Tensions are rising in Asia with Russia's invasion of Ukraine. Image: Facebook

China’s government has provided new clarity on President Xi Jinping’s “dual circulation”, a broad but vague economic strategy first broached in May 2020 that among other objectives aims to stoke more domestic demand-driven growth.

The Central Committee of the Communist Party of China (CPC) and the State Council jointly released on April 10 a key document titled “Opinions about accelerating the establishment of a unified domestic market” that prescribed new measures to break down local protectionism and other blockages that restrict local consumption.

Measures in the document aim at building efficient, standardized, fair competition and a fully open national supply chain system. That drive towards more efficient and less monopolized local markets is at the philosophical core of Xi’s regulatory clampdown on big tech companies, which has been predicated on breaking their often monopolistic behaviors.

The dual circulation strategy was first announced in May 2020 by the Politburo Standing Committee of the Chinese Communist Party (CCP) and later revised by Xi to prioritize “internal circulation.” 

In a three-day Central Economic Work Conference that ended on December 18, 2020, Xi said China should pay more attention to demand-side management, break the blocking points, make up for shortcomings and link production, distribution, circulation and consumption in order to build a “new development pattern.”

At the time, Xi also said China should improve its product engineering so it could self-supply all key components and materials.

More concisely, the broad strategy involves expanding domestic demand, focusing more on the domestic market, improving innovation, reducing dependence on foreign markets while at the same time remaining open to the outside world. The drive for more domestic-driven growth, and less reliance on exports, was initially driven by the trade war with the US.

The dual circulation shift has been hampered by the Covid-19 pandemic, which has seen Chinese exports remain buoyant through robust shipments to the West amid surging demand for electronics and medical equipment.

However, mainland academics say it is still necessary to build up a large consumer market by breaking monopolies and curbing unfair competition in the face of rising external uncertainties, recently accentuated by Russia’s invasion of Ukraine and the threat of secondary Western sanctions being applied to China for supporting its ally in Moscow.

Since Trump’s trade war started in 2018, Beijing has moved to reform its supply chains. Those inward-looking moves, which ultimately aim to help China reduce its reliance on Western trade, became more urgent when the country faced the first Covid-19 epidemic wave in early 2020.

The government’s “zero tolerance” approach to Covid-19 is crimping growth prospects with Shanghai in lockdown and the virus spreads to other cities. Analysts say that makes it difficult to undertake the sweeping structural reform suggested under dual circulation.

“At present, the international situation continues to undergo profound and complex changes,” Xi said in a meeting with members of the Chinese People’s Political Consultative Conference on March 6 this year.

Chinese President Xi Jinping raises a fist while donning a Mao suit at last year’s Communist Party centennial. Photo: Agencies

“Economic globalization has encountered adverse currents, and the game between major powers has become increasingly fierce. As the world has entered a new period of turbulent changes, China’s domestic reform, development and stability tasks are arduous.”

Xi’s comments came soon after Russian troops invaded Ukraine on February 24. Despite Western sanctions imposed on Moscow over its aggression, Beijing has said it would maintain normal trade relations with Russia.

As the US and Europe punitively decouple from Russia, there are concerns China could be next in their sights, giving the dual circulation strategy more urgency.

Guo Liyan, a researcher with the China Macroeconomic Research Institute, a unit of the National Development and Reform Commission, said one of the key measures of the dual circulation drive is to build a unified national market, which could both unleash the potential of domestic markets and provide China with a great foundation to resist external uncertainties.

Guo said local governments in regions such as Beijing-Tianjin-Hebei, the Yangtze River Delta, the Greater Bay Area and Chengdu-Chongqing have gained important experience in regional economic integration towards the aim of a more unified national market.

She added that cities and provinces should drop their protectionism and avoid discriminating against non-local companies or forming small economic circles in the name of promoting “inner circulation.”

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Follow Jeff Pao on Twitter at @jeffpao3