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China economy
OpinionComment
Yu Yongding
Yu Yongding

Opinion | Dual circulation strategy continues China’s push to open up

  • Export promotion strategies can become self-negating when an economy grows past a certain point, and China is no longer a small economy
  • Dual circulation does not imply any fundamental change in the growth paradigm, and China will not turn its back on the world no matter what happens

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An oceangoing freighter loads containers at a port in Lianyungang, in eastern Jiangsu province, on September 7. While the contribution of exports to China’s growth formula has shrunk over the years, they are still expected to play an important role in the country’s “dual circulation” strategy. Photo: Xinhua
Yu Yongding
In May, China’s central leadership proclaimed it would “fully develop the advantages of [the country’s] super-large market and the potential for domestic demand to establish a new development pattern featuring domestic and international dual circulations that complement each other.” “Dual circulation” has been the subject of intense discussion within and outside China ever since.
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Does the announcement signal a fundamental shift in China’s growth paradigm or development strategy? Why was this new concept introduced, and what policy changes will it entail?

To answer these questions, one should revisit the process of China’s “reform and opening up” since it began in the late 1970s. Around the end of that decade, the key hurdle preventing China from taking off economically was a shortage of foreign exchange reserves. Policymakers faced what seemed to be a Catch-22: China could not jump-start its exports without foreign reserves, and without decent export growth it could not accumulate the minimum necessary amount of reserves.

In that event, China was lucky. The rise of the original equipment manufacturer (OEM) sector in the 1970s gave China a window of opportunity to break through the deadlock. OEM manufacturing began to flourish in China’s southeast coastal regions during the late 1970s and early 1980s.

Despite little or no foreign exchange reserves, Chinese OEM firms were able to import and process parts and components that were being outsourced by foreign corporations. These final products, with the value added by Chinese firms, were then sold in international markets.

The processing trade allowed China to leverage its comparative advantage in abundant, low-cost skilled labour. Gradually, it established a feedback loop from importing intermediate products to processing to exports. With each round, Chinese firms were able to accumulate more reserves. This increase in foreign exchange in turn enabled the import of more intermediate products for processing and export.

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