China's inward shift has profound implications for the world economy

The policy of Zili Gengsheng or self-reliance was the long-standing guiding philosophy of the Mao Zedong era as the People's Republic had faced international sanctions and isolation led by the United States since its founding in 1949.

The policy was brought into even sharper relief in the 1960s when China fell out with the Soviet Union, which withdrew all of its economic, technological and personnel assistance. With the country almost totally isolated, the Chinese government was forced to build up a whole range of industries on its own.

Since 1979, Deng Xiaoping's open-door policy has opened up China to overseas investment and technological know-how and the country has become the world's factory. The policy of self-reliance has given way to that of interdependence, which has helped build the world's second-largest economy.

Since the start of the US trade war against China in 2018, however, Chinese President Xi Jinping has repeatedly called for self-reliance. Over the past year, relations between Beijing and Washington have been in a tailspin, and the outbreak of the coronavirus pandemic has prompted lockdowns around the world, seriously disrupting global supply chains.

It is against this background that China's leadership has recently signalled a strategic shift in economic priorities.

A construction site in Shanghai, China. Photo: Reuters alt=A construction site in Shanghai, China. Photo: Reuters

Over the past two months, a new catchphrase known as "dual circulation theory" has been gaining currency but also causing controversy at the same time. According to the theory explained in official media, Chinese leaders envision a new economic pattern to be dominated by "major domestic economic circulation" and facilitated by circulation between China and the rest of the world.

At a time of global uncertainties, the government's renewed emphasis on internal circulation by boosting domestic consumption and industries makes sense.

Given Xi's repeated calls for self-reliance, however, there is also speculation over whether China is again pushing for autarky as its economic interdependence with the US and other Western countries comes under a lot of strain and decoupling has become a buzzword over the past year.

Chinese leaders first put forward the dual circulation theory at a meeting of the Communist Party's Politburo Standing Committee, the country's highest governing council, on May 14.

Later that month, Xi further explained the theory in a meeting with a group of government advisers at the annual sessions of the National People's Congress and the Chinese People's Political Consultative Conference.

Chinese President Xi Jinping. Photo: AFP alt=Chinese President Xi Jinping. Photo: AFP

He said China had the most comprehensive range of industries in the world and its 400-million-strong middle class offered extraordinary market potential.

Xi said China would focus on overcoming structural imbalances and developing a more closely integrated domestic market to become the mainstay of the economy.

Last month, Vice-Premier Liu He, one of Xi's most trusted advisers, sounded an even more optimistic tone and said at a forum in Shanghai that the dual circulation pattern was already taking shape.

Chinese officials are drafting the 14th five-year plan, which will set out social and economic development goals for the years 2021 to 2025. The general consensus is that China's new plan will focus more on the domestic market and industries to ease its reliance on international trade and technology.

The inward shift does not necessarily mean China will retreat from global supply chains or into isolation. In fact, Beijing has sped up efforts to open up manufacturing and financial services to woo foreign investors, just as Washington intensifies its push to isolate China.

Still, China's decisive turn to the domestic market and industries will have far-reaching implications not only on the Chinese economy but also on the world economy as a whole.

A container vessel approaches the Yangshan Deepwater Port in Shanghai, China. Photo: Bloomberg alt=A container vessel approaches the Yangshan Deepwater Port in Shanghai, China. Photo: Bloomberg

The shift stems from the Chinese leaders' sombre assessment of external conditions, which are expected to worsen in a post-Covid-19 world.

More than once, Xi has warned that officials must be mentally and professionally ready for the worst-case scenarios "over a fairly long period to come".

Geopolitically, a global backlash led by the US is building against China and the country faces the most hostile international environment in more than 30 years.

Washington has taken increasingly forceful measures to curb China's economic clout and threatened to cut the country off from global supply chains.

The US is pushing American companies to move operations, and switch key suppliers, out of China while leading an international campaign to stifle overseas expansion of China's telecoms and tech companies, including Huawei and ZTE.

On Tuesday, Washington's intense pressure on its European allies to drop Huawei from their 5G networks paid off when Britain announced that the country's telecom firms would not be allowed to buy new Huawei 5G kit from the end of this year and would be required to remove all Huawei equipment by 2027.

US President Donald Trump has taken credit for the British decision, saying he personally lobbied many countries not to use Huawei "because we think it's an unsafe security risk".

The White House is also reportedly considering moves to restrict or impose outright bans on Chinese-owned social media apps TikTok and WeChat.

TikTok appears to be in America's sights. Photo: Reuters alt=TikTok appears to be in America's sights. Photo: Reuters

China has benefited immensely from economic globalisation in the past decades, particularly after joining the World Trade Organisation in 2001, and it has become a critical player in global industrial and supply chains, which is one of the country's key attractions for foreign investors.

While the possibility of full decoupling between China and the US is very low, Chinese leaders are obviously preparing for the worst.

The fact that Xi repeatedly mentioned that China has the world's most complete range of industries seems to suggest that the country is fully capable of building up its own industrial and supply chains.

This article originally appeared on the South China Morning Post (SCMP).

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