China Prepares To Become The World’s Largest Economy

Economic News: China is most likely to become the world’s largest economy in the next few years. It is preparing itself for major shifts in global trade.

The coronavirus pandemic and tensions in the US have rocked the world. As a result, the Chinese government has come out with another batch of policy terms. The terms are to bolster China’s economy under the vague umbrella of “dual circulation.”

The phrase “dual circulation” broadly refers to two circles of economic activity – the internal and external with greater emphasis than before on local business.

The high-level political talk comes months before authorities plan to release China’s economic blueprint for the next five years – the 14th five-year plan. Increased public discussion has also helped crystalize some of the effects of global trade.

For example, some economists at ICBC International have recently put out a series of notes on “dual circulation”. In one of the reports, they discussed the implications of the Chinese policy on globalization’s next round.

ICBC International is a Hong Kong-based subsidiary of the giant state-owned Chinese bank.

 

Prior round of globalization: ‘The world is flat.’

According to Stephen Olson, the ‘dual circulation’ policy demonstrates China’s acknowledgment that they won’t rely on trade for the next two decades, as was the case for the previous two decades.

Stephen Olson is a research fellow at the nonprofit Hinrich Foundation.

Stephen also noted that the pursuit of deep economic integration with China was increasingly seen in the US as a strategic mistake. However, it worked out extremely well for China and considerably less for the US.

The trade tariff wars between China and the US over the last two years have already reduced the flow of goods between them.

According to China Customs data, the US is still China’s largest export market. However, last year amid escalating trade tensions, North America ceded the top trading partner’s spot to the European Union.

Data also showed that the ten countries that make up the Association of Southeast Asian Nations (ASEAN) became China’s largest trading partner.

In his speech last week, the Chinese President, Xi Jinping, said that his country’s position globally would continue to rise. Their ties with the global economy will become closer, and other countries’ market opportunities will broaden. They will become a massive gravitational field for attracting international goods and Key resources.

 

China’s domestic challenges

China is facing its litany of challenges, such as the torrential floods in the south that followed the coronavirus outbreak.

Long-standing issues such as high reliance on debt for growth have become more pronounced. Others include an environment that favors state-owned enterprises to run privately run businesses.

China’s private sector generates the most jobs.

Yan Se is the chief economist at Founder Securities. He partly reminds local governments what they must do to improve domestic environments and greater policy emphasis on the Chinese market.

Yan Se expects further policy support to come for foreign investment into China and cross-border e-commerce. As the Chinese market grows and cross-border challenges increase, more foreign companies adopt an “ín China, for China” strategy.

China has welcomed the investment and made significant efforts to keep its businesses despite geopolitical tensions.

Data from the Ministry of Commerce revealed China recorded a 12.2% growth in foreign direct investment to $9.05 billion in July. It marked a fourth-month straight of increase since the height of the coronavirus pandemic in early February.

However, the Organization for Economic Cooperation and Development (OECD) expects global foreign trade investment flows to fall 30% amid the pandemic.

What Else?

Bruce Pang, the head of macro and strategy research at China Renaissance, said, “Capital is King”. He added that if you offer more of it than other countries, then more people would come in to invest.

According to Pang, trends in foreign investment and changes in Chinese exports were already happening and had only accelerated since the coronavirus outbreak.

Companies and authorities are also trying to help China’s businesses shift their focus to the domestic market.

According to Xu Hongcai, turning China’s exports inward was good, so China could develop steadily and grow. It is also good for the world. Xu Hongcai is the deputy director of Economic Policy Commissions at the China Association of Policy Science.

 

Potentially painful transition

Amid all the talk about boosting domestic consumption, China envisions something different, especially in the next few months.

Currently, its domestic demand is recovering, but it is difficult for much of it to recover to the epidemic before the epidemic, Xu said.

He added that overall demand had declined due to substitutes, and people need to find other kinds of jobs. Therefore the transition period is more painful.

After the GDP contracted by 6.8% in the first quarter, there was a surprised 3.2% increase in the second quarter due to increased investment in real estate. Retail sales dropped 1.1% in July as an increase in online sales was not enough to offset the overall drop.

According to Dan Wang, consumption will not drive the economy this year and next year, but exports and investment will. Dan Wang is a Shanghai-based chief economist at Han Seng China.

He said to increase consumption or its contribution to growth, China will have to do major reforms. Specifically, in its income distribution, and the most difficult in doing that is the state-owned enterprise reform.

However, in the long-term, the pressure is accelerating for China to make the shift toward relying more on its domestic market.

One of the main reasons China is pursuing “dual circulation” is that since its growth in global prominence, whatever it does will significantly have an impact as other countries re-evaluate their dependence on the Asian giant, Dan Wang said.