The "dual circulation" strategy was frequently mentioned before the Fifth Plenary Session of the 19th Central Committee, and the "Proposal" repeatedly refers to the "new development pattern."
Significance of creating a new pattern of dual-circulation economy: The new development pattern is a historic major choice; it is an overarching grand strategy; it is a systematic major initiative.
I. What are economic internal and external circulation?
(1) Economic internal circulation and external circulation
Internal circulation economy — the entire industrial chain, from supply side to consumption side, is within national borders.
External circulation economy — demand relies on foreign markets, capital comes from abroad, and technology comes from abroad.
(2) The shift from "interaction between internal and external circulation" to a model with "internal circulation as the mainstay"
Since 1978 in the last century, China's economy can be divided into two stages:
1978–2008: Against the backdrop of economic globalization, China adopted a development strategy of international circulation.
2009 to the present: the stage of interaction between internal and external circulation.
(3) The essence of economic internal circulation and economic external circulation
The essence of external economic circulation: it essentially drives domestic economic development through exports. The significance of external circulation is to stimulate us to improve the quality of development.
The essence of internal economic circulation: it drives the economy through domestic investment and consumption. Internal circulation is the fundamental and main source of power for sustained domestic economic development, and it brings increments.
II. Analysis of environmental conditions for an economy mainly based on internal circulation: what favorable and unfavorable impacts will internal circulation as the mainstay bring?
(1) Starting with internal circulation as the mainstay is a strategic choice to respond to changes in domestic and international situations.
Previously, the economy was driven by relying on external circulation, which required the foreign virtual economy to expand continuously. In 2008, the U.S. financial crisis broke out; in 2018, the China-U.S. trade war broke out; in 2019, the pandemic broke out. As the world economy declined, problems began to appear in our external circulation.
1. U.S. suppression and decoupling
When any country's GDP exceeds 60% of that of the United States, the U.S. begins to contain it. China's total economic output has now exceeded 70% of that of the U.S., which has made the U.S. completely restless—trade wars, technology wars, financial wars, and so on.
2. Impact of the COVID-19 pandemic
The COVID-19 pandemic struck without warning. The world economy suffered a severe setback, global demand markets shrank, and the international situation presented an unprecedentedly complex landscape. According to IMF forecasts, the global economy will contract by 4.9% in 2020, with advanced economies shrinking by 8% and emerging markets and developing economies shrinking by 3%.
3. The momentum of the international circulation has weakened, and globalization is encountering headwinds
China's total import and export volume ranks first in the world. From 2006 to 2015, one-third of the various trade dispute cases in the WTO over the 10 years were brought against China. China's foreign trade dependence declined from 64% in 2006 to 32% in 2019. Relying on exports is no longer sufficient to continue supporting long-term sustainable economic development.
4. China's large-scale consumption upgrade is "on the way"
(2) Benefits of focusing mainly on domestic circulation
Among today's developed countries, none has become a powerful nation by relying on an export-oriented economy; they are basically driven by domestic demand.
First, an economy dominated by domestic circulation can unleash huge potential. China has the world's most complete and largest industrial system, strong production capacity, and comprehensive supporting capabilities, as well as a super-large domestic demand market of 1.4 billion people including more than 400 million middle-income groups.
Second, under domestic circulation, China's economic benefits will improve. Processing trade earns only labor fees, accounting for 10% of output value, and generates only about 12% of GDP. If it shifts to domestic circulation, the output value will account for at least 30%-33% of GDP; this is the gap between domestic and external circulation.
Third, the national economy is safer, and it is conducive to balanced regional development. Domestic circulation can hedge against world economic crises, pandemic spread, or social unrest that would seriously affect the domestic industrial chain. Domestic circulation can increase enterprises' incentive to deeply cultivate the domestic market.
Fourth, enterprises' technological progress and independent development will be strengthened. Under external circulation, if one believes everything can be exchanged, then building ships is not as good as buying ships, and buying ships is not as good as leasing ships, thus losing independent innovation capability. Domestic circulation can force domestic enterprises to accelerate technological progress.
Fifth, starting with domestic circulation as the mainstay can expand China's voice. On the one hand, large-scale imports indicate that the Chinese people are relatively prosperous and have the ability to absorb world products; on the other hand, large-scale imports raise China's position in the international market, strengthen its influence in the world, and also help reduce trade frictions.
(3) Three problems existing in the domestic economic circulation:
First, it leads to larger-scale overcapacity
Second, it causes a high debt leverage ratio for the whole society
Third, it causes the economy to shift from the real economy to the virtual economy
Our economy can be restarted through internal circulation, but it faces three major problems: overcapacity, high debt, and the shift from real to virtual economy. Ultimately, we can only rely on boosting domestic consumption to absorb excess capacity, but this is not easy. In 2019, our consumption rate was only 39%, even lower than India's 66%. High housing prices, high education costs, and expensive medical care have greatly squeezed consumption.
3. Drawing lessons from history: The economic dual circulation of Germany and the United States before and after World War II
1. Germany: After World War I, Germany's industrial revival succeeded, and a large number of industrial products were sold worldwide. At that time, Germany was a typical external circulation country. With the Great Depression in 1929, Germany's economy fell into trouble and a large number of workers became unemployed. To escape the crisis, Germany heavily borrowed to develop military industry and public works, creating the German "economic miracle." As the debt situation worsened, it could only resort to external war, forming a new "external circulation."
2. The United States: The United States achieved a true dual circulation of internal and external. The U.S. knows that for sustained development, it needs a huge internal market where what is produced can be absorbed domestically. To make the economy circulate internally, Roosevelt proposed relying on a large middle class to promote internal economic circulation by raising workers' wages. How does the U.S. maintain its external circulation? First, economically, it uses the dollar hegemony and its status as the world's financial center to profit and fleece the world. Second, it exports high technology to the world, collecting service fees and intellectual property fees. Third, the U.S. has a powerful and highly technology-intensive manufacturing industry.
4. Striving to create a new economic pattern of dual circulation
Looking at the growth patterns of major countries such as Japan, Germany, and the United States, at a certain stage it is necessary to gradually shift from an export-oriented development model to a development model that is primarily domestic in nature.
(I) How to Build a Complete Domestic Demand System
1. Building a complete domestic demand system requires promoting investment in domestic manufacturing
China must reduce its dependence on foreign markets, seize the new round of technological cycle, and achieve self-reliance and controllability in key areas. To stimulate domestic demand and promote investment in domestic manufacturing, we must break through "bottleneck" technology constraints and complete the upgrading of the manufacturing industry.
2. Focus on supply-side structural reform and increase effective investment
At present, in light of the trend of consumption upgrading, there are many shortcomings on China's supply side. The Party Central Committee and the State Council have issued the "Opinions on Further Advancing the Market-Oriented Allocation of Factors of Production," clearing and abolishing various rules and practices that hinder the unified market and fair competition, and unleashing the potential of production factors.
3. It must be based on employment expansion and sustained growth of residents' income
Without employment and income, domestic demand cannot be discussed. We need to further improve policies that encourage and promote employment, achieving the situation where "large enterprises stand tall and small enterprises are everywhere."
4. The government's role in expanding domestic demand must be better leveraged
The government can play a direct role in expanding domestic demand by forming current consumption demand through government procurement and public investment.
5. A unified national market should be established. The state should prohibit local authorities from abusing administrative power to restrict or exclude fair competition, prohibit the use of dominant market positions to charge unreasonable fees or forcibly set unreasonable transaction conditions, and relax foreign investment access restrictions in fields such as commerce, trade, and logistics.
(II) We need to form a new pattern in which domestic and international dual circulations reinforce each other.
Promote the domestic and international dual circulation. Based on the domestic major cycle, leverage comparative advantages, and coordinate efforts to build a strong domestic market and a strong trading nation. Attract global resources and factors through the domestic major cycle, fully utilize both domestic and international markets and resources, actively promote the coordinated development of domestic demand and external demand, imports and exports, and the introduction of foreign investment and outbound investment, and maintain a basic balance of payments.
Compared with the previous international major cycle, the new dual circulation has the following characteristics:
The driving force of the internal circulation is mainly consumption and investment in manufacturing; the driving force for manufacturing investment mainly relies on domestic consumption. Under the structure of 'dual circulation,' China achieves self-reliance and control in key areas, and then exports high-end equipment and industrial products with higher added value. Residents' income: under the internal circulation, engaging in exports of industrial products with higher added value yields higher profits, bringing faster growth in residents' income, which helps further stimulate domestic demand. Industrial structure under 'dual circulation': after industrial upgrading, the share of high-tech industries increases, and the capital goods manufacturing sector becomes developed, which will promote the rise of industrial services, and the share of the service sector will further expand.
