The “Dual Circulation” is Necessary Part of China’s New Development Paradigm

Editor’s Note: How will China’s economy start at the beginning of 2021? How will China promote the dual circulation development and what role will the private economy play? Li Daokui, a renowned economist, analyzed and answered the above questions in an exclusive interview with China Focus. Li Daokui is Mansfield Freeman Chair Professor of School of Economics and Management, Tsinghua University. He currently serves as Director of Institute for Chinese Economic Practice and Thinking, Tsinghua University.

China Focus: What is the background of the new development paradigm of a dual circulation? Why was it formally proposed at the Fifth Plenary Session of the 19th CPC Central Committee?

Li Daokui: China has a large population of 1.4 billion. In the process of modernization, we are bound to grow bigger before getting rich. Our per capita GDP has not yet reached the global average level. The global average is $11,000 while that for China just reached $10,000 last year. So rich countries ahead of you will feel suspicious. This is also normal in history. Suspicion is very natural when they see you are still less developed but have a long-term goal for 2035. In this case, the international environment we are facing is certainly very complicated. This is the first overall background.

The second background is the inevitable norm of the development of major countries. When all major countries develop into a certain stage, they must be dual-circulating based on domestic flow and circulation. Let’s take a look at historical cases. The United States is a typical case. From the end of the Civil War in 1865 to 1894 the total industrial output surpassed that of the UK for the first time to qualify the US as an industrial power. This process was completely dominated by domestic circulation. Looking back at history, an important reason for the American Civil War was the economy. The South, which advocated opening-up, lost to the North, which advocated industrialization and protection of its own market.

Therefore, Americans spent 30 years unifying its own market to some extent. In 1871, when Germany was unified, it also relied on the domestic circulation. At that time, there was a theory called German Historical School, according to which foreign trade was not necessarily the only way to modernization.

Therefore, the new development paradigm with dual circulation has two backgrounds. One is the complex international environment brought up by a large population leading up to getting big before getting rich. The other is the inevitable development norm of a major economy.

China Focus: On the Central Economic Work Conference that outlined key tasks for 2021, China’s policymakers decided  to effectively unblock the domestic circulation. What is your view on it?

Li Daokui: What are the macro problems? Economic geography must be rearranged. Let me tell you a number. How many years in history did we need to achieve the economic growth as we did in the last four decades?  The answer is 1500 years. Economic growth entails the redistribution of population, labor forces, capital, loans and space. As a scholar, I think we should have a bigger picture instead of sticking to the current pattern. It is encouraged to scale up some regions according to the natural rules of economic development and population migration. Second, we must pay heed to people’s happiness in regions with emigration. Our party always puts people first, namely people’s happiness. We hope that people who have not moved out, such as people in Northeast China, can also enjoy their lives. It is unrealistic to seek undifferentiated growth in all parts of China. It must be that some regions are larger in overall economic scale, but the average happiness level should be consistent.

As far as capital is concerned, my understanding is precise regulation, which means that capital may increase in some fields. For example, key enterprises may be encouraged to issue more bonds and reduce the dependence on bank loans thereof. I think there is still room for development in the real estate sector. Many of the 1.4 billion people need to move from rural areas to cities or from one city to another. There are surely new housing needs. Some buildings may have to be demolished while others to be built. Therefore, the funds for in the real estate sector need to be increased. Personally, I hope to ease the control with precise regulation.

China Focus: The meeting also brought forth “demand-driven supply”. How to understand it？

Li Daokui: “Demand-driven supply” is a new wording, which is very important. In the past five years, we took huge efforts in the structural reform of the supply side and solved many problems. But now it is necessary to increase demand to boost the Chinese economy to a higher level. To be more direct, we must enlarge middle-income population. I believe the number of these people might double, from 400 million to 800 million by 2035. The increased demand can invigorate the enterprises, leading to more R&D input.

Demand drives supply. In the next five to ten years, the most prominent source will be urbanization, or more broadly, the flow of the population among different regions. Therefore, my prediction is that some regions in China will develop very fast in the next five to ten years while others may find its economic size shrinking. However, I sincerely hope that through various policy levers, the average living standard and happiness index will not decline but be on the consistent rise.

China focus: What role do you think China’s private economy will play in 2021?

Li Daokui: The private economy has entered a new stage. During the first year of the 14th Five-Year Plan, we must follow the overall national policy and exert our efforts in regional development. The Chinese economy might be restructured within 15 years with some regions developing very fast, such as the Pearl River delta, the Yangtze River delta, the Chengdu-Chongqing belt and the Beijing-Tianjin-Hebei region. There are plenty of opportunities therein.

The second aspect is about some major bottlenecks. Frankly speaking, it might not be the theory or the system but the key parts, component and apparatus, even some very small ones. In these aspects, enterprises in Japan, Germany and the United States have been leading the world for a long time so we have to buy from them. We can’t produce lithography machines or aircraft engines due to the lack of one or two critical parts. The whole society must be mobilized to enable the private economy to concentrate on overcoming difficulties in quality parts. If many private enterprises in China can be in the lead, our overall industrial capability, even scientific and technological capability, will be boosted to a new level.

Reporting by Jiang Hui

Translated by Chen Ying

Copy-edited by Liu Xiaomin