Abstract: In this article, the author discusses the current situation of China’s economic circulation and the challenges for building the dual-circulation new development pattern from four perspectives, namely the pattern of demand, the pattern of distribution, the pattern of production, and the pattern of import-export. He points out that the new development pattern emphasizes enhancing the reinforcement between domestic and international circulations, rather than simply stressing the role of domestic circulation as the main body.
I. The implication of the new development pattern
First, what is the new pattern of development? I think the key element is the mutual reinforcement between domestic and international circulations.
The proposal for the 14th Five-Year Plan defines the new development pattern as one with domestic circulation as the main body and domestic and international circulations reinforcing each other. As a large economy, domestic circulation has always been the main body of China’s economic development, so we should now pay more attention to improving the mutual reinforcement between domestic and international circulations.
The Central Economic Work Conference put forward the task to "unclog blockages, strengthen weak links, and link production, distribution, circulation, and consumption" for the Chinese economy. According to Marxist political economy, "circulation (exchange)" only refers to the movement of things, and does not produce or create value. As for "consumption", we can understand it as consumption in the broad sense, including government consumption, household consumption, and investment which represents future consumption.
These four links of the economy can also be summed up as the three components of the national economic account—production, distribution, and expenditure—in order to analyze economic circulation. If production, distribution and expenditure are interlinked, the circulation is smooth.
Assuming that there are three pipelines in the national economy, namely household consumption within aggregate demand, residents’ income within distribution, and consumer goods within production. If the diameters of the three pipelines are the same, circulation would be smooth, otherwise economic circulation and development would be hampered.
II. China's economic circulation: status quo and problems
Second, I will discuss the current situation of China's economic circulation from four perspectives: demand pattern, distribution pattern, production pattern and the pattern of exports and imports, as well as possible challenges for establishing a new development pattern.
First, demand pattern.
We could use the input/output table to compare the final demand (final uses) in 2007 and 2018. Exports accounted for 28% in 2007 and 15% in 2018, indicating a significant decline in the proportion of exports. We could see a shift away from export demand—capital formation as a share of total demand increased by six percentage points from 31% to 37%; the share of government spending increased by 4 percentage points, and the share of consumer demand increased by 3 percentage points from 29% to 32%.
The declining proportion of exports in final demand shows that Chinese economy had been increasingly dominated by domestic demand. But the problem was that the fall in the share of export demand was largely offset by the rise in the share of government spending and capital formation, while the share of household consumption remained relatively stable.
I think the reason was that household consumption ratio (measured by per capita spending as a share of disposable income) was falling. Data from 2013 to 2018 show that consumption of China's urban residents continued to decline, which might be related to the rise of household leverage —the income of urban residents was increasingly squeezed by the skyrocketing housing prices and mortgages, causing the proportion of other spending to fall. During the same period, however, the consumption of rural residents had increased as they were under little pressure to pay off mortgages.
Some people may wonder whether it is the high income of urban residents that has led to a decline in marginal consumption. I don’t think this is the reason at least when considering urban residents as a whole, the proportion of individuals with decreasing marginal consumption is relatively small even among high-income or middle-income groups. Of course, this requires more in-depth analysis of data.
Second, distribution pattern.
Now let’s have a look at the distribution pattern. Labor compensation accounted for 41% of GDP in 2007 and 52% in 2018, a significant increase. However, labor income is not equal to residents’ disposable income, but much higher than the latter because of statistical standards used—
Measurement of labor compensation includes many items that cannot be defined as residents’ disposable income for the current period, such as medical insurance, social insurance, and housing provident fund paid by employers. This part of income cannot be used for current consumption.
According to a survey carried out by the National Bureau of Statistics, total resident income as measured by residents’ per capita disposable income multiplied by total population has remained around 42% to 43% of GDP in recent years, which is lower than the ratio of labor compensation to GDP by about ten percentage points.
To briefly summarize the distribution pattern of residents’ income, the proportions of residents’ income in both the primary distribution and the redistribution process have declined slightly, while the proportion of government revenue has remained unchanged in the primary distribution, but increased slightly after redistribution. It shows that reverse redistribution has occurred to a certain degree.
If we look at cross-industry distribution of business profits, Internet and information services, banking, and real estate account for about 30% of the total profits of the 149 industries. This reflects the uneven distribution between industries.
Third, production pattern.
Final demand also reflects the production pattern. We can group the 149 industries into investment, consumption, and export industries according to the end use. In 2018, among 149 industries, 68 were consumer industries, 22 investment industries, 58 export industries, with one remaining industry that can’t be categorized as one of the three types.
Furthermore, we can have a look at the technology pattern of the industries. High-tech enterprises have a particularly high foreign dependence. Supply chain disruption can have a great impact on the production in these industries. For example, instruments and meters, medical devices and equipment, special equipment, transportation equipment, electronic components, and computers are such industries that rely heavily on imports and are subject to more constraints.
Domestic supply is insufficient in consumer industries. For example, air transportation is a typical consumer industry, with consumption accounting for 60% of the total output. Meanwhile, import takes up a very high proportion of the total output. In 2019, about 160 million Chinese residents travelled abroad, but a considerable proportion of the tourists did not choose domestic airlines.
Press and publishing, radio, television and film, culture and art, sports and entertainment are all typical consumer industries. All the output was used for consumption. However, supply in these sectors is insufficient and therefore relies heavily on imports. This is a key problem to be solved during the process of optimizing the production pattern in the future.
Another problem with the production pattern is the coexistence of overproduction and undersupply. Some of the industries with this problem are net importers. Among those with net imports of over 100 billion yuan, the petroleum sector ranks first, followed by electronic component producers including chip producers, and others like nonferrous metals, iron ore, synthetic materials, air passenger transport, etc.
There are generally three types of net importers, which are producers of resource-intensive products, those of high-tech products, and service (including high-end service) providers. The first lack resources, which is hard to resolve; the second, including electronic component producers, lack innovation; the third, including the air transportation, cultural and tourism industries, suffer from undersupply as a result of system and institutional barriers.
Changes in the industrial structure are also obviously flawed. The proposal on the 14th five-year plan mentioned “balancing the development of finance and the real estate sector with that of the real economy”, and “maintaining the proportion of the manufacturing industry”. The reasons behind can be partly seen from the changes in the industrial structure.
Since 2010, the weight of the industrial sector in the Chinese economy has declined from 40% to 32%, while that of the financial sector rose from 6.2% to 7.8% and that of the real estate sector, from 5.7% to 7%. The share of manufacturing has gone down exceptionally fast by 0.9 percentage points per year, or by 8 percentage points over a period of nearly ten years. As the economy develops, the share of manufacturing will inevitably decline, but the decline in China has been way too big and too fast.
There are multiple causes of this phenomenon. One is the ballooning of the financial sector especially indirect financing. Mounting debts squeezed the growth space of the real economy, and the skyrocketing housing price also squeezed out manufacturing activities.
For example, during 2010 and 2017, interest expenditures of industries above designated scale doubled while their value added only increased by 90%, which means that they are strained by interest payments.
Fourth, the import-export pattern.
China’s imports now are typically production-oriented, as 76% of the imported goods and services are used in intermediate production, while those for consumption take up a low proportion. This shows that production in China is highly dependent on the global market.
Meanwhile, China’s imports are concentrated in a few industries. Among the 149 industries, imports of the top 10 industries account for 48.6% of total imports. Those with the largest volume of imports are electronic components, petroleum, nonferrous metals, iron ores, and air passenger transport. High-tech industries in China e.g. electronic components, have a high level of import reliance (import/total output).
This means China will not be able to sustain production and maintain a sound economic circulation without the global market and imports; at the same time, it has to export to secure enough foreign exchange for the imports.
Top exporting industries in China include communications equipment, computers, electronic components, followed by wholesale, textile, retail, metal products, power transmission and distribution, and culture, sports and entertainment supplies. These industries will have to produce more than what is consumed domestically to have the extra exported in exchange for major imported goods such as soybeans and iron ores.
Therefore, while the domestic circulation remains the mainstay in the Chinese economy, some of the sectors will have to maintain high imports and high exports, and for them the domestic circulation cannot serve as the mainstay. There is a reciprocal causation between the imports and exports of these industries—export and import support each other.
For instances, the foreign reliance of the electronic component producers in China is over 20%, while its reliance on imports is as high as 59%; others with high import and export reliance include office supplies, instruments and meters, medical devices and equipment, other transportation equipment, daily-use chemicals, special equipment, and computers. These sectors will have to integrate deeply into the global economy to have normal economic circulations.
Download PDF at:
