Dual circulation is a strategic process, not a theory

Author: Andrew Sheng, HKU China watchers were puzzled by the country’s ‘dual circulation strategy’ when it first surfaced in 2020. Chinese President Xi Jinping called for the ‘formation of a new pattern of economic development’, given the rapidly changing global context, and the strategy is being embedded in China’s 14th Five Year Plan (2021–2025). Xi […] The post Dual circulation is a strategic process, not a theory first appeared on East Asia Forum.

Dual circulation is a strategic process, not a theory

Author: Andrew Sheng, HKU

China watchers were puzzled by the country’s ‘dual circulation strategy’ when it first surfaced in 2020. Chinese President Xi Jinping called for the ‘formation of a new pattern of economic development’, given the rapidly changing global context, and the strategy is being embedded in China’s 14th Five Year Plan (2021–2025).

A worker looks through the fence of a construction site that is decorated with pictures of the Great Wall at Badaling, north of Beijing, China, 1 September, 2016 (Photo: Reuters/Thomas Peter).

Xi stressed that the dual or ‘twin domestic and international circulations would mutually reinforce each other, but with the larger domestic circulation as the principal focus’. Alicia Garcia Herrero saw this as ‘bad news for others’ exports’, as China seeks ‘to reduce dependence on imports … in reaction to the US push to decouple global supply chains’.

Lawrence Lau sees dual circulation as a cyclical shift over the long term. Before 1980, international circulation (total exports plus imports) was below 10 per cent of domestic circulation (domestic consumption, investment and government expenditure), rising to as high as 68 per cent by 2006, before falling back to 37 per cent currently. Lau warns that total global decoupling is a lose-lose for all.

Interpreting China has always been difficult because the Chinese language carries terms that can be interpreted reflexively, such as the Chinese word for ‘crisis’, which contains both ‘danger’ and ‘opportunity’. Yukon Huang argued in that observers see China through multiple lenses, often forgetting the size and complexity of Chinese society and economy. The result is that ‘efforts to typecast China often fail’.

Even Western-trained Chinese analysts have difficulty explaining China’s performance using the theoretical economic and ‘analytical frameworks that economists and financial experts are most comfortable with’. They hark back to the Washington Consensus where development was seen as coming from free markets, liberal democracy, rule of law and minimal government, forgetting that these require complex strategic choices, processes and institution-building that may take centuries. There is no ‘Beijing consensus’ because the Chinese recognise that there is no theory to guide development under uncertainty, so development is more a process methodology than a theory.

Repeated attempts to describe China as an ageing, corrupt, autocratic and heavily indebted system with excessive imbalances and distortions — that will inevitably fail because of bad governance and a lack of democracy — do not give the complete picture. The country has survived two millennia of upheavals, with the world’s oldest bureaucracy still intact in design but evolving over time to adapt to new realities.

That bureaucracy survived because it remembers that no theory, rule, law or order survives forever. Change is a process, but to succeed there must be a process to manage these changes. Foreign policy doyen Henry Kissinger articulated this conundrum as: ‘Americans think in terms of concrete solutions to specific problems. The Chinese think in terms of stages in a process that has no precise culmination’.

Americans frame policy for any problem with ‘first best’ outcomes. The Chinese understand that no ‘first best’ is possible under radical uncertainty, because history teaches that the only operational strategy that works in the fog of uncertainty is a process of search, experiment, pilot, advance or retreat and review. Thus the phrase ‘crossing the river by feeling the stones’ guides simple operational choice within complexity. Dual circulation retains operational flexibility to adapt with fast pivots as conditions change.

While the West thinks atomistically in deductive, logical and linear terms, the Chinese think in abductive, fluid and dialectical systemic terms, trusting experimentation and stressing outcomes rather than elegant theories. The West thinks in ideal types, prioritising individual rights, whereas the Chinese realise that for a system as a whole, trade-offs between individual rights and social obligations are inevitable.

Chinese policymakers, who are more often engineers than lawyers or economists, think about development in terms of an open giant complex system. The dual circulation framework is dialectic, being a strategic balance between internal loops and external loops, depending on overall threats and opportunities. Dialectically, if the outside world does not want to engage with China, it will focus internally.

But since China has the largest trading partnerships, increased domestic consumption will inevitably bring larger imports and global trade. If trading partners reject win-win cooperation, then withdrawal to internal circulation is less lose-lose than trading insults. When rivalry clouds entangled partnership, temporary separation is better than divorce.

The United States and China are warring elephants in the proverbial global room. The dual circulation policy applied to bilateral relationships basically says that it takes two to tango. Only time will tell which elephant can pivot more adeptly than the other.

Andrew Sheng is Distinguished Fellow at the Asia Global Institute, University of Hong Kong.

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