China’s economic strategy shift shows Xi Jinping is preparing for ‘worst case scenario’, analysts say

Frank Tang

China’s move to double down on a pivot away from export-led growth in favour of developing its domestic market reflects a strategic shift by Beijing to prepare for the “worst case scenario” after the coronavirus pandemic, according to analysts.

President Xi Jinping told dozens of top economic advisers in Beijing at the weekend that China was pursuing a new development plan in which “domestic circulation plays the dominant role”.

“For the future, we must treat domestic demand as the starting point and foothold as we accelerate the building of a complete domestic consumption system, and greatly promote innovation in science, technology and other areas,” Xi said in comments published by the official Xinhua News Agency.

Xi’s remarks suggest that Beijing is moving towards giving up the “great international circulation” strategy adopted in the 1990s that helped fuel its growth to become the world’s second-largest economy.

It’s a kind of preparation for the worst-case scenario, including the decoupling with the United States and even the whole western world

Hu Xingdou

“It’s a kind of preparation for the worst-case scenario, including the decoupling with the United States and even the whole Western world,” said Hu Xingdou, a Beijing-based independent economist.

Hu said China has no choice but to face the adversity, but warned that it must not undo its market reforms and not go back to the closed nature of a command economy where the central government makes all economic decisions.

Instead, Hu said China should expend more effort convincing the rest of the world that it has no intention of building an economic model that is different from the current global system.

Under the previous export-oriented strategy, a government policy literally translated from Chinese as “big in, big out”, China positioned itself as the manufacturing link in global value chains by importing components and then re-exporting finished goods for consumer markets.

The system had worked well after its entry into the World Trade Organisation in 2001 and helped the country become the so-called workshop of the world; but the model has started to lose its shine in recent years, with China struggling to move up the value chain.

This development, coupled with a trade war and technology rivalry with the United States, and an expected fragmentation of the global economy after the coronavirus pandemic, has encouraged Beijing to seek self-sufficiency in future.

Xi’s speech on Saturday offered the clearest clues so far regarding the Chinese leader’s thinking on economic strategies in response to Washington’s decoupling threats.

According to Xi, China faces unfavourable winds in the outside world, including a deep recession in the global economy, disruptions to international trade and investments, “rampant protectionism and unilateralism” and geopolitical risks.

“We now have to seek development in a more unstable and uncertain world,” Xi said.

Xi also urged China to become more self-reliant in technology and marketplace, and in particular named the digital economy, smart manufacturing, health and life science and new materials as sectors that China needed to concentrate on to drive growth.

It’s the direction of economic transformation. The question is, how?

Raymond Yeung

China, according to Xi, will stand on the “right side of the history” to insist on multilateralism, while it will also not close itself off from the outside world. Instead, China will “unswervingly” push ahead with globalisation in the direction of “openness and inclusiveness”, Xi said.

Xi’s latest comments had echoes of his speech at the World Economic Forum in Davos in 2017, when he also promoted globalisation. At the time, it was viewed as a strong, public rebuke of the newly inaugurated US president, Donald Trump.

Raymond Yeung, ANZ Bank’s chief Greater China economist, said China’s strategic shift comes from a worry that external demand will not recover in the next two or three years.

“It’s the direction of economic transformation. The question is, how?” Yeung said.

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