Special Commentator/Yu Yongding
Published in the 969th issue of China News Weekly on October 26, 2020
In May of this year, the Standing Committee of the Political Bureau of the CPC Central Committee proposed that “to give full play to my country’s super-large-scale market advantages and domestic demand potential, and build a new development pattern in which the domestic and international dual cycles promote each other." The subject of lively discussion.
China started the reform and opening process in the late 1970s. At that time, the main obstacle to curbing economic growth was the shortage of foreign exchange reserves, and policymakers were faced with a dilemma: Without foreign exchange reserves, they could not start exports quickly, but without sufficient amounts Export growth is unable to earn and accumulate the most basic foreign exchange reserves.
Fortunately, the OEM foundry industry that has emerged since then has provided China with an opportunity to break the deadlock.
Despite the shortage of foreign exchange reserves, Chinese companies have been able to import and process various parts and components outsourced by foreign companies, and then sell them on the international market.
This kind of processing trade allows China to play its comparative advantage in the abundant and low-cost skilled labor force, and gradually establishes a feedback loop in which imported intermediate products are processed and then exported.
In each cycle, Chinese companies can accumulate more foreign exchange reserves, and the increase in reserves in turn promotes the import, processing and export of more intermediate products.
As the accumulation of foreign exchange reserves continues to accelerate, China's preferential policies for foreign direct investment attract a large amount of capital inflows, which has further strengthened this trend.
In 1988, scholar Wang Jian coined the term "international cycle" to describe China's export-oriented development strategy.
This strategy has achieved amazing success.
In 1981, China’s exports and imports were only US$22.5 billion and US$21.7 billion respectively.
By 2013, China's total trade volume had reached nearly 4.2 trillion U.S. dollars, ranking it among the world's number one trading country.
During these 30 years, China's GDP has jumped from the 17th place in the world to the second place.
However, export-oriented strategies may have a counterproductive effect when economic growth exceeds a certain point.
China, which has expanded for 40 years under the “international cycle” model, is no longer a small economy, and its export-oriented influence on the world is no longer negligible.
In fact, since the turn of the century, any product purchased in China has been increasing in price, while the prices of all its products have been falling.
At the same time, China's unstoppable export orientation has provoked fierce trade protectionist boycotts by importing countries.
China’s continued trade and capital account surpluses have been transformed into accumulated foreign exchange reserves, which reached US$3 trillion in 2014, far exceeding the amount needed to ensure liquidity.
The Chinese government itself has long realized that the success of the "international cycle" strategy will cause a variety of new problems.
The "Eleventh Five-Year Plan" released in early 2006 clearly stated that China's growth should be based on domestic demand, especially consumer demand.
The driving force of economic growth should shift from the growth of investment and exports to the balanced growth of consumption and investment, as well as the balanced growth of domestic and external demand.
However, the transformation of China's economy has already started before this. The evidence is that its trade-to-GDP ratio and export-to-GDP ratio reached peaks of 65% and 36% respectively in 2006.
In the ten years from 2008 to 2018, the proportion of net exports in China's GDP fell from 10% to 1%.
The contribution of net exports to China's GDP growth has been negative almost every year since 2009.
From this point of view, the recent introduction of the "double cycle" concept does not mean that China's growth paradigm has undergone a fundamental change.
The Trump administration’s “decoupling” and sanctions policies have left China no choice but to redouble its efforts to link economic growth with domestic demand and support domestic innovation to ensure its position in the global value chain.
This may help explain why China emphasizes "dual cycles."
Undoubtedly, with a huge domestic market of 1.4 billion people and advanced manufacturing capabilities, China can survive no matter what label is affixed.
China News Weekly, Issue 39, 2020
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