China parties as it plots an anti-decoupling strategy
Superpower politics has begun to directly shape China's economic policies. Expect more changes. Originally published in the Australian Financial Review.
As the photos of mass pool parties in Wuhan attest, China has emerged from the COVID-19 crisis more rapidly than anyone predicted earlier this year. China led the world headlong into the pandemic. Now it seems to be dancing its way out of it.
In place of talk about “China’s Chernobyl”, the notion that the Chinese Communist Party might fall apart just as the Soviet Union fractured over its cover-up of a nuclear accident in 1986, Beijing is focused on something positive, the management of an economic recovery.
More than that, the Chinese bounce-back and the relative collapse in output in the US is accelerating history, bringing forward the moment that China takes over from America as the world’s largest economy.
Homi Kharas of the Brookings Institution calculates that China will overtake American in real terms by 2028, two years earlier than predicted before the pandemic.
That will be a monumental event of itself, psychologically as much as geopolitically. As Kevin Rudd likes to remind people, that will be the first time since George III (1738-1820) that you’ll have a non-English speaking, non-democratic, non-Western state as the largest economy in the world.
But COVID-19, and the superpower stand-off that had hardened alongside it, has wrought another change that will be just as consequential as the relative size of the Chinese and US economies.
No longer will leaders be focused on whether economies grow. In China, as in Australia and just about anywhere, the emphasis will be on how they grow.
The 'dual circulation' policy is Beijing’s attempt to manage decoupling on its own terms, by doing more at home.
The details of China’s blueprint for a new mode of growth have been dribbling out since May, when the Politburo announced its policy for the awkwardly named “dual circulation” strategy.
The first circulation refers to global integration, the focus of economic policy in recent decades; the second is what Beijing wants more of in the future, which is domestic reliance.
Old wine in new bottles
In part, this is old wine in new bottles. Chinese leaders have long pushed for consumption to make up more of growth than investment and exports. Consumption has been growing strongly but still makes up a relatively small share of growth.
The old impulses, to juice the economy with spending on infrastructure and housing, have been on display in the wake of the pandemic, with investment recovering far more quickly than consumption.
That’s good for Australia, with booming iron ore sales flowing straight to the budget bottom line, but not necessarily positive for China, as it adds to already high levels of debt and worsens the imbalances that Beijing’s policymakers want to correct.
The deeper meaning of the “dual circulation” strategy, however, is more political, as it encapsulates Beijing’s strategy to counter the push in Washington to decouple America, and its allies, from the Chinese economy.
China nominally decries the notion of decoupling as protectionist, though in truth Beijing has been pursuing that strategy for years. China, to take one example, cocooned its internet off from the start to block outside influences and companies, so it could nurture domestic champions it could watch and control.
The US decoupling policy nonetheless has the potential to hurt China, particularly the threat of export controls for semiconductors which could nobble the global expansion of companies such as Huawei.
China is heavily dependent on foreign semiconductors, spending more money last year on importing them than it did on buying foreign oil.
The “dual circulation” policy, then, is Beijing’s attempt to manage decoupling on its own terms, by doing more at home.
The clearest and most detailed enunciation of the emerging new policy will be in the next five-year economic plan covering the half-decade from 2021.
For all their echoes of the former Soviet Union, the plans are still crucial in setting the direction of Chinese economic policy.
Although many economists still favour the “global integration” side of the policy, even liberal commentators in China have recognised the new political imperatives of superpower competition for economic policy.
Yu Yongding, a prominent liberal economist, is advocating a greater emphasis on industry policy of the kind laid out in China 2025, the blueprint for capturing high-end manufacturing, which itself was key in triggering the start of the pushback in the United States and in Europe against Chinese mercantilism.
“In the past, we emphasised an export orientation because [we believed] that export-oriented countries, especially small countries, were successful,” he says in a recent report from the Centre for Strategic and International Studies.
“In the future, we need to use more power to boost import substitution.”
The pool parties in Wuhan are, in a way, part of the same process.
To outsiders in countries still struggling with the virus, the parties looked shocking. In China, though, the photos are the government’s way of saying that its way works best.
Expect more such propaganda, and parties, in the future.
Richard McGregor is a senior fellow at the Lowy Institute in Sydney.