Dual Circulation: Potential to be Either a Blessing or a Curse

At China’s 2021 National People’s Congress, the Communist Party approved the country’s 14th Five-year Plan (FYP). The importance of FYPs to China cannot be understated; they function as the foundation for the strategies implemented by the various ministries, provinces and municipalities. The plan is an opportunity for the government to stand back from its day-to-day operations and focus on medium-term targets, coordinate departments that usually do not interact, and build political consensus for the main programmes and policies to be implemented in the five years to come.

European Chamber President Jörg Wuttke

I was serving as president of the European Chamber when the last FYP was unveiled, and cannot help but compare what I wrote in my foreword in EURObiz then to what is included in the new ‘state-planning’ document now.

Five years ago, I wrote that the Chinese Government was capable of bringing unequal treatment to an end, as well as of negotiating an ambitious Comprehensive Agreement on Investment. While we have seen the latter happen just in time for the new FYP, and recent events have thrown ratification of this agreement into doubt, the unequal treatment and discriminatory practices against foreign enterprises endures.

Maybe this time it will be different, though whether for better or for worse will depend on the industry concerned. We live in a time where COVID-19 and geopolitical tensions are muddling the market. China’s answer to these external challenges and decoupling trends appears to be formulated in its ‘dual circulation’ strategy. Though the concept is still somewhat vague—not unusual for new Chinese policies—it seems to imply greater reliance on domestic supply chains and domestic demand as compared to the ‘international circulation’ of overseas trade and technology. 

The dual circulation strategy will prove to be either a blessing or a curse for our members, who will be put, figuratively speaking ‘business class’, ‘economy class’ or ‘cargo hold’ , depending on their sector.

If your company has the technology or expertise to empower the rest of the value chain—like the chemicals and machinery sectors—you will find yourself in the business class, welcomed to embark on China’s journey.

The non-contentious industries where consumer goods are produced—like automotive—are likely to be put in economy class. China will welcome investment in local production sites that will eventually reduce imports of high-quality European goods demanded by Chinese consumers.

That leaves the areas where China’s industrial policy will be to remove foreign competition in the Chinese market so that its national champions can flourish. Unfortunately, this means that foreign companies in sectors where China wants to become self-sufficient or to dominate globally—like network equipment and digital services—will be increasingly pushed out (if they had been let in at all).

How to prepare for the coming five years? Companies should determine which ‘class’ is on their ‘ticket’ and then start to formulate a strategy to maximise opportunities within the boundaries of the FYP, determining where to help China achieve its new goals.