My view on China's Post-Pandemic Economic Model and the challenges it faces
At the end of last year I participated - virtually - in a number of conferences in China, on the green agenda and another on the global economy. In addition, at that time, i was asked to give my views in a 15 minute video on China's new economic theory: dual circulation. I was told that my comments generated much interest. As a result, I was asked to summarise my views on dual circulation and this is what I have done here.
These comments appear in Bank of China (UK)'s new publication, 'China Economic Watch', that is being made available publicly for the first time. I am an independent, non-executive director of Bank of China (UK).
For the first edition I was asked to write the key theme, and this is it.
China’s Post-Pandemic Economic Model
China’s economy has rebounded strongly from the pandemic.
As the year progresses, a prudent monetary policy aimed at curbing the expansion of credit and keeping inflation in check may slow overall growth to a more sustainable pace. Despite this, 2021’s growth should still meet the official target of more than 6%, following last year’s 2.3%.
Attention this year, however, should focus not just on China’s growth rate but on its new growth model of dual circulation that was unveiled last year.
China has no shortage of ambitious aims. Dual circulation sits alongside the 14th Five Year Plan, unveiled in March, that will drive immediate economic policy.
The success of dual circulation is also critical to the 2035 goal of delivering technology advances and doubling income per head.
What does dual circulation mean, and what should we make of it?
Dual circulation is a policy of two parts: domestic and international. Domestic circulation is aimed at transforming and growing China’s economy. The international component, meanwhile, appears less about boosting China’s global role and more about how, through external resources, it can support its domestic economic aim to boost living standards and create jobs.
This is a good time for China to unveil a new economic strategy. As China’s population ages, its trend rate of economic growth is expected to slow.
Also, rising geopolitical tensions and the legacy of the pandemic points to a more difficult and uncertain international environment. Trade tensions have been evident in recent years. While in areas of mutual benefit such as addressing climate change, China will play a key role and international cooperation is inevitable, the US and UK look set to adopt a more robust relationship with China in defence, security and areas linked to human rights. Bilateral business and financial ties will have to develop within this new context.
Thus, dual circulation is viewed by some as a more inward-looking growth model. It certainly should make China more self-sufficient and resilient to external shocks. But it may be wrong to suggest the external dimension is any less important, given China’s focus on the Belt Road initiative and its decision to join RCEP, an Asian regional trading bloc, last year.
China, too, is not immune to the same policy challenges facing all major economies, of high public debt and exceptionally low interest rates. By necessity, this reinforces the need for China to move away from debt-fuelled growth and aim to move up the value-curve in the face of future intense competition and the growth of artificial intelligence.
The issue is whether dual circulation can deliver China’s new pro-growth agenda?
A decade ago, attention was on the need for China to overcome the Middle Income Trap where many countries find it difficult to move from middle income to high income. This is not mentioned now, as China’s middle class continues to swell, as income standards rise.
Yet, the concerns that underpinned it are reflected in the need for China to move from an economy with an over-reliance on exports and investment to one where it sees higher domestic consumption. The share of domestic consumption is still low.
In my view, this policy is likely to succeed, but there are six areas that merit particular attention.
One, success depends upon a stronger role for the private sector. China cannot run its economy in the future in the same way that it has run it in the past, given its increasing size and scale. There will be a need for the market mechanism to play a bigger role, including deeper and broader capital markets and deeper and broader insurance markets. In the latter, China may provide a role model in terms of pension provision for its middle classes.
In March 2020, the Central Committee said that the market needs to play a more important role in the allocation of land, labour, capital and technology. Then in May, they stated that there is a need to minimise government intervention in micromanagement of the economy. I agree.
The implication of this is probably the most important one for China, namely that while the direction of its economy is clearly upwards, one should expect increased volatility along that upward trend.
Two, infrastructure is critical for success. Hard infrastructure is an important part of dual circulation, with increased transport and broadband connectivity. So too is soft infrastructure, covering skills and training. There is also the need to not lose sight of institutional infrastructure, as divergences at a regional level point to greater devolution of policy. This is a challenge anywhere, but perhaps more so in China given its scale.
Three, there is a need to ensure compatibility between domestic and international circulation, whereby the higher wages that would flow from a successful domestic policy do not undermine competitiveness. To address this, improving the supply side of the economy needs to go hand in hand with boosting domestic demand.
Boosting domestic demand needs: improving the social safety net, higher wages, generating jobs, and ensuring a successful social welfare model, perhaps using the dividends from successful stateowned enterprises to fund this. On the supply side, reform is key to future success, including boosting research and development and raising productivity.
Four, resilience will be a feature in a post-Covid world. China is heavily dependent upon imports in some important strategic sectors such as technology, energy and food. This sits alongside other policy aims, such as ‘Made in China 2025’, where China wants to shift from low to high end manufacturing focused on robotics, information technology and clean energy. Indeed, China’s target to achieve net zero carbon emissions by 2060 points to it working with others, like the UK, on the green agenda, as we are likely to see this year.
Five, the importance of a level playing field. Import substitution is not always possible, nor is it the best solution. China needs to support the multilateral trading system, as it makes sense for itself and the global economy. In doing so it would overcome fears in some circles that there is not a level playing field for foreign firms looking to sell into China.
Six, one size does not fit all. Different regions of China will grow at different speeds. In my view, there is a strong case to use the Greater Bay Area as a pilot for the success of dual circulation, This Area is likely to be one of the most dynamic parts of the world economy in coming decades and it includes nine cities in Guangdong Province, plus Macau and Hong Kong. This points to a vibrant world class cluster and to an innovative technology hub with global influence, plus Hong Kong’s importance as a financial centre.
China’s new growth model has been unveiled at an appropriate time, given the changing domestic and international environment. Dual circulation is likely to evolve. As I have outlined here, there are a number of areas that merit attention as it is a policy that looks set to deliver solid, sustained growth.