The "dual circulation" strategy was frequently mentioned before the Fifth Plenary Session of the 19th CPC Central Committee, and the "Recommendations" repeatedly referred to the "new development pattern."
The significance of creating a new dual circulation economic pattern: the new development pattern is a historic major choice; the new development pattern is an overall major strategy; the new development pattern is a systematic major measure.
I. What are the internal and external economic circulations?
(1) Internal economic circulation and external economic circulation
Internal circulation economy — the entire industrial chain, from the supply side to the consumption side, is within the national borders.
External circulation economy — demand relies on foreign markets, capital comes from abroad, and technology comes from abroad.
(2) The transition from "interaction between internal and external dual circulations" to an "internal circulation-dominated" economic model
Since 1978, China's economy can be divided into two stages:
1978–2008: Against the backdrop of economic globalization, China chose the development strategy of international great circulation.
2009–present: The stage of interaction between internal and external circulations.
(3) The essence of internal and external economic circulations
The essence of external economic circulation: it essentially drives domestic economic development continuously through exports; the significance of external circulation lies in stimulating us to improve the quality of development.
The essence of internal economic circulation: it continuously drives the economy through domestic investment and consumption. Internal circulation is the fundamental and primary source of power for sustained domestic economic development; internal circulation brings incremental growth.
II. Analysis of the environmental conditions faced by an internal circulation-dominated economy: what favorable and unfavorable impacts will internal circulation dominance bring?
(1) Launching internal circulation dominance is a strategic choice in response to changes in domestic and international situations
Previously, we relied on external circulation to drive the economy, which required the continuous expansion of foreign virtual economies. 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, etc. As the world economy declined, problems began to appear in our external circulation.
1. U.S. suppression and decoupling
Whenever any country's GDP exceeds 60% of that of the United States, the United States begins to contain it. China's total economic output has now exceeded 70% of that of the United States, which has completely made the United States unable to sit still — trade war, technology war, financial war, etc.
2. The impact of the COVID-19 pandemic
The COVID-19 pandemic struck suddenly, the world economy suffered a severe setback, global demand markets shrank, and the international situation presented an unprecedented complex landscape. According to IMF forecasts, the global economy will shrink by 4.9% in 2020, with advanced economies shrinking by 8% and emerging market and developing economies shrinking by 3%.
3. The momentum of international great circulation has weakened, and globalization has encountered headwinds
China's total imports and exports rank first in the world. From 2006 to 2015, one-third of the various trade dispute cases in the WTO over the 10 years were fought with China. China's foreign trade dependence fell from 64% in 2006 to 32% in 2019. Relying on exports is no longer sufficient to support long-term sustainable economic development.
4. China's large-scale consumption upgrading is "on the way"
(2) The benefits of launching internal circulation dominance
No developed country today has become a strong country by relying on an export-oriented economy; they are basically dominated by domestic demand.
First, an internal circulation-dominated economy can unleash huge potential. China has the world's most complete and largest industrial system, strong production capacity, comprehensive supporting capacity, and a super-large domestic demand market of 1.4 billion people, including more than 400 million middle-income people.
Second, under internal circulation, China's economic efficiency will improve. Processing trade earns only labor fees, which account for only 10% of output value and generate only about 12% of GDP. If transformed into internal circulation, output value GDP would account for at least 30%–33%; this is the gap between internal and external circulation.
Third, the national economy will be safer, which is conducive to balanced regional development in China. Internal circulation can hedge against world economic crises, pandemic spread, or social unrest, which would seriously affect the domestic industrial chain. Internal circulation can increase enterprises' motivation to deeply cultivate the domestic market.
Fourth, enterprises' technological progress and independent development will be strengthened. Under external circulation, people may think everything can be exchanged, so building ships is not as good as buying ships, and buying ships is not as good as renting ships, thus losing independent innovation capacity. Internal circulation can force domestic enterprises to accelerate technological progress.
Fifth, launching internal circulation dominance can expand discourse power. On the one hand, large imports represent the relative affluence of ordinary people in China and their ability to absorb world products; on the other hand, large imports raise China's status in the international market and strengthen its influence in the world, which also helps reduce trade frictions.
(3) Three problems existing in the internal economic circulation:
First, it leads to larger-scale overcapacity
Second, it causes a high debt leverage ratio for the whole society
Third, it leads the economy to shift from the real to the virtual
China's economy can restart through internal circulation, but it faces three major problems: overcapacity, high debt, and shifting from the real to the virtual. Ultimately, the only way is to promote domestic consumption to absorb excess capacity, but this is not easy. In 2019, China's 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.
III. Learning from history: Germany's and the United States' economic dual circulation around World War II
1. Germany: After World War I, Germany's industrial revival succeeded, and large quantities of industrial products were sold worldwide; at that time, Germany was a typical external circulation country. With the Great Depression of 1929, the German economy fell into difficulty, and large numbers of workers lost their jobs. To escape the crisis, Germany vigorously borrowed to develop military industry, public works, etc., creating the German "economic miracle." As the debt situation worsened, it ultimately could only resort to external war, forming a new "external circulation."
2. United States: The United States achieved a true internal-external dual circulation. The United States knew that sustained development required a huge internal market so that what was produced could be absorbed domestically. To make the internal economic circulation work, Roosevelt proposed relying on a large middle class to promote internal economic circulation and raising workers' wages. How did the United States secure external circulation? First, economically, it profited from the hegemony of the U.S. dollar and the world financial center, fleecing the world. Second, through high technology, it exported technology worldwide to obtain service fees, intellectual property fees, etc. Third, the United States has a strong and technologically advanced manufacturing industry.
IV. Focus on creating a new dual circulation economic pattern
From the growth patterns of major countries such as Japan, Germany, and the United States, at a certain stage, a country must gradually evolve from an export-oriented development model to an internal-demand-dominated development model.
(1) How to build a complete domestic demand system
1. Building a complete domestic demand system requires promoting domestic manufacturing investment
China must reduce external dependence, seize the new round of the technology cycle, and achieve independent and controllable key areas. Launching domestic demand to promote domestic manufacturing investment requires breaking through "bottleneck" technology restrictions and completing manufacturing upgrading.
2. Take supply-side structural reform as the main line and improve effective investment
At present, in response to the trend of consumption upgrading, there are many shortcomings on China's supply side. The CPC Central Committee and the State Council issued the "Opinions on Further Promoting the Market-based Allocation of Factors," cleaning up and abolishing various rules and practices that hinder a unified market and fair competition, and unleashing the potential of production factors.
3. It must be based on employment expansion and the sustained increase of residents' incomes
Without employment there is no income, and domestic demand is out of the question. We should further improve relevant policies that encourage and promote employment, and achieve "big enterprises standing tall and small enterprises covering the earth."
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 must be established. The state should prohibit local governments from abusing administrative power to restrict or exclude fair competition, prohibit the use of market dominance to charge unreasonable fees or forcibly set unreasonable trading conditions, and liberalize foreign investment access restrictions in fields such as commerce and logistics.
(2) A new pattern of mutual promotion between domestic and international dual circulation must be formed
Promote domestic and international dual circulation. Based on the domestic great circulation, give play to comparative advantages, coordinate the promotion of a strong domestic market and a trade powerhouse, use the domestic great circulation to attract global resource factors, fully utilize both domestic and international markets and resources, actively promote the coordinated development of domestic and external demand, imports and exports, and foreign investment attraction and outbound investment, and promote a basic balance in the international balance of payments.
Compared with the previous international great circulation, the new dual circulation has the following characteristics:
The driving force of internal circulation is mainly consumption and manufacturing investment; the driving force of manufacturing investment mainly depends on domestic consumption; under the "dual circulation" structure, China achieves independent and controllable key areas and then exports high-end equipment and industrial products with higher added value; residents' incomes — under internal circulation, engaging in the export of higher value-added industrial products yields higher profits, bringing faster growth in residents' incomes and helping to further launch domestic demand; industrial structure under "dual circulation": after industrial upgrading, the share of high-tech industries rises, capital goods manufacturing is developed, which will promote the rise of industrial services, and the share of services will further expand.
