerging markets economist at Commerzbank

This article appeared in the South China Morning Post print edition as: Pivot to self-sufficiency

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