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China is prioritizing the domestic market to boost the economy as exports continue to be hit by the pandemic, uncertainties in the global supply chain and rising protectionism. It will not be an overnight fix

By NewsChina Updated Oct.1

People going shopping in a night fair in Wuhan, Hubei Province on June 3

China is turning inward to inject vitality into its domestic market to stimulate the pandemic-hit economy and seek self-sufficiency, while the outside world augurs more uncertainties than hope. At a symposium with corporate leaders in Beijing in July, Chinese President Xi Jinping reiterated a new model of development, first raised in May, in which the domestic market takes the dominant role while the domestic and international economic networks complement each other. 

Having largely contained the coronavirus earlier than most other countries, China’s economy has started recovering. After a slump of 6.8 percent in the first quarter, its GDP rose by 3.2 percent in the second quarter, totaling 45.66 trillion yuan (US$6.56t) in the first half of the year. But the key indicators in most fields, including GDP, the industrial sector, services sector, investment, exports and consumption remain below normal. “It is far too early to be optimistic” in spite of the hard-won growth, said Dong Yu, vice head of the China Institute for Development Planning at Tsinghua University in Beijing, who added that more targeted policies are required to pull the economy back to normal. Domestic pressure, coupled with a sluggish global economy and rising protectionism, makes the outward-to-inward shift in economic strategy highly anticipated as a way out. “The key lies in unleashing the huge domestic market potential and smoothing the domestic supply-demand circulation,” Dong said.  

Imperative Move
In past decades, China has experienced rapid economic growth by joining the global value chain guided by an export-oriented strategy. But this outward-led model proved fragile during the pandemic, making a shift inward a pragmatic step.  

In the first half of 2020, total foreign trade volume was 14.2 trillion yuan (US$2t), a year-on-year drop of 3.2 percent. In spite of a passable purchasing managers’ index (PMI) of 50.9 percent, the sub-indices for new orders, export orders and existing orders in June were all below the threshold of 50 that separates expansion from contraction. Eastern and southern coastal provinces that are highly dependent on foreign trade, such as Guangdong, Jiangsu and Zhejiang, saw their foreign trade plunge in the first five months. The impact continues to this day. The World Trade Organization (WTO) predicted in April that overall global trade could drop between 13 to 32 percent this year.  

On June 22, China’s State Council released a notice to encourage export-oriented Chinese enterprises experiencing difficulties to repurpose and sell their products at home.  

At a time when export sales across many sectors are depressed, helping exporters sell goods domestically will keep them alive and reduce unemployment until the situation improves, said Cui Fan, a professor of international trade at the University of International Business and Economics in Beijing.  

“Enhancing domestic [demand-supply] circulation will help stabilize outward-oriented entities for the time being so they can recover and join the international market again,” Cui said.  

Building a sound self-sufficient circulation system and reducing reliance on overseas markets is also a move in response to uncertainties in the long run brought about by the pandemic and geopolitical changes.  

“Aside from challenges in resuming external demand, different countries may prioritize safety instead of efficiency in allocating their supply chain, which will threaten the safety of the global value chain. The tense geopolitical scenario may pose bigger challenges to China’s economy,” Dong said. “All this may exert a long-term influence and recovery will take a long time.” 

Wang Xiaosong, a professor of economics at the Renmin University of China in Beijing, said the crisis in supply chains deserves more attention than foreign trade, which may resume once the virus is contained. He said that China has been dependent on overseas supply of key intermediary products and components for mechanical, electrical and high-tech products. 
“If China and the US end up decoupling, or if developed countries join up to blockade China, its global supply chain will be jeopardized. China should not depend too much on overseas markets or their supply of intermediaries,” Wang said.  

The suspension of production worldwide during the pandemic already has disrupted the supply chain of some industries in China, including electronics and automobiles. In 2019, China imported automobile parts worth US$36.7 billion, over 80 percent of which were from Germany, Japan, the US, South Korea and Mexico.  

Enhancing domestic circulation is expected by many experts to stimulate technical innovation, fill in the gaps in the current supply chain and extend the chains to realize self-sufficiency. Wang believes that the new model of development focusing on the domestic market was initially raised to balance domestic and international markets as the good old days of relying on the processing trade have gone. “But in the long run, it probably will force domestic companies to reinforce innovation in science and technology and thus strengthen and update China’s overall supply chain,” Wang said.  

Strenuous Turn
In spite of the huge domestic market and rising household consumption, it is not easy for the outward-led economy to shift inward for its main growth, Wang said. “It will take time for the domestic market to adapt and mature for internal circulation. Only when consumption, investment and foreign trade, particularly exports, achieve a virtuous cycle can a system featuring healthy domestic and international circulation be accomplished,” he said. 

First, there are challenges in boosting domestic demand so export-oriented goods can be sold at home. Domestic consumption is yet to recover from the impact of the pandemic. Total retail sales of consumer goods in the first half of the year dropped 11.4 percent year-on-year. Many businesses in the services sector where people need to gather in crowds, such as live performance venues and cinemas, are still not open or are operating at a reduced capacity.  

The domestic demand has a ceiling even without the pandemic, Wang said. Further exploiting the market means boosting demand, so it will require measures such as persuading Chinese consumers to spend more, when their natural inclination is to save money, particularly when the economic outlook is uncertain.  

“It touches on deeper concerns about the level of social reform such as building a sound social security system, improving the healthcare system, and enlarging middle-income groups by raising incomes,” Wang said.  

Huang Qifan, vice director of the China Center for International Economic Exchanges, an association for economic exchanges and consulting, wrote in an article published by the Liaowang Institution, a think tank established by the State-run Xinhua News Agency, that the key lies in boosting jobs and increasing people’s incomes. “Employment and income are the preconditions for discussion,” Huang wrote.  

Building a sound domestic demand system also demands deeper reforms on the supply side, particularly in pushing forward market-oriented flow and allocation of the factors of production. “There are still chokepoints hindering the market-oriented allocation of capital, land, technology, data and other factors of production,” Cui said.  

He cited China’s auto industry, which is struggling with a slide that started in 2018. “In spite of boasting the largest consumer market, the automobile industry is not concentrated enough and lacks international competitiveness,” Cui said. Local protectionism is seen as one factor, particularly for new energy vehicles, which has resulted in a fragmented market instead of a unified and fully competitive one. This has prevented strong players from standing out. 

“We should further push market-oriented reforms, break the shackles of local protectionism and stimulate an optimized allocation of resources in which the market plays a decisive role, to spur the emergence of enterprises with global competitiveness,” Cui said.  

Wang said that the threshold for the entrance of foreign products and factors of production remains high in some fields. “Establishing smooth domestic circulation needs as a first step the breaking of these barriers and deepened opening-up to embrace foreign products, factors and investment,” he said.  

In reiterating a strategy which focuses on the domestic economic network, Chinese President Xi Jinping said at the entrepreneurs meeting that China must update its supply chain, give priority to innovation in science and technology and accelerate research in key technologies.  

Technology is regarded as crucial in completing the supply chain and making the domestic market self-sufficient, particularly against the rising risks of technological decoupling. “The competition in science and technology will grow fiercer in the wake of the pandemic, as we can see from the US’s attack on Chinese tech companies. It is urgent to accelerate the innovation-driven development strategy [raised in 2012] and enhance China’s competitiveness in science and technology,” Huang said.  

China’s R&D spending has continued to rise in recent years, climbing to nearly 2.2 percent of GDP in 2018, close to that of many developed countries. But the spending in fundamental research that requires long-term investment accounted for only 5.5 percent of R&D funding, far below the average 15-20 percent in many innovation-oriented countries. “In improving the weak links [in technology], China needs to spend more in fundamental research and raise the proportion to around 15 percent,” Huang suggested, also calling for more efforts in realizing technology transfers.  

Developing the domestic market also requires better connectivity with the outside world rather than closing the door, according to Huang. Against rising protectionism and unilateralism, Huang believes that China should be more open to the world, encourage imports, open more fields to foreign investment and improve the business environment.  

“This will not only diversify the supply system but also attract more capital to China and help it fill the gaps in its supply chain,” he said. “An efficient and stable chain will not only drive domestic circulation, but also help stabilize the benign circulation of the global economy.”