EC Will China’s Common Prosperity Upgrade Dual Circulation?

Chinese leaders know that they want to discontinue the country’s existing growth model, but they haven’t yet landed on what the sustainable alternatives are. Beijing’s new common prosperity policy will only help shift domestic demand at the margins, but a full-fledged rebalancing will require a more radical transformation.

In a September 2021 interview, Logan Wright of the Rhodium Group came up with an especially felicitous way of describing the economic conundrum Beijing faces. “I think there’s generally more coherence right now in Beijing about the critique of China’s current growth model,” he explained, “rather than coherence around what that alternative would really look like.”

I agree. Over the past decade or more, Beijing has developed a clear understanding of the limitations of its once highly successful growth model. Chinese leaders recognize that the country’s reliance on high savings to fund high investment no longer made sense once China had closed the enormous gap that had emerged by the late 1970s between its moderately high investment needs and its extremely low investment level. Once that gap was closed and even reversed, sometime in the mid-2000s, an extraordinarily high savings rate could no longer create sustainable demand by funding productive investment.

But because China’s high savings rate was the obverse of an extraordinarily low consumption rate, Beijing could not allow investment growth to decline without causing a sharp decline in GDP growth. And yet at the highest levels of Chinese economic policymaking circles, there is a recognition that nonproductive investment has become a serious problem. In an important July 2021 essay by Chinese leader Xi Jinping on the country’s “new development dynamic,” for example, he demanded that China improve the quality and returns of economic growth and that the country should begin to pursue “genuine rather than inflated GDP growth.”

In theory, it would be possible to accomplish this by shifting a huge amount of investment with low or negative economic returns into high-productivity sectors of the new economy. But Beijing has been trying unsuccessfully to do this for years, and for reasons I have discussed elsewhere, this is likely to be almost an arithmetical impossibility. That is why Chinese policymakers largely recognize that China must transform its growth model into one in which the consumption share of GDP rises substantially. But while Chinese policymakers understand the limitations of the country’s current growth model, they have failed to present a coherent alternative.

To explain what I mean, it helps to go back a little. In May 2020, the Chinese government introduced the dual circulation development model that has since guided many of the policies that have been implemented or announced.

According to the dual circulation model, China plans to emphasize both growing exports (international circulation) and expanded domestic demand, powered mainly by rising consumption (internal circulation), with the two reinforcing each other. The idea is that expanding demand for Chinese-manufactured products and exports as well as domestic consumption would support and strengthen China’s manufacturing base which, for Beijing, is the engine of China’s development success.

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