The Shift in Beijing and the "Double Circulation" Strategy

The Plenum of the Chinese Communist Party was just concluded, bringing together the approximately two hundred members of the Central Committee – strictly behind closed doors – to define the details of the 14th five-year plan of the People's Republic of China (2021-2025) and the medium to long-term strategy entitled "Vision 2035," that is, how to become a country that is fuqiang, rich and powerful. While we have few details of the latter concept apart from the confirmation of moving towards "socialist modernization," the new five-year plan revolves entirely around a key concept introduced by president Xi Jinping in person last May: "double circulation." This is a technocratic definition that conceals the plan to avoid stagnation and address global economic uncertainty.

The idea is to focus on the domestic economic circuit, and only secondarily on economic integration with the rest of the world. It is no coincidence that in recent months Xi visited a farm, speaking of how the country is not able to produce the food necessary for the entire population, and a technological innovation center where he showed that China is at the cutting edge of quantum cryptography applied to the smartphone and microchip industry. "The world has entered a period of turbulence and transformation," he explained to the country's economists a few weeks ago. "We must face the adverse winds and unfavorable currents that come from the outside, and thus China must take giant steps in key technologies as soon as possible.[1]

Translated for those less accustomed to the language of propaganda, this means that the Communist leadership has decided: they must rely on domestic demand and innovation. From now on, foreign markets and investors will only be the second engine of growth. According to an analysis in Milano Finanza,[2] that in turn cites Euler Hermes, a credit insurance company in the Allianz group, the consequences of this economic choice will be significant for countries such as Malaysia, Singapore, Thailand, and Chile, with losses that will oscillate between 5 and 6.5 percent of GDP, and a peak of over 10 percent for Taiwan. The Eurozone should limit the effect to around 0.9 percent, and Italy to 1 percent with repercussions especially in the sectors of machines, construction, and food and agriculture.

For Beijing today, the challenge is to avoid the middle income trap and limit the effects of US decoupling and the pandemic. The recipe is an old and dear one for authoritarian countries when they seek to entrench themselves: autarky and economic and energy self-sufficiency. But in this precise moment, it also means preparing for the worst possible scenario and disengaging from the demand of a world that is unable to curb the Sars-Cov-2 contagion, and from the dependence on Washington in some key industries such as semiconductors. It means passing measures that help the service sector and reduce inequality. Poor people, it is known, have a propensity to save that does not go well with the need to expand domestic consumption. Raising their quality of life means redistributing wealth, facilitating internal mobility, and further favoring the movement of individuals from the countryside to the cities, seeking a solution to the complex system of hukou, the legislation originating in Maoist times that links the rights of Chinese to their birthplace, creating a still unresolved dichotomy between rural and urban areas in the country. Above all, though, it means innovating in those sectors that will be fundamental in the future: artificial intelligence, domotics, electric transport, and green technologies.

The path has been defined, and The Economist has already nicknamed it "Xinomics,"[3] explaining it as a further evolution of "State capitalism." There will be an increasing effort to channel innovation from the private sector into an economic process designed from above and carried forward by large public enterprises. The challenge is to shift from "made in China" to "created in China," even at the cost of remaining isolated.