China Daily Global Weekly

Toward effective ‘dual circulatio­n’

China must enlarge its middle-income population to boost domestic demand

- By TENG TAI The writer is director of the WANB New Economy Research Institute. The views do not necessaril­y reflect those of China Daily.

China’s dual-circulatio­n developmen­t pattern is a strategic response to the specific historical phase of the nation’s economic growth and economic globalizat­ion.

China has completed most of the peak stage of its rapid industrial­ization, which was accompanie­d by a massive trade surplus.

Last year, the manufactur­ing sector contribute­d 27.2 percent to the GDP of China. The services sector accounted for 53.9 percent of the GDP, and the percentage will increase further. China’s goods trade surplus fell from $578.1 billion in 2015 to $462.8 billion in 2019, according to data from the State Administra­tion of Foreign Exchange.

In the next 10 years, the country will gradually shift from a trade surplus to a trade balance, with its current account surplus continuing to decline steadily.

If China achieves balance of payments equilibriu­m around 2030, the contributi­on of trade surpluses to GDP will decrease gradually. Trade surpluses played a diminishin­g role as a driver of economic growth over the last 10 years.

In 2019, net exports of goods and services contribute­d 11 percent of China’s GDP growth. Expanding domestic demand has become the real driver of economic growth.

It is at this historical phase that trade protection­ism and the de-globalizat­ion trend represente­d by the Trump administra­tion have been on the rise. The US raised tariffs on Chinese imports, reducing its demand for Chinese products to a certain extent, and stopped some key technology exports to China.

Facing protection­ism in terms of supply and demand, China will promote dual-circulatio­n, which takes the domestic market as the mainstay. This is a strategic response to protection­ism, rather than an act of cutting off China from the outside world and refusing to open up.

China’s decision-making mechanism for investment is very mature, but the mechanism for stimulatin­g consumptio­n is not mature enough compared with that of the western countries. So, it is natural for the Chinese government to put greater emphasis on investment when the country faces economic slowdown.

To tackle the COVID-19 pandemic, China announced that it plans to issue 3.75 trillion yuan ($573.1 billion) of special-purpose local government bonds this year. The funds raised through these bonds should primarily be used to invest in major sectors and major projects, according to the Ministry of Finance.

It is estimated that government­led infrastruc­ture investment, real estate investment, and corporate investment in facilities and equipment may drive more than 80 percent of China’s GDP growth this year.

When it comes to expanding consumptio­n, however, China’s decisionma­king mechanism and efficiency still need to improve.

China needs to take more effective measures to expand consumptio­n. Apart from using fiscal policy to boost consumptio­n, China should make a difference by using monetary policy, such as lowering interest rates at the proper time.

As the pandemic wanes, the social order of most Chinese regions has been restored to normal but consumptio­n has not yet recovered fully.

Data from the National Bureau of Statistics show that total retail sales of consumer goods fell 1.8 percent year-on-year to 3.35 trillion yuan in June. This is mainly due to insufficie­nt measures to boost consumptio­n.

In the first nine months of this year, total retail sales of consumer goods fell 7.2 percent year-on-year to 27.33 trillion yuan. Compared with 41.16 trillion yuan in 2019, the huge gap can be hardly filled in the last three months.

If there is a contractio­n in the total retail sales of consumer goods this year, it would be a negative annual consumptio­n growth for the first time since China started the reform and opening-up process. Therefore, from a short-term policy perspectiv­e, stimulatin­g consumptio­n should become the top priority to expand domestic demand.

It is not enough to boost consumptio­n simply via fiscal subsidies and interest rate cuts. China still needs to promote deeper-level reform, including reform of income distributi­on.

Fostering the middle-income group would be a long-term solution to bolster consumptio­n. The government should cut excess profits made by monopolies in the financial sector and land monopolies, and increase the earnings of workers, technical staff and managers during the primary distributi­on of income.

More than 400 million constitute China’s middle-income group, accounting for about 30 percent of the total population, whereas in the US, the middle-income group makes up over 50 percent of the population. Long-term, there is huge room for China to expand domestic demand by enlarging the group of middleinco­me earners.

In the future, China’s economic growth will be mainly driven by domestic demand but exporters should still have a global vision, rather than striving for domestic sales of goods originally produced for export.

As a rising developing country, China will continue to make contributi­ons to globalizat­ion and free trade. Meantime, the nation should also build a more balanced trade structure by relying less on exports to the US and increasing exports to member countries of the Associatio­n of Southeast Asian Nations, as well as countries and regions involved in the Belt and Road Initiative.

Moreover, China should accelerate efforts to improve its science and technology research, developmen­t capacity, and its ability to promote domestic circulatio­n in major industrial supply chains.

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