Xi Jinping’s new economic strategy for China: ‘Dual circulation’ or doublespeak?
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Chinese President Xi Jinping traveled to Shenzhen on Wednesday to mark the 40th anniversary of that city’s establishment as a “special economic zone.”
The trip was billed as a celebration of the policy change that set in motion Shenzhen’s extraordinary transformation from rural backwater to global manufacturing colossus. Modern Shenzhen is home to 13 million people, the world’s biggest Foxconn factory, and the headquarters of tech powerhouses like Huawei Technologies, Tencent Holdings, and DJI Technologies. Since 1980, Shenzhen’s GDP has expanded by an estimated 10,000-fold to $360 billion and now exceeds that of Hong Kong, the financial hub just across the Pearl River.
The catalyst for that metamorphosis was a decision by Deng Xiaoping, then China’s “paramount leader,” to create a capitalist enclave in communist China and open it to foreign investment, global trade, and Western technology. Shenzhen became the testbed for economic reforms gradually introduced throughout the rest of China. Deng called the hybrid model “capitalism with Chinese characteristics.”
Xi embraced Deng’s legacy yesterday. He laid flowers at the feet of the six-meter bronze statue of Deng that stands in Shenzhen’s Lianhuashan Park. In a 50-minute speech he vowed to carry on Deng’s agenda of “reform and opening up.”
But Xi made clear that his interpretation of “reform and opening up” differs starkly from that of his predecessor. At the top of a long list of lessons from Shenzhen’s success, Xi cited not entrepreneurialism, private sector initiative or market competition but “adhering to the Party’s leadership.”
Xi invoked a favorite Deng aphorism: China must “cross the river by feeling the stones.” Deng meant that the nation must be flexible, pragmatic, and willing to adapt to obstacles as they emerged. Xi, meanwhile, wrapped it in clunky bureaucratic jargon that communicated the exact opposite: “We must have greater political courage and wisdom and combine ‘crossing the river by feeling the stones’ with strengthened top-down design to steadily deepen reforms in important areas and pay more attention to the system.”
Xi’s own economic agenda to date has been all about “strengthened top-down design.” He has consolidated the Communist Pary’s control over nearly ever major economic policy-making body and his own control of the party. He has leaned on China’s giant state-owned banks to prop up state-owned enterprises, pushed private companies and investors into partnerships with state-owned firms, forced private companies to set up party committees with increasing say over strategy, and doled out vast state subsidies to induce companies to pursue state-led industrial policy objectives.
Last month, even as Chinese companies like Huawei and TikTok parent ByteDance scrambled to persuade American lawmakers that they are independent private entities—and would never compromise the privacy of American customers even if ordered to by Beijing—Xi publicly exhorted the United Front Work, a department responsible for projecting party’s influence at home and abroad, to unite the private sector around the party.
In recent months, as the Trump administration has stepped up its efforts to restrict Chinese companies’ access to American technologies, Xi has amplified his call for Chinese firms to develop their own technologies and become more self-reliant. In Shenzhen yesterday, Xi warned that “the world has entered a period of turbulence and transformation,” and praised Shenzhen for showing that China must “gain the initiative in the global technological revolution.”
In May, Xi floated a new strategic concept he called “dual circulation growth strategy,” which he referred to again yesterday. China watchers seem mostly perplexed by the concept. The Wall Street Journal‘s Lingling Wei ventured that the strategy involves “prioritizing domestic consumption, markets and companies as China’s main growth drivers” while relegating investments and technologies from overseas to “more of a supporting role.” The New York Times‘ Chris Buckley tried to explain the idea this way: “The grandly technocratic name…means China should rely on a robust cycle of domestic demand and innovation as the main driver of the economy while maintaining foreign markets and investors as a second engine of growth.”
But as Buckley observes, China has been promising since before the Great Financial Crisis to boost domestic consumption and reduce its dependence on exports, with mixed results. The danger for China is that Xi’s dual circulation strategy is mostly doublespeak for import substitution and massive misallocation of resources by government planners—an approach closer to Mao’s disastrous Great Leap Forward than Deng’s triumph in Shenzhen. This brilliant piece by Financial Times correspondent Kathrin Hille suggests that’s exactly the outcome of China’s headlong rush to catch up with the U.S., Taiwan, and South Korea in the semi-conductor industry.
Bo Zhuang, chief China economist at TS Lombard, argues dual circulation strategy “is not a proposition to turn China into a ‘closed economy,’ as was the case during the Mao era. Rather it is a pragmatic policy choice against the backdrop of de-globalization and the worsening U.S.-China relationship.” The strategy, Zhuang contends, “aims to build up domestic economic strength through rebalancing in the face of intensifying external risks while maintaining China’s deep engagement with the global supply chain.”
Whatever it is, Xi’s “dual circulation strategy” seems destined to be the centerpiece of China’s 14th five-year economic plan, to be endorsed later this month at a meeting of the party’s Central Committee. Stay tuned.
More Eastworld news below.
This edition of Eastworld was curated and produced by Grady McGregor. Reach him at email@example.com.
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Ant Group – The U.S. state department has proposed adding the Alibaba-backed financial services firm to the U.S.’s trade blacklist in the run-up to the firm’s upcoming blockbuster IPO in Shanghai and Hong Kong. In China, Ant Group is facing scrutiny over a proposal to sell retail investors shares exclusively through its own mobile payments app. Reuters
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Tencent – The Chinese tech giant plans on increasing its stake in Universal Music Group from 10% to 20% through exercising an option that expires in January. Last year, Tencent purchased a 10% stake in the world's largest music company in a deal that valued Universal Music at $35 billion. Bloomberg
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