context: The Q2 Politburo meeting laid out the strategy emphasising the 'domestic loop' of economic circulation. This is in part a passive response to intensifying conflict with the US, but the shift towards a more closed economy may also prevent external influence over the domestic political landscape, which might menace the regime's survival. Those who fail to appreciate state's potential capacity to close the economy are ignorant of the history.
He Fan 何帆 Shanghai Jiaotong University professor argues it is a misconception that the emphasis on domestic circulation reverses the opening up and reform and will lead down the path of 'closing borders and cutting off from the rest of the world'. Closing borders, says He, focuses on 'excluding the foreign' rather than 'highlighting the domestic'. In the former scenario, consumption and production are separate, and the market forces are constrained. There is no market circulation, and resources are distributed through government directives. In modern times, argues He, once a market opened up, it is difficult to return to a closed status; therefore, a complete reversal of opening up and reform is impossible.
The dual circulation targets two conflicts: production efficiency versus stability and security in an increasingly complex external environment; the immense productive capacity of Chinese firms serves international markets, leaving domestic middle-class demand unattended, says He.
On the first conflict, Chinese firms have been trying to break monopolies of international firms. After years of technological and capital accumulation, many domestic firms could substitute foreign competitors in petrochemicals, mobile phones and automobiles. Substituting foreign products with domestic ones in supply chains would continue in the future, says He.
On the second conflict, leveraging China's strong capacity to service the domestic middle class requires a shift from an outward-oriented industry ecosystem, with firms especially susceptible to external shocks. To facilitate exporting firms servicing domestic markets, local governments in Zhejiang, Jiangsu, Fujian, Guangdong, and Shandong are exerting their weight. Market actors are also on the move; internet platforms like Yeation, Biyao, and Pinduoduo are helping companies explore domestic markets and consumers, adds He.
The relative effectiveness of government-led and market-initiated models is unclear, but both are indispensable in building domestic circuits, says He.