What does China’s dual circulation policy mean for ASEAN?

Chinese President Xi Jinping. Photo: Kremlin.ru / CC BY

As China pivots its economic development strategy inwards, how will the shift impact trade flows in Southeast Asia?

By Dora Heng

In October, the Chinese Communist Party (CCP) Central Committee will be convening to outline China’s next five-year plan. Foreign investors and other China watchers will be watching closely for directives from Beijing around its new “dual circulation” strategy, a policy that refers to anchoring growth in the domestic economy (“internal circulation”), while allowing internal and external markets to drive each other (“external circulation”).

President Xi Jinping first announced the idea of dual circulation in May at a meeting of the Central Political Bureau. In thinking about China’s long-term development, Xi said he envisages a China that is less dependent on global integration and is instead supported by domestic consumption.

Why is China pursuing a policy of dual circulation?

It is important to note that this shift towards internal growth is not a sharp pivot for the Chinese government. While export-driven growth has been key for China since the 1970s, this model of development is no longer sustainable. Since the late 2000s, exports of goods and services have been slowly declining as a percentage of GDP. China’s exports as a percentage of GDP peaked in 2006 at 36% and declined to 18% by 2019. Considering rising nationalism and economic protectionism around the globe, as well as its trade war with the US, China’s move to diversify and hedge against export markets is understandable.

Source: World Bank Data

At the same time, the Chinese population has witnessed rapid growth in standards of living as the country has urbanized. China’s middle class grew, as did urban populations—from comprising 19% of the population in 1980 to 60% in 2019.

Source: World Bank Data

As consumers move into the middle class and their living standards increase, they contribute to growing domestic demand. This internal consumption boom is also boosted by the swift and extensive development of China’s e-commerce industry. According to the Ministry of Commerce, China’s e-commerce transactions reached 34.81 trillion yuan (5.2 trillion USD) in 2019, a year-on-year increase of 10%.

While China was the epicenter of the first wave of the COVID-19 pandemic, the country has responded with strength and emerged as one of the economic bright spots for Asia. While the Asian Development Bank has revised its 2020 GDP growth forecast for Asia down to -0.7%, China is one of the few countries with a positive GDP growth forecast at 1.8% for 2020. With the pandemic under control, China’s economy has been on the road to stabilization and recovery. Domestic consumption has served as the main driver of growth while export markets take a hit amidst trade tensions and key trade partners struggling to manage the fallout of the pandemic.

What are the implications for ASEAN?

“Dual circulation” does not entail a retreat from economic globalization. However, this might signal a new model of globalization for China that tilts in favor of regional integration as China rebalances against the fallout of trade tensions with the US.

ASEAN will continue to play an important role as China’s strategic business partner. In the first quarter of 2020, ASEAN overtook the EU as China’s largest trading partner. ASEAN-China trade accounted for 15% of China’s total trade volume. Multilateral companies are adapting in response to supply chain disruptions from COVID-19, making ASEAN an appealing option for companies considering a “China Plus One” strategy.

ASEAN is also becoming a larger driver of foreign direct investment inside China. In the first half of 2020, investment from ASEAN to China increased by 2.9% compared to the same period last year. In June, China unveiled its masterplan to transform the entire island of Hainan into a free trade port by 2035, positioning it as the largest special economic zone in China. This has great relevance for ASEAN, given Hainan’s proximity to Southeast Asia.

Some ASEAN member states are reacting favorably to opportunities inside China. As announced by Deputy Prime Minister Heng Swee Keat at the FutureChina Global Forum in September, Singapore is collaborating with China on the New International Land-Sea Trade Corridor of the Chongqing Connectivity Initiative. The corridor connects the city of Chongqing and western China to ports in Guangxi and elsewhere, and is a strategic node on China’s Belt and Road Initiative (BRI), a state-backed initiative to strengthen China’s global connectivity. In the first half of 2020, there was a 20% increase in trade volume through this corridor.

Slated for signing before the end of 2020, the Regional Comprehensive Economic Partnership (RCEP) is another demonstration of the region’s commitment to multilateralism and trade. This proposed free trade agreement (FTA) between the 10 ASEAN member states and 5 partners—China, Japan, South Korea, Australia and New Zealand—would be the world’s largest FTA by population, accounting for 45% of the world population and 40% of global trade.

Outside of government initiatives, private companies are also actively brokering partnerships between China and ASEAN. Cainiao, a logistic affiliate of Alibaba Group, is working with fellow Chinese firm BEST Inc to launch an integrated cross-border e-commerce logistic service between China and Malaysia.

Through the policy of “dual circulation,” China offers a revised playbook for governments and businesses to engage on trade and investment. ASEAN and China need to remain committed to regional integration through open trade and improved connectivity.

About the Author

Dora Heng
Dora hails from Singapore but has lived and worked across Asia, North America and Africa. She is interested in how digital economies can support growth across Southeast Asia. She is currently pursuing her masters degree at Harvard Kennedy School of Government.