Xi’s Post-Virus Economic Strategy for China Looks Inward

He inspected fields of corn amid jitters about food supplies. He visited steel works trying to overcome a slump in profits. He toured an innovation center at a time when President Trump has raised barriers against China’s technological takeoff.

China’s leader, Xi Jinping, has used his recent trips to highlight a warning: The country must retool its economy to be more self-sustaining in a post-pandemic world of uncertainty, weakened demand and hostility.

China needs its people to spend more and its manufacturers to be more innovative, Mr. Xi has said, to ease dependence on fickle foreign economies. Most pressing, official media comments on Mr. Xi’s strategy have said, China must be ready for sustained acrimony with the United States that could put at risk its access to American consumers, investors and know-how.

“The world has entered a period of turbulence and transformation,” Mr. Xi told an audience of prominent Chinese economists brought to the Communist Party’s headquarters in central Beijing late last month. “We face an external environment with even more headwinds and countercurrents.”

China must “make breakthroughs in core technologies as quickly as possible,” Mr. Xi said.

Mr. Xi has called his new initiative a “dual circulation” strategy. The grandly technocratic name, which he first used in May, means China should rely on a robust cycle of domestic demand and innovation as the main driver of the economy while maintaining foreign markets and investors as a second engine of growth.

To some, Mr. Xi’s latest initiative looks like a glossy reboot of longstanding efforts to overhaul the Chinese economy. Chinese leaders have promised since at least 2006 to make domestic consumer spending a bigger share of economic activity, reducing reliance on exports and infrastructure building — with mixed success.

But Mr. Xi’s new strategy demands to be taken seriously, even if its implications are still hazy. He has cast it as a security imperative to keep China growing in an era of global turbulence, and that new geopolitical urgency will raise pressure on officials to show results.

“This policy has a lot to do with China’s changing international environment, particularly the deterioration of Sino-American relations,” Yao Yang, the dean of the National School of Development at Peking University, said in an emailed response to questions. “China needs to prepare for the worst-case scenario, in which the U.S. seals off China in certain tech areas.”

Chinese officials and experts have already been rushing out rival proposals to flesh out Mr. Xi’s strategy. Some have urged the government to ramp up support for Chinese technology companies. Others have called for reducing barriers to foreign investors, to help ensure that China keeps its friends and is not cut off.

China’s formula for growth has been evolving, though in the view of some economists, too slowly. Exports contribute notably less to economic growth than they did a decade ago, but the shift to domestic consumption has been incremental. And China depends on imports of technology, crops and energy, adding to the government’s worries about external vulnerability.

“Frankly, a succession of policies from the Trump administration have made us see the importance of this more clearly,” Yu Yongding, an economist in Beijing who previously advised China’s central bank, said in a telephone interview, referring to Mr. Xi’s new emphasis on domestic consumption. “We may step up the pace of our adjustment.”

Mr. Xi has said that dual circulation will shape China’s next five-year development plan, which will be largely finalized later this year and rolled out next year. A Communist Party leaders’ meeting in October is likely to reveal more of what Mr. Xi has in mind for that plan and beyond.

The leaders will be sorting through competing proposals on how to meet Mr. Xi’s goals as they hammer together the five-year plan. Central to their deliberations is how China should handle restrictions by the United States and other advanced economies that have become increasingly frustrated by and wary of China.

In the end, Mr. Xi’s preference for state dominance is likely to determine what proposals become policy.

“I do think that China is preparing for an even further degree of decoupling,” Zhu Ning, a deputy dean at the Shanghai Advanced Institute of Finance, said in an interview. “In most of the propaganda, the domestic consumption cycle receives far more attention than the foreign cycle.”

Mr. Xi’s recent itinerary reflects the broader strategy he is mapping for China while the United States and other Western powers remain largely consumed with the coronavirus crisis.

Inspecting the flat, fertile farmland of northeast China in late July, he spoke of ensuring that the country could feed itself. In Anhui Province in central China, he visited a tech innovation center with displays of “quantum security” mobile phones, microchips and other symbols of homegrown technological prowess.

China faces an “external environment where the global market is shrinking,” Mr. Xi said while visiting Anhui, according to the People’s Daily, the party’s main newspaper. China’s exports have rebounded from the shock of the first months of the pandemic, but Mr. Xi suggested that the longer-term outlook was uncertain.

China’s stepped up effort to remake its economy was a “long-term strategic move,” he said, as if to pre-empt any doubt about his resolve.

Mr. Xi’s program is likely to bring more measures to support domestic service industries, such as tourism, and more support for new energy sources to displace imports, Wang Wen, executive dean of the Chongyang Institute for Financial Studies, a think tank in Beijing, said in an interview. He said that the new strategy implied a more ambitious agenda than just expanding consumer spending.

To increase domestic consumption, the Chinese government would have to markedly reduce inequality by shifting wealth to ordinary households. Poorer people are unlikely to spend freely when they lack disposable income and tend to save money for emergencies.

That could require difficult social and economic changes that have met official resistance. Mr. Xi’s new edict has also revived decades-long calls for breaking down bureaucratic barriers that make it difficult for rural residents working in cities to get medical care or send their children to schools.

“Any efforts to reduce inequality would, in theory at least, translate into higher domestic consumption,” Jane Golley, an economist at the Australian National University in Canberra, said by telephone. “The failings that they’ve had there is part of the reason that they’ve struggled to see a significant boost in the share of consumption.”

Mr. Xi’s dual circulation initiative may have a more immediate impact by redoubling efforts to build homegrown technology and reduce China’s need for foreign-made microchips and other key components in smartphones, computers and other equipment.

Many Chinese officials and analysts say that American enmity has compelled Beijing to spend more on creating its own crucial technologies. In the latest blow, the Trump administration announced in August that it was restricting the ability of Huawei, the Chinese telecommunications equipment giant, to buy chips made or designed with American equipment and software.

The new strategy does not mean that Beijing is closing the door on foreign investors and markets, Chinese officials assert, and experts say that a rupture with the United States would be economically devastating for both sides.

A debate has emerged about how China should balance strengthening its economic fortifications while keeping access to foreign markets.

Professor Yu, the economist in Beijing, set off controversy by arguing last month that Mr. Xi’s new initiative should include revamping “Made in China 2025,” a program to support domestic manufacturing that other governments criticized as unfair. In the interview, Mr. Yu said that he was not arguing for state-driven industrial planning, and wanted commercial investment to drive the effort.

A push for technological independence could further alarm those in the West who have worried that China has turned its back on Deng Xiaoping’s era of “reform and opening up.”

“Those hawks would say: ‘See, we were right about China’s state capitalism,’” Professor Yao of Peking University said, adding that he believed that China and the United States could resolve disputes over technological rivalry through negotiation.

Mr. Xi often orchestrates policy drives by first issuing sweeping commands, leaving subordinates to hammer out detailed proposals. In 2015, he launched “supply-side structural reform” to cut bloated industrial capacity, and it evolved from a catchphrase to a campaign that bore results.

“The leadership doesn’t issue slogans like these because they think things will be easy. They issue them to force focus, mobilization and prioritization,” Julian Gewirtz, a senior fellow at the Council on Foreign Relations who studies Chinese politics, said by email. “Dual circulation has a lot of mileage left to go before it’s towed off to the junkyard of discarded slogans.”

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