✪ Cao Expedition | BOC International Research Corporation
At 22:00 on the evening of September 16, the Ministry of Commerce issued a message saying that China has applied to join the Comprehensive and Progressive Agreement on Trans-Pacific Partnership (CPTPP). Analysts believe that this move not only gives new possibilities to this regional trade organization initiated by the United States and abandoned by the United States, but also shows China's attitude and confidence in further opening up and embracing globalization. So why did China suddenly make this decision?
This paper focuses on the macro trend, and on the basis of analyzing the changes in the world economic system and the strategy of China's "double cycle" strategy, this paper points out that China is reshaping its economic relations with the world, which provides an important reference for us to understand the above problems. The author points out that the development of China, a huge economy, has begun to surpass the "center-periphery" structure of the traditional world economic system – China is not only a world-scale, systematic capacity provider, but also a world-scale demander. After industrialization in a closed environment and reform and opening up to join the global economy, China has entered a new stage of pursuing global economic rebalancing. At this stage, the main problem is excessive consumption and insufficient investment in developed countries, and insufficient consumption in late-developing countries. Since ten years ago, China has gradually reached the lower middle-income level and moved towards a high-income society in terms of population structure, economic structure and industrial structure. In the future, consumption will become the driving force of economic growth, and China's industrial industry and consumption will be quite dependent on imports. As long as the level of national income continues to grow, the economy will continue to grow and make a significant contribution to the new balance of the global economy. This is the universal significance of the internal cycle driving the double cycle, and it is also the value of China's practical actions to practice the concept of a community with a shared future for mankind.
This article was originally published in Culture Magazine, No. 3, 2021, and was originally titled "Reshaping China's Economic Relations with the World in a Double Cycle". The article only represents the views of the author and is for the reference of all the kings.
Reshaping China's economic relationship with the world in a double cycle
▍ The meaning of the double cycle proposed
In 2020, in the face of the new stage of China's economic development and the unprecedented changes in the world in a hundred years, China proposed to accelerate the formation of a "new development pattern with the domestic cycle as the main body and the domestic and international dual cycles promoting each other". The proposal of this pattern points directly to the relationship between China and the world, aiming to form a new type of economic relationship between China and the world in the new era, which is of great significance to China and the future of the world.
Economic activity itself is a cycle of supply and demand. But unlike the common economic method of analyzing the total amount of supply equal to demand, "circulation" is the analysis method of political economy. It divides economic activity into four links: production, distribution, circulation, and consumption, and economic activities go through these four links in turn, and expand reproduction again and again. Different from the aggregate analysis method, the analysis of economic phenomena from the perspective of economic circulation will pay more attention to the overall picture of social and economic activities. The economic cycle involves both technological progress in the production and circulation of material products and the economic institutional arrangement of value realization. Under certain conditions of technological progress, if there are difficulties in the cycle, this difficulty will be expanded and reproduced, become a systematic system deviation, and eventually rise to the economic system and mechanism problems, and be related to the political, social, cultural, ecological and other aspects.
If this "circular" approach to political economy is extended to the world economy, we can see that the world economic system presents a "center-periphery" structure. The "central" countries accumulated capital from domestic to international before the "peripheral" countries, and became not only the leaders of technological progress, but also the arrangers of the economic system. In contrast, the "periphery" states are followers of technological progress and subordinates of the corresponding economic system. The structural characteristics of the "center-periphery" of the world economic system stipulate the different nature of the double cycle of countries in different positions, and are fully reflected in international economic and trade relations: "peripheral" countries export raw materials, including agricultural and mineral products, to "central" countries, and import manufactured goods. The two form an interdependent relationship in this sense, achieving mutual promotion in a certain sense.
In this world economic system, China's rise is not only a major change in the world pattern today, but also an important factor affecting the future world pattern. Since the founding of New China, especially since the reform and opening up, China's economy has grown rapidly, not only becoming the second largest economy and the largest trading body, but more importantly, this growth is the comprehensive development of the economy and society, which is manifested in the rapid increase in per capita income and the substantial improvement of social development indicators. In 2020, while China's per capita GDP reached 10,000 US dollars, it eliminated absolute poverty under the current international standards, contributing more than 80% to the world's poverty reduction, and entering the ranks of lower-middle-income countries as a whole.
The economic and social development of This huge economy in China has begun to transcend the "center-periphery" structure of the traditional world economic system: China is both a world-scale system of capacity providers and a world-scale demander. On the one hand, from the perspective of the "center" countries of developed economies, China's export of manufactured goods and raw materials to the world seems to be a developed economy; on the other hand, from the perspective of the "peripheral" countries of developing economies, although China exports manufactured goods to the world, most of them are labor-intensive products with low added value, and although there are raw materials imported from the world, they are more capital goods, especially technology-intensive products with high added value, and it is still a developing economy. So, what type of economy is China? This has become a confusion in the current international community's cognition, and it also constitutes an important background for sino-US economic and trade conflicts.
Since the 2008 international financial crisis, the world economy has generally entered a "new normal": despite the continuous expansion of fiscal and monetary policies in various countries for more than a decade, the world economy is still sluggish. While showing the overall characteristics of low growth, low trade, low inflation and low interest rates, the economic performance of various countries is inconsistent, unsynchronized and divergent. The sudden outbreak of the new crown epidemic has exacerbated this differentiation. The anti-economic globalization trend of populism and protectionism is likely to become an institutional arrangement and may change the paradigm of the world economy.
The turbulence of the world economy and the changes in the international pattern have forced China to assume the obligation of being a responsible major country, and while providing impetus for the "strong, balanced and sustainable growth" of the world economy, it is also necessary to defend economic globalization and lead a new type of economic globalization. Since 2019, China's residents' consumption of goods has surpassed that of the United States to become the world's largest market, and China's economy has become a hub connecting traditional developed economies and developing economies. Judging from this development trend, if the expansion of domestic demand is taken as the strategic basis and the construction of a super-large-scale domestic market becomes a sustainable historical process, China's economy will realize the domestic cycle as the main body; if this continuously expanding domestic market is shared by the world through institutional opening-up, the internal circulation of China's economy will drive the external cycle and realize the mutual promotion of domestic and international dual cycles. This process of mutual promotion of the double cycle is also the process of generating a new economic system between China and the world, and a dynamic process of practicing the international governance concept of a community with a shared future for mankind by promoting a new type of economic globalization.
▍The historical problems and practical logic of the internal and external cycles of China's economy
(I) Planned economy: "Internal circulation" lays the foundation for modernization
As early as the Xia, Shang, and Zhou dynasties, China created a formed agricultural civilization, and has a long history, and is the only uninterrupted form of civilization among the four ancient civilizations. According to Madison's Millennium Statistics of the World Economy, in the Ming and Qing dynasties, China's total GDP was already the first in the world. In 1820, China's share of world GDP was 32.9%, while the combined GDP of Western European countries in the same period accounted for only 23.6% of world GDP. However, although China's economy accounted for about 1/3 of the global GDP at that time, this GDP foundation was based on a self-sufficient agrarian civilization. At that time, the capital of Western European countries had already promoted product manufacturing to the era of mechanized large-scale industry with the help of market economic mechanisms.
Different from the self-sufficient natural economy of agrarian civilization, the market economy is an economy that is produced for others. When products that need to be consumed by others are manufactured on a large scale by machines, the constraints of the market become the basic constraints, and insufficient demand becomes the norm. Driven by the maximization of profits of manufacturers at the micro level, the intrinsic desire for profits has turned into all-round competition with each other. While promoting technological progress, this competition has also promoted the transfer of capital accumulation from domestic to foreign countries, and violently interrupted the historical process of natural economic development in traditional agricultural civilization countries. For China, this turning point in history took place during the Opium War of 1840. Since then, China's share of GDP in the world has plummeted, and by 1950, China's share of GDP in the world had fallen to 4.5%.
The century-old history from the Opium War in 1840 to the founding of New China in 1949 is not only the history of China being bullied and insulted by the Western industrialized powers, but also the history of China's economic and social backwardness. Reality has made China realize that "backwardness means being beaten." To this end, the development of industry, the road of industrialization and the realization of modernization have become the demands of the whole nation. The founding of New China finally laid the basic conditions for the realization of this national demand. With a deep memory of the bullying and insults of the Western powers in the past century, the independent completion of the cause of industrialization and modernization has become the most ideal path in the minds of the Chinese people. The Soviet Union provided an example: in 1950, the Soviet economy was on the rise, and its share of GDP had reached 9.6%, making it the second largest economy in the world at that time.
The experience of the Soviet Union shows that through the mobilization of state administration and the adoption of a planned economic system to concentrate forces on national industrialization, it is possible to accelerate industrialization without relying on foreign countries, and it is possible to quickly reverse the backward appearance of economy and society. This naturally becomes the most reasonable reference for China, which is eager for national rejuvenation. The "one-sidedness" of "taking Russia as a teacher" has become the choice of history.
Generally speaking, as developing countries, modernization through industrialization is a historical trend. Industrialization, especially catching up with the industrialization of developed countries, continues to expand industrial investment is the first. Therefore, the adoption of economic plans represented by industrial policies and efforts to expand industrial investment have become a common choice in developing countries. However, unlike the economic plans of developing countries on the basis of market economy, China at that time formed an economic system of dual economy. It is characterized by relying on the power of the state, mobilizing savings, continuously increasing the investment rate, and expanding industrial investment by continuously reducing consumption.
The specific way to achieve this is: in the rural areas where the majority of the population is concentrated, through collective ownership methods such as cooperatives, support "unified purchase and unified marketing", and transfer economic surplus (savings) to industry while suppressing the price of agricultural products; in cities where industry gathers, economic surplus (savings) is invested in the industries and sectors of the national economy most needed through the form of state ownership. Economic activity under the planned economic system is a forced acceleration of reproduction. As a result of the use of the administrative power of the state to forcibly reduce consumption, the savings mobilized by it are directed at an accelerated rate towards industry. When China's first five-year plan was completed, a basically complete industrial system represented by 156 large backbone heavy industrial enterprises was initially formed, and at the same time, infrastructure construction also made great progress, constituting the basic pattern of China's state-owned enterprises today and the regional layout of the industrial system, which became the background of China's industrial development.
But this forced reproduction of the expansion can take place only to the extent that the administrative power of the State can cover. Closure is the internal logic of the planned economic system, and only by completely controlling uncertainty can economic activities form a closed loop and operate smoothly and controllably. In order to avoid interference with the closed-loop operation of the economy, it is necessary to reduce foreign economic activities to a minimum, not only can there be no foreign direct investment (FDI), but also in foreign trade can only maintain the indispensable material surplus adjustment, the so-called export is only to support the surplus adjustment of imports of foreign exchange acquisition. As a result, the economic cycle under the planned economic system is basically carried out within the territory of the country, and there is no possibility of external circulation.
(II) Reform and opening up: "external circulation" is integrated into the world division of labor
After the reform and opening up, China began to implement a market economic system. The market economic system itself is an open economic system, and its integration into the global market economic system is its natural logic. In this sense, the so-called Reform of China is to transform the industrialization of the country, which was previously led by the plan and represented by state-owned enterprises, into the industrialization of the whole people led by the market, including private and foreign capital, and thus mobilize the enthusiasm of all parties to accelerate the realization of industrialization. The so-called opening up of China is to integrate the process of industrialization into the process of economic globalization, and promote the rapid upgrading of the industrial structure through alternate import substitution and export-oriented industrialization. Reform has promoted opening up, and opening up has promoted reform, and the two complement each other. Due to China's abundant labor resources and low prices, once the advantages of low-cost labor are incorporated into economic globalization, it will attract global industries to transfer to China. China's economy can not only get rid of the passive situation of "internal circulation" under the planned economic system, but also through participating in the international division of labor, it can form an "external cycle" that is compatible with the market economic system of the world market and promote the global economic cycle.
China's economy's participation in the global economic cycle is beneficial to both China and the world. This can be argued for in terms of improving global resource endowments. At the beginning of reform and opening up, the proportion of China's major production factors in the world was either abnormally high or low. In 1980, China's labor force accounted for 22.4% of the global labor force; capital and technology were extremely short, China's total capital formation accounted for only 2% of the world's total, and R& D investment accounted for only 0.5% of the world. At the same time, China's natural resources such as arable land, fresh water and oil account for a very low proportion of the world, at 7%, 6% and 1.5% respectively. International experience shows that the process of industrialization is manifested in both the continuous increase in the proportion of industrial output value in GDP and the continuous transfer of rural surplus labor to industry. Under the planned economic system, a high proportion of the labor force is invisible unemployed in the agricultural sector, which not only causes the waste of labor resources, but also cannot form an effective demand due to extremely low income, making the internal circulation under the planned economic system unsustainable in the long run.
Through reform and opening up, investment attraction, a large amount of overseas capital flowed into labor-intensive industries, forming export advantage industries. In 2006, when the proportion of "external circulation" was the highest, the employment intensity (employment number/ million yuan added value) of China's industrial added value per million yuan was 6.73% of the total industry, while the export-oriented textile industry was 12.74%, clothing, shoes and hats were 18.29%, furniture manufacturing was 14.12%, leather, fur and feathers and their manufacturing was 17.36%, and the manufacture of stationery and sports supplies was 21.52%. The external circulation has created a large number of employment opportunities, made it a reality for farmers to work in the cities, raised the income level of low-income people, and gradually bridged the rupture of the dual economy in China's industrialization.
At the same time, for China's economy, the use of foreign exchange from the export of labor-intensive industries for imports has also improved the situation of China's factor endowments of production. On the one hand, imports of energy, raw materials and agricultural products support the development of related industries in the country. Imports of agricultural products are effectively equivalent to imports of arable land and freshwater resources. For example, in 2018, China imported 88.03 million tons of soybeans, and if it is planted in China, it needs 46.33 million hectares of arable land, which is equivalent to 13 times the soybean planting area in Heilongjiang Province and 1/3 of the country's arable land. On the other hand, over the years, the import of mechanical and electrical products has accounted for about 1/2 of China's imported products, mainly complete sets of equipment, key stand-alone machines and advanced instruments and meters. In recent years, the proportion of imports of high-tech products, including chips, has continued to increase, and has now exceeded 30%. The import of these products has made an important contribution to the improvement of China's technical equipment level and consumption level, and has also led the direction of technological progress.
More importantly, China's economy has joined the global economic cycle, changed the pattern of international division of labor, and promoted economic globalization into a new stage. In the 1990s, under the influence of the initial success of China's reform and opening up, most of the countries with the original planned economic system adopted the market economy system except for a few countries. Institutional coherence has led to a significant reduction in global institutional transaction costs and a significant increase in the degree of tradability. This is manifested not only in trade in goods, but also in the international flow of factors of production, with the General Agreement on Tariffs and Trade (GATT) transforming into the liberalization of factor trade, i.e. the World Trade Organization (WTO) that liberalizes investment trade. While investment and trade liberalization has made the factor endowments of various countries naturally manifest, it has also made possible the layout of global productive forces due to the free flow of capital. The industrial chain is no longer confined to one country, but between countries in the world, one link is in one country, and another link is in another country.
With the development of information and network technology, communication and transaction costs continue to decline, and advances in transportation technology have compressed the "time distance" of space, allowing enterprises to carry out zero-inventory production. In order to reduce costs, multinational companies can use outsourcing to disperse standardized parts of the production chain to other countries. After China's accession to the WTO, the competitive advantage of its labor force has been favored by the world, and thus promoted the international division of labor from the traditional horizontal or vertical division of labor between countries to the global division of labor within the industry, and gradually changed into the global division of labor within multinational enterprises, forming a global industrial chain and extending to the global supply chain and value chain. It should be pointed out that the formation of the global industrial chain is a clear symbol of this round of economic globalization.
In the new global division of labor, China's mainstream industrial technology has been greatly improved, and high-tech scientific and technological innovation is accelerating. At present, China is the only country in the world with a complete industrial system. China owns all of the 41 industrial categories, 191 medium categories and 525 sub-categories designated by the United Nations. The production capacity and output of many of these industries are among the top in the world, which has a competitive advantage and constitutes the resilience of China's economy. According to the data released by the Chinese Academy of Engineering, among the 26 major industrial types, more than 60% of China's industries are currently in the state of "independent controllability" and "safety and control", and the ability to resist external risks is high. Among them, communication equipment, advanced rail transit equipment, power transmission and transformation equipment, textiles, home appliances industry, in the current world's leading level; aerospace equipment, new energy vehicles, power generation equipment and other industries, are also in the world's advanced level. Judging from the filing of PCT international patent applications in 2018, although the United States is still the first in absolute number, the growth rate of patent applications in the past two years has been only 0.1%. In contrast, the number of patent applications in China has shown double-digit growth, and the absolute number is closely followed by the United States, ranking second in the world.
(III) Rebalancing: A New Challenge to Economic Globalization
After the end of the Cold War, the market economic system gradually became the basic economic system of the world. Institutional coherence has led to a significant reduction in institutional transaction costs, and in addition to the still restrictions on labor mobility, factors of production can basically achieve free global mobility, which has greatly improved the situation of abnormally high and abnormally low resource endowments in the world, especially in developing countries. The capital represented by the global productivity allocation of multinational enterprises, flowing from rich developed countries to developing countries in short supply, combined with local natural resources, including labor, has accelerated local industrialization and promoted global economic growth, while also bringing about unprecedented and profound changes in the world economic structure.
First, while the global economy is growing by one percentage point faster than before, global trade is growing faster, more than double the average; at the same time, the international financial growth rate of global capital flows is much faster than the growth rate of the economy and trade. In this sense, economic globalization is first manifested as global financial integration.
Second, three new types of interdependent and differentiated regional plates have emerged in the world: First, the Asian manufacturing sector represented by China. This sector integrates its low-cost labor advantage into globalization, manufactures high-quality and inexpensive manufactured goods for the world, depresses the global inflation rate, and contributes to the global economy while also sharing the dividends of economic globalization, which is manifested in the rapid rise in income and foreign exchange reserves. The second is the resource exporters sector represented by Brazil, Russia and the Organization of Oil Exporting Countries (OPEC). This sector integrates the advantages of natural resources into the globalization, supports economic globalization in raw materials and raw products, and is also manifested in the rise of export earnings and foreign exchange reserves. The third is the developed economy sector represented by the United States, which incorporates the advantages of the service industry, especially the financial services industry, into globalization, and at the same time provides capital for globalization, it also obtains rich returns and shares the dividends of economic globalization.
Third, the global economy has emerged in a competitive relationship between developed and developing economies. The current economic globalization is first manifested in global financial integration, which means that in the process of investment and trade liberalization, the flow of capital factors is barrier-free. Developing economies, while becoming debtors to advanced economies, introduce capital, combined with local resource endowments, including labor, to form industrial industries that become suppliers of global products, manifested as a large export of trade in goods. In contrast, developed economies have the advantages of the service industry, especially the financial services industry, and while becoming creditors of the developing economy with capital outflows, they also enable their domestic residents to obtain cheaper and more convenient debts, forming a debt consumption model and becoming the largest consumer market for global products. The main importers and exporters of trade in goods present a competitive relationship in terms of liabilities/claims, production/consumption, and export/import.
Fourth, the gap between developing and developed economies continues to narrow. The more scarce capital factors in developing economies can continue to flow in, coupled with the increase in global economic growth, the expansion of aggregate demand, and the choice of export-oriented industries in developing economies, resulting in an accelerated trend in industrialization. This has led to faster GDP growth than advanced economies, which in turn has led to a continuous narrowing of the traditional North-South gap. At present, in terms of total GDP, developing economies have slightly surpassed developed economies, and the gap between the north and the south is more reflected in the differences in productive services, especially financial services. The north-south gap was the foundation of the international multilateral governance system after World War II, and it was also the object of its governance. Today, the narrowing of the gap between the North and the South has even shaken the current international governance system.
The above-mentioned profound changes in the world economic structure have brewed up the relationship deviation of the global economy and the imbalance of the global economy. Ostensibly, this imbalance is reflected in the continued increase in the balance of payments current account surplus as a share of GDP in developing economies, and the simultaneous increase in the current account deficit of advanced economies as a share of GDP. In essence, it reflects a systemic imbalance in global savings (investment) and consumption. Developed economies consume too much and save too little and invest underinvest; developing economies, on the contrary, consume too much, save too much and invest too much. Mirroring is static, while imbalance is dynamic. Dynamic imbalances cannot sustain static mirror relationships, and the result is a global economic crisis of 2008, triggered by the US subprime mortgage crisis.
In the aftermath of the financial crisis, one of the requirements for a global economic rebalancing was that a country's current-account surplus should not exceed 4% of GDP. However, 12 years after the financial crisis, the rebalancing has not progressed as expected. Although China's current account surplus as a share of GDP has fallen from 9.9% in 2007 to less than 1% in 2019, the current account deficit of other economies, especially developed countries, has not fundamentally improved in addition to China's excellent performance.
At the same time, the global economy has changed the situation of rapid growth before the financial crisis and has fallen into a continuous downturn. It complicates the systemic deviance of the global economy, and the rebalancing of the global economy unfolds in more extreme forms, especially in the Sino-US economic and trade relationship. China and the United States are the two largest economies in the world today and are also economic and trading partners of each other. With China's accession to the WTO, Sino-US trade has continued to rise, from $80.485 billion in 2001 to $541.4 billion in 2019, with an average annual growth rate of 13.2%. In Sino-US trade, China showed a sustained trade surplus, with a high point of $323.33 billion in 2018, and the United States showed a sustained trade deficit. The two sides are each other's largest holders of trade surpluses. In 2018, China's surplus with the United States accounted for 92.1% of the total trade surplus, and the US deficit with China accounted for 47.6% of its total trade deficit.
The paradox of the question also arises here, why is China's current account surplus continuing to decrease, while its surplus with the United States continues to grow? The same question can be asked of the United States: Why is the CURRENT account deficit of the United States, although it remains high, but the deficit with China is increasing faster? The profoundness of the problem is that the United States should expand investment in terms of the development of the US economy itself – and the US is doing just that. Since the financial crisis, from the Obama administration to the Trump administration to today's Biden administration, there has been a continuous emphasis on "American re-industrialization" and monetary policy supplemented by quantitative easing, but the effect has not been great. Investment is only a new high in various indexes in the financial market, but it is difficult to enter the real economy and is constantly outflowing. Is it true that the economic system and mechanism of the United States are in serious trouble, causing its economic cycle to be poor, causing the effectiveness of economic policies to decline, and forcing it to sacrifice the banner of trade protectionism and other non-economic policies?
By extension, the current international economic and financial governance system established by the United States after World War II is now seriously disturbed by the poor economic cycle of the United States, and its operation is becoming increasingly difficult, so that even the United States itself, as a "country on the top of the mountain", no longer believes in the effectiveness of this system and has no intention of maintaining it.
At present, the structural adjustment of the world economy has just begun, especially under the impact of the new crown epidemic, there are still many variables in the future. In the face of the confusing world economy, whether from the logic of global economic rebalancing, from the perspective of China's economic and social modernization process without interference, or for the sake of the long-term goal of building a community with a shared future for mankind, China must take the expansion of domestic demand as the strategic basis, take the domestic cycle as the main body, and deal with the uncertainty of the world economy with the certainty of China's sustainable economic growth.
Taking the domestic cycle as the main body is not only the basic starting point for forming a dual cycle mutual promotion development pattern, but also a realistic choice. From an economic point of view, the supply and demand of economic growth are simultaneous processes. On the supply side, technological progress is the source of economic growth, and on the demand side, the continuous expansion of the market is the guarantee of economic growth. Therefore, if we want to form a domestic cycle as the main body, we must work together on both sides of supply and demand, and the core is to establish and improve the system and mechanism of smooth circulation. From the logic of China's own economic development, for a long time, China has been an export-oriented economic development, although it is the second largest economy, but it is the largest trading body. However, the current situation at home and abroad shows that this process is no longer sustainable. Judging from the domestic situation, the wage income of Chinese residents has continued to grow at a relatively fast rate in the past decade. With the rise of wage income, the average wage level in China is currently 3 to 4 times higher than that in ASEAN and South Asia, and the high labor cost makes large-scale labor-intensive exports more difficult. Internationally, with the global economic downturn, the outlook for trade growth is bleak, and trade growth will even be lower than GDP growth. Even if the existing world market share of about 14% and the position of the largest trading body are maintained, it may face the problem of shrinking the scale of imports and exports, and it is even more difficult for exports to further expand. China's economic and social development makes us necessary to expand the internal cycle.
▍ The development pattern of dual circulation mutual promotion is taking shape
Marked by the eradication of absolute poverty by 2020, China has begun to enter the lower middle-income society as a whole, that is, a moderately prosperous society. In the next step, China is moving towards a middle- and high-income society. International experience shows that the period of crossing the threshold of high-income society is also a period of rapid economic and social transformation, which is manifested in the transformation of the industrial economy to a service-oriented economy in terms of economy. At this stage, consumption will become the main driving force for GDP growth.
In fact, in the past decade, China's economy has begun to develop in this direction, which provides the basis and guarantee for expanding the internal cycle.
First, in the past decade, China's economic structure has been fully transformed, employment pressure has continued to ease, and the domestic consumer market is taking shape. First, since 2012, the proportion of the service industry in the total GDP has begun to exceed that of the secondary industry, and the service industry has become the dominant industry in China. The service sector can absorb more jobs than industry. Reflected in the macro, every percentage point of GDP growth in 2010 can create 1.2 million jobs, and in 2019, every percentage point of GDP growth will create 2 million jobs; reflected in the micro, the ratio of the number of people seeking (the ratio of the number of people in demand to the number of job seekers) is greater than 1, which means that the supply of jobs is more than that of job seekers. These data all show that China's employment pressure is continuing to ease, and it does not need higher economic growth to create better jobs, which also means that China's economy's dependence on export industries is weakening.
Second, the structure of the Chinese is also changing, which heralds the emergence of the "Lewis inflection point". In addition, the number of people entering the market has also begun to decline, with the average annual decline from 2 million in 2013 to 4.7 million in 2019. The decline in the new market labour force has led to a general increase in wage levels, and is particularly prominently manifested in the rise in the minimum wage. Statistics show that since 2012, the average growth rate of the minimum wage level has been more than double digits, and some provinces and autonomous regions, such as Xinjiang, have reached a growth rate of more than 30% in individual years. Wages are the main source of income for the low-income class, and the rise in wages undoubtedly means an increase in consumption, especially the increase in consumer demand for the service industry.
Finally, the full transformation of China's economic structure is also manifested in the decline of China's current account surplus as a ratio of GDP from 9.9% in 2007 to less than 1% in 2019, that is, exports are no longer the main factor driving GDP growth. At the same time, the proportion of consumption in GDP continued to rise, of which the service industry is growing at a faster rate, and the added value of the service industry surpassed industry for the first time in 2013, becoming the main factor leading GDP growth. China's economy is in the process of changing from high-speed to high-quality growth, and the "domestic cycle as the main body" is emerging.
Second, the policy of continuously expanding domestic demand has begun to show results, which is embodied in two aspects. First, capital formation remained high. The 2008 financial crisis made China realize that the external circulation of relying only on exports was unsustainable, so the 12th Five-Year Plan accordingly proposed "adhering to the strategy of expanding domestic demand, building a long-term mechanism for expanding domestic demand, and promoting the transformation of economic growth to relying on consumption, investment and export coordination" accordingly. Over the past decade, China's capital formation has remained high, contributing more than 30% to GDP on average. Among them, infrastructure investment is the most prominent, is undergoing a transformation from the traditional "iron public foundation" investment to "new infrastructure" investment, and leading the manufacturing and real estate investment and its structural adjustment, the industrial structure is undergoing fundamental changes.
Second, the policy of continuously expanding domestic demand has begun to be institutionalized, and its core is people-oriented. Driven by a series of policies, residents' consumption has continued to expand, especially under the impetus of strategies such as targeted poverty alleviation and rural revitalization, and the sustainable development of "urban-rural integration" is providing a strong impetus for China's economic transformation to service.
The "Twelfth Five-Year Plan" proposes to establish a mechanism to expand domestic demand, the core of which is to expand residents' consumption, and the way to do so is to expand residents' income. China has connected villages and villages to roads, electricity, telecommunications and television. The improvement of infrastructure has made China's logistics accessible to every corner, and the elimination of absolute poverty has greatly increased purchasing power. On the one hand, the consumption of manufactured goods has become a common behavior, perpetuating the life cycle of traditional manufacturing, especially light industry. On the other hand, the sales channels of agricultural products have also been improved, and the incomes of farmers have increased. At the same time, since China abolished the agricultural tax in 2006, a policy framework of "industry feeding agriculture, cities driving the countryside" has gradually formed, the income of rural residents has increased significantly, and the gap between per capita consumption between rural and urban areas is gradually narrowing, which will help the continuous expansion of the domestic consumer market. The two phases are comprehensive, and China has entered the era of large consumption, characterized by industrial products going to the countryside and agricultural products entering the city, which has spawned a new form of e-commerce. Among them, the consumption "sinking" represented by Pinduoduo and Meituan is the most prominent.
The report of the Eighteenth National Congress put forward "two increases, two synchronizations", that is, in the primary distribution, the proportion of wage income is increased, and the increase rate is required to be synchronized with the speed of labor productivity increase; in national income, the proportion of residents' income is increased, and the increase rate is required to be synchronized with GDP growth. In the past decade, in terms of GDP, in addition to the GDP growth of 2.3% in 2020, China's GDP growth has been above 6.1% for nine consecutive years, and gdp has almost doubled in ten years. In terms of residents' income, in the past decade, the income growth of urban residents has basically been the same as GDP growth, while the income growth of rural residents is slightly higher than GDP growth, and even more than 10% in some years, basically doubling. Final consumption expenditure has always contributed more than 50% to GDP, around 60% in most years and even more than 80% in peak years.
At the same time, China's current population above middle income is 400 million, which is more than the number of the U.S. population, and their consumption tendencies are beginning to shift to a high quality of life. In 2020, the average GDP of Chinese has exceeded $10,000. In 2013, the World Bank set the high-income social standard at $12,616 per capita, according to which China will enter a high-income society during the 14th Five-Year Plan period. This pursuit of a high quality of life has generated a strong demand for the service industry and led the consumption tendency of society. Among the residents' expenditure, the fastest growth of service consumption is in the fields of education and medical care, and most of these types of consumption have the characteristics of strong locality, so they have become the main driving force of internal circulation.
In 2019, China's urbanization rate has reached 60.6%, a significant increase from 18% in the early days of reform and opening up in 1978, but there is still a gap of more than 15% compared with the average urbanization rate of 75% to 80% in developed countries. Continuing to increase the urbanization rate will be significantly conducive to expanding the middle-income group, and will also become an important part of the pattern of internal circulation as the main body. International experience shows that industrialization, and the urbanization associated with it, is at the heart of the transformation of the dual economic structure of developing countries. With this transition, the economy will show rapid growth. As long as this transition is not complete and the structural growth potential remains, the growth process will not be suspended. At present, China's industrialization has entered the middle and late stages, and the service industry has become the leading industry, but urbanization is still lagging behind. Statistics show that over the past decade, China's urbanization rate has increased by an average of one percentage point per year. At this rate, China can maintain a high growth rate for 15 years and accordingly bring about an increase in residents' incomes.
At the same time as the gradual transformation of China's economy and the initial formation of the main body of internal circulation, the external circulation of China's economy has also been developing.
Over the past decade, China's imports and exports have expanded, now accounting for about 13% of global trade. The following figure lists industries with high dependence on the international market and supply chain, among which computers, clothing, communication equipment and other industries have a higher dependence on the international market, and electronic components, energy and mineral development, and passenger transport industries have a higher degree of dependence on the international supply chain.
Overall, the import rate has increased rapidly, and China's current account surplus has shown a continuous downward trend. In this context, the balance of payments began to rely heavily on the capital account. Since 2015, offline direct investment in capital projects has been greater than foreign investment in China, showing a deficit, and the balance has begun to rely heavily on financial accounts. In recent years, with the launch of Shanghai-Hong Kong Stock Connect, Shenzhen-Hong Kong Stock Connect and Bond Connect, the capital market for securities investment in China has begun to rise and has increasingly become an important part of overseas investment in China.
In this context, the process of RMB internationalization is also accelerating. After the 2008 financial crisis, the global liquidity shortage of the US dollar caused serious difficulties in the settlement of international trade payments. On July 2, 2009, in order to meet the needs of the development of international trade, the settlement means of RMB for cross-border trade in goods were launched, which opened the process of RMB internationalization. In the past ten years, the internationalization of the RENMINBI has expanded from the original 5 overseas cities and 365 enterprises to all enterprises in the country; from trade in goods to trade in services, to direct investment, and has now been extended to indirect investment represented by financial business, covering all countries and regions in the world. Under the impact of the new crown epidemic, the world economy fell into a historic recession, the dollar index fluctuated sharply, in contrast, the internationalization of the renminbi has expanded against the trend, not only the renminbi exchange rate is appreciating, but also countries have increased their reserves for the renminbi, so that the share of the renminbi in the global foreign exchange reserves reached about 2.1% for the first time, becoming the world's fifth largest reserve currency, which for the first time matched the position of the renminbi in the SDR. The fact that the renminbi is currently rising and falling in tandem with the currencies of countries surrounding China shows that the renminbi has begun to become the "anchor currency" of the Asian region. The renminbi has also become the preferred currency for overseas investment in China's financial markets.
The double cycle is to expand domestic demand as the strategic base point, with the domestic cycle as the main body, to promote the international cycle. At present, the world economy is in a downturn, and the sustainable development of China's economy has become a global issue. If China can lead sustained economic growth with innovation, residents' incomes will continue to increase and the Chinese market will continue to expand. This will not only benefit China's economic and social development, but also share this continuously expanding market for the world through institutional opening up such as rules, and China is embracing and leading globalization. China's huge market demand, shared by the world through multilateral and bilateral rules and other institutional openness, will make a significant contribution to promoting the "strong, balanced and sustainable growth" of the world economy. This is the universal significance of the internal cycle driving the double cycle, and it is also the value of China's practical actions to practice the concept of a community with a shared future for mankind.
This article was originally published in "Culture Horizontal" No. 3, 2021, the original title is "Reshaping China's Economic Relations with the World in a Double Cycle", welcome to share individually, please contact the copyright owner for media reprint.