China fixes ‘something seriously wrong’ using its economy
05 October, 2020
As the world’s factory commences to consider it’s own domestic market to spur monetary growth, regardless of what happens, China won't turn its back on the rest of the world, says Yu Yongding.
In May, China’s central leadership proclaimed that it could “fully develop the features of [the country’s] super-large market and the prospect of domestic demand to determine a fresh development pattern featuring domestic and international dual circulations that complement one another.”
“Dual circulation” has been the subject of strong discussion within and outside China since.Does the announcement signal a fundamental shift in China’s growth paradigm or development strategy? Why was this new concept introduced, and what policy changes does it entail?
A FRESH PHASE AFTER ‘REFORM AND OPENING UP’
To answer these questions, one should briefly revisit the process of China’s “reform and opening up” since it began in the late 1970s.
Around the end of this decade, the main element hurdle preventing China from removing economically was a shortage of foreign-exchange reserves.
Policymakers faced what seemed to be a Catch-22: Without foreign reserves, China cannot jump-start its exports, and without decent export growth, it might not earn and accumulate the minimum necessary amount of reserves.
In the case, China was lucky.
The rise of the original-equipment-manufacturer (manufacturing inputs) sector in 1970s gave China a window of opportunity to break through the deadlock.
Original Equipment Manufacturing (OEM) commenced to flourish in China’s southeast coastal regions during the late 1970s and early 1980s.
Despite little or no foreign-exchange reserves, Chinese OEM firms were able to import and process parts and parts which were being outsourced by foreign corporations.
These final products, with the worthiness added contributed by Chinese firms, were then sold in international markets.
The processing trade allowed China to leverage its comparative advantage in abundant, low-cost skilled labour.
Gradually, a feedback loop - from importing intermediate products to processing to exports - was established.
With each round, Chinese businesses could actually accumulate more reserves. Which increase in foreign exchange subsequently enabled the importation of more intermediate products for processing and export.
Through this virtuous import-export cycle, China amassed foreign reserves at an accelerating pace.
Large capital inflows - the consequence of China’s preferential policy on foreign direct investment - further strengthened this trend.
ANOTHER STAGE AFTER EMBRACING INTERNATIONAL TRADE
In 1988, the Chinese researcher Wang Jian coined the word “great international circulation” to describe China’s export-led development strategy.
The strategy turned out to be a stunning success.
In 1981, Chinese exports and imports totalled just US$22.5 billion and US$21.7 billion, respectively. By 2013, China’s total trade reached practically US$4.2 trillion, making it the world’s trade leader.
In those three decades, China’s GDP rose from 17th on the planet, just behind holland, to second, surpassing Japan this year 2010. But export-promotion strategies may become self-negating when an economy grows past a specific point.
After 40 years of expansion under the great international circulation model, China is no more a tiny economy, and the global impact of its export drive is no more negligible.
In fact, because the turn of the century, the cost of whatever products China purchases has tended to rise, whereas whatever it sells has fallen in cost.
Worse, China’s relentless export drive has provoked (justifiably or not) severe protectionist responses from importing countries.
China’s persistent trade and capital-account surpluses have translated right into a persistent accumulation of foreign-exchange reserves, which reached US$3 trillion in 2014 - a quantity far above what's needed to ensure liquidity.
Source: www.channelnewsasia.com
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