The Modest Impact of China's Dual Circulation Policy... Will It Revive in the Second Half?

Dual Circulation Policy Prepared for US-China Conflict... Necessity Decreases Due to COVID-19
Slowing Chinese Economy... Expansionary Fiscal Policy Expected

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Gong Byung-sun] It has been a year since the Chinese government introduced the ‘dual circulation policy’ to stimulate domestic demand, but production based on external demand has rather strengthened. As concerns about economic downturn have increased in the second half of this year, an acceleration of the transition to the dual circulation policy to boost domestic demand is expected.

On the 7th, Shinhan Financial Investment explained that although the Zhengzhou government presented the dual circulation growth strategy last year, export-centered growth is still ongoing. The dual circulation policy refers to a plan to build a strong internal economy without relying solely on external demand in response to external economic uncertainties, thereby linking domestic and international circulations.

(Provided by Shinhan Financial Investment)

More than a year has passed since the dual circulation policy was proposed, but the recovery of domestic demand remains sluggish. Retail sales, which had been recovering rapidly until the third quarter of last year, slowed down from the fourth quarter and remain below pre-COVID-19 levels.

On the other hand, the production economy based on external demand is strengthening. During the early spread of COVID-19 last year, industrial production fell by nearly 24% compared to the end of 2019 but recovered within two months. Moreover, the recovery trend in industrial production has not been temporary but has continued to increase beyond pre-COVID-19 levels.

The slow policy transition is believed to be due to multiple reasons. First, there was an unintended export boom as a reflection of the COVID-19 situation. Additionally, advanced countries maintained household purchasing power through aggressive stimulus measures. In fact, retail sales in OECD member countries exceed pre-COVID-19 levels by more than 6%.

At the same time, production bases in some emerging countries competing with China, such as India and the Association of Southeast Asian Nations (ASEAN), experienced delays in production normalization due to the spread of COVID-19. In contrast, China quickly controlled the spread through strong lockdown measures and rapidly returned workers to the field. Ha Geon-hyung, a researcher at Shinhan Financial Investment, explained, “Exports remained strong amid the recovery of demand for goods in advanced countries and production disruptions in major emerging countries. Originally, the dual circulation policy was intended to prepare for disputes between the U.S. and China, but the surge in exports lowered the need for policy transition.”

The Chinese government focused on stable growth rather than quantitative growth for domestic demand. To solve housing problems in large cities, it strengthened real estate regulations including loans, and the People’s Bank of China, the central bank, reduced the level of monetary easing through fine-tuning. Furthermore, by regulating platform industries, it is also preventing disorderly expansion of capital. In the first half of this year, the Chinese government conducted an antitrust investigation on e-commerce company Alibaba and last month imposed security investigations and a ban on new member recruitment on Didi Chuxing.

However, Shinhan Financial Investment believes that conditions for transitioning to the dual circulation policy are being established recently. This is because concerns about economic downturn in China have increased in the second half of the year. The export order component of the manufacturing Purchasing Managers’ Index (PMI) has declined for four consecutive months since April this year. External demand has also weakened, with new orders falling near the baseline (50). Moreover, the rise in real estate prices has slowed this year, creating an environment where regulations that hindered domestic demand growth can be eased.

(Provided by Shinhan Financial Investment)

Accordingly, Shinhan Financial Investment forecasts that stimulus measures for the domestic demand-centered dual circulation policy will resume. Although the monetary stance will not be eased due to concerns about delayed restructuring and rising real estate prices, fiscal policy is expected to shift to an expansionary stance. Researcher Ha said, “In the first half of this year, the Chinese government maintained a balanced fiscal policy due to concerns about overheating risks. Since external demand is expected to weaken in the second half, the central government will increase fiscal spending, and local governments will issue special infrastructure bonds.” Considering China’s annual fiscal execution targets, the central government will need a fiscal deficit of 3.25 trillion yuan (approximately 575.12 trillion won) in the second half, and local governments have about 1.92 trillion yuan left for special bond issuance.

The infrastructure investment sector is expected to benefit from the dual circulation policy. The infrastructure investment sector consists of old infrastructure including transportation, environment, water resource management, and public facilities, as well as new infrastructure such as 5G communication networks, data centers, and artificial intelligence equipment. Researcher Ha said, “Infrastructure investment is highly correlated with government spending. Although government spending increased by only about 1% in the first half, if fiscal targets are met, the spending growth rate will expand to around 10%.”

This content was produced with the assistance of AI translation services.