The leadership in China has always been good at inventing melodious concepts, the exact meaning of which remained vague. In the initial phase, this hundred flower speech was called the four freedoms. Since Xi Jinping there has been talk of the “Chinese Dream”, the “New Silk Road” and now the “Two Circles”. The tagged campaigns sound good with the people, at the same time their content is so vague that you can imagine everything and nothing under it.
The fifth plenary session of the 19th Central Committee of the Communist Party of China met from Monday to Thursday. It adopted the 24th Five-Year Plan, a kind of blueprint for economic development over the next five years. While precise GDP growth targets have often been issued in recent years, this time more general models have been formulated. By 2035, for example, the country should achieve “socialist modernization”.
With the “China 2025” strategy, for example, the CP wants to promote ten key industries in order to become leaders there. The “Dual Circulation Theory” should help. The model of the two cycles can be understood as Beijing’s answer to Washington’s “decoupling”, the economic unbundling of the two largest economies.
China’s dual strategy
One cycle is the old one, which is supposed to take a backseat in times of tension with the USA: In this cycle, Beijing is still firmly integrated into international trade flows. It imports raw materials from Australia, Africa and South America and floods global markets with cheap goods – most of them from the economically potent and export-oriented Pearl River Delta with the cities of Shenzhen and Hong Kong.
The other cycle, the inner one, should grow. Here, Chinese companies produce for Chinese consumers – foreign companies are only marginally involved. If this cycle grows proportionally, the other inevitably decreases.
None of this is new. It is well known that domestic consumption in China should and is growing. Fifteen years ago, exports represented 60 percent of China’s gross domestic product. This share has decreased to 17 percent.
For years, foreign analysts and Chinese executives have been pointing out that China’s growth potential lies in its new middle class. Hundreds of millions of people have moved from the countryside to the cities since the 1980s. Their share rose from 19 percent in 1980 to 58 percent in 2017. The process did not always go smoothly. Unlike in India or other emerging countries, a prudent policy of the central government could avoid slum formation. With the move to the city, salaries rose – between 2001 and 2015 by an average of eleven percent per year. Many new city dwellers managed to rise from poverty to the lower middle class. Today there are between 400 and 600 million.
The process is ongoing. While in the past few years it was mainly the big metropolises on the east coast such as Shanghai, Beijing, Guangzhou and Shenzhen that boomed, the so-called Tier2 and Tier3 cities should ensure the upswing in the coming years. These include provincial capitals and smaller large cities such as Zhengzhou, Xiamen or Wenzhou.
Different app worlds
The fact that China’s economy can and must grow primarily through the willingness of its own residents to consume is nothing new. Added to this, however, is the growing conflict with the USA. Even under President Biden, Washington’s decoupling policy is unlikely to change much. Beijing has to react to that.
What an economy that is decoupled from the rest of the world can look like today is perhaps best seen if you try to use your smartphone within China. The services that are so essential in the West such as Whatsapp, Facebook, Instagram, Google, Youtube and Twitter do not work. If you still want to use it, you need a Virtual Private Network (VPN), which, however, slows down the flow of data. Instead, the super apps Wechat and Alipay are omnipresent in the People’s Republic – for paying, communicating or buying a plane ticket. Those who do not have it are almost lost in everyday life.
According to the “Macro Polo” consultancy, these tendencies will increase in the coming years. “By 2025, China’s technological ecosystem will have matured and caught up with Silicon Valley in terms of dynamism, innovation and competitiveness”, states the recently published study “Forecast 2025: China Adjusts Course”. “China will largely succeed in building a strong new infrastructure – cloud computing, 5G networks, smart cities and surveillance networks to ensure the transition to the industrial internet.” US export controls could only slow this process down.
Incidentally, German companies have been relying on China’s buyers for years and are increasingly becoming part of the “inner cycle”: “German” cars have long been completely developed, designed, built and sold in China. In the first half of 2020, Volkswagen will generate 42 percent of its sales in China, BMW 34 percent and Adidas 24 percent. On paper this may drag some companies through the crisis – but in fact they have long since become dependent on Beijing.
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