Empire Building with DCS?

China, Geopolitics, and the Global South

Uwe Hoering, February 2022

In the West, China is currently seen as an important driving force behind the global economic recovery after the Corona crisis. But can it continue to fulfil this role – or is “the future of globalisation with China at stake”, according to the European Chamber of Commerce in China?[1] The background to this apprehensive question is the “new economic model” that state and party leader Xi Jinping announced in May 2020, the ‘Dual Circulation Strategy’, DCS.

But in contrast to his announcement of the New Silk Roads (“Belt and Road Initiative”) in 2013, which triggered a worldwide Tsunami of debate[2], the reactions of the public at large have so far remained rather limited[3].  Yet behind the label “Dual Circulation Strategy” (DCS) lies nothing less than a veritable reorientation of China’s development strategy that could have far-reaching implications for further globalisation and China’s role in it. Political scientist James Crabtree even sees it as “an economic strategy for a new Cold War.”[4]

“President Xi’s vision of “dual circulation” is a darkly pessimistic economic strategy, fit for a new Cold War.”

James Crabtree, Noema Magazine, December 2020

The New Silk Roads were already a clear indication that China is trying to break free from its investment-driven, export-oriented growth path. The winning model for China’s rise to become the “workbench of the world” has increasingly suffered from many contradictions and problems especially since the financial crisis of 2007/2008: Economically, export markets collapsed, the growth rate decreased and financial stimulus programmes led to internal debt and a real estate bubble. On the domestic front, labour disputes, environmental damage, corruption and growing inequality between rich and poor and urban and rural areas signalled increasing risks to political stability and the Communist Party’s claim to leadership. This situation was exacerbated by US policies that use economic and growing military pressure as weapons in geopolitical competition.

In this light, the concept of the “dual cycle” bundles together many of the economic policy countermeasures of recent years. [5]  It aims at further integration and closer coordination of national and global economic policies. The 14th Five-Year Plan (2021 to 2025), which emphasises the DCS, states: “Internal large-scale circulation and international circulation reinforce each other.”

Economic nationalism

So far, international attention has mostly been focused on the “internal cycle”, i.e. on expanding domestic demand, import substitution and accelerating economic modernisation and technology development. For the new economic pattern supports in particular the industrial modernisation strategy “Made in China 2025”, in which such sectors as artificial intelligence, aerospace, “green” technologies and medical technology are to be expanded as a matter of priority. This is how the People’s Republic intends to reduce its strong dependence on the USA and its allies in foreign trade and in technology and know-how. Xi Jinping identifies the energy sector, the supply of mineral raw materials and food security as key national security risks due to a high dependence on imports.[6]

However, the CP is by no means concerned with self-sufficiency or self-reliance in the conventional sense, i.e. the broadest possible independence and consistent decoupling from international trade relations or production chains. This becomes clear when we look at the second, “external circulation”. It rather aims at an intensified interlocking with global markets, both in terms of imports and of own exports. The New Silk Roads, which were already designed as a “spatial fix” (David Harvey) for domestic problems of the Chinese economy such as the accumulation crisis, overcapacities in key sectors of the economy and falling profit rates, play a special role in this process: This strategy was initially concerned primarily with infrastructure development as a prerequisite for the expansion of markets and investment opportunities, the relocation of wage-intensive or environmentally harmful industries to low-wage countries and the diversification of the supply of raw materials, especially in the energy and agricultural sectors – in a nutshell, a new phase of globalisation shaped by China. In the meantime, this has been expanded to include the so-called Digital Silk Road, which is intended to improve the logistical infrastructure for the expansion of trade and investment.

China’s economic policies “could be described as a distinct variant of economic nationalism that is both selective protectionist and expansionist.”

Such a shaping of foreign relations according to China’s own interests, which is now being reinforced by the DCS, includes, among other things, a state capitalist controlled and directed expansion of foreign investments by Chinese corporations and a reduction of imports, especially from industrialised countries. It could therefore be described as a distinct variant of economic nationalism that is both selective protectionist and expansionist. The ultimate goals remain economic growth, albeit “normalised”, and increased profits in order to secure the “common prosperity” promised by the state and the party and as a result domestic political legitimacy and stability.

Balancing the domestic economy

Such a fundamental restructuring is not easy, however, even for Chinese capitalism with its abundant state power – and it is also costly. This is evident, for example, when it comes to the intended increase in domestic demand: A spectacular step to boost it is the call for domestic corporations to donate some of their profits to social projects, termed “tertiary redistribution”[7] in Chinese economic jargon. Indeed, the companies complied with this by committing billions of dollars. However, the impact of this on increasing purchasing power and reducing inequality, which is a major risk for social conflict, is like a mere flash in the pan.

On the other hand, more substantial measures to redistribute income and wealth – like higher wages, the expansion of social safeguards and the inclusion of groups like the rural population or migrant workers, who have so far been largely excluded from economic prosperity – are far more difficult and expensive to implement. Moreover, they should not jeopardise the dynamism of the Chinese economy as a whole.

Fundamental dependencies

With regard to foreign economic relations, on the other hand, the “dual circulation” strategy points to the growing importance of the Silk Road countries for China and its “internal circulation” – and this in several ways. For instance, observers see “a fundamental shift in China’s economic engagement in Central Asia”[8].  Many of these countries have been little more than transit sites for the connections between China and Europe and/or mere suppliers of commodities. While exports of fossil fuels to China continue to play an important role for them, Beijing’s financing of large infrastructure projects or coal-fired power plants is declining. Instead, the number of Chinese industrial projects is on the increase, especially in the processing industry – a development that these countries have long been calling for. The Central Asian Analytic Network (CAAN) states: “Chinese companies are now seeking to build factories, expand processing of raw materials and modernise domestic agribusinesses.”[9]  A similar progressive integration into the “dual cycle” can be observed in Southeast Asia.[10]

In addition to this relocation of industries to neighbouring countries, the modernisation and growth of China’s domestic economy also requires continued expansion of energy and raw material imports. While the People’s Republic can rely more on its own strengths in technologies to catch up and reduce dependencies, it is often dependent on imports not only in the case of fossil energy sources such as crude oil and natural gas, but also and especially for strategic raw materials for the modernisation of industry such as copper, nickel, cobalt and lithium.[11]  Chinese corporations already seem to be responding to this situation by launching a procurement drive among energy and mining companies.

In agricultural products, too, the potential and prospects for becoming less dependent on foreign agriculture are slim, even if Xi Jinping is currently beating the drum vehemently for an increase and modernisation of agricultural production for “food security”. In contrast to the pursuit of greater self-reliance, fundamental dependencies therefore remain. Thus, the Silk Road countries could become an Achilles’ heel of the new economic model.

Centre and periphery

If one reads the concept of a “dual circular economy”, which has as yet hardly been filled with much substance, as an answer to external and domestic political risks and the need to further develop China’s growth strategy, the perspectives expressed in it present a very complex, even contradictory picture: Optimists may well see new opportunities in this approach, at least for some BRI countries, and thus an intensification of South-South cooperation. This would result in a boost to industrialisation in these countries through further infrastructure development, offshoring of investments and improved market access to China for processed products and key raw materials – and thus offer them the prospect of participating in China’s continued prosperity.

The responses of Western business circles are mixed: In the debate, both hopes and concerns are being expressed. Some observers expect selective liberalisation in areas such as services or high technology to strengthen the domestic cycle. On the other hand, there are worries about declining export opportunities due to import substitution and intensified competition in third markets.

“Consolidating the domestic economy, increasing consumption and prosperity and strengthening China’s position vis-à-vis its competitor, the USA, will be achieved through increasing exploitation of nature and people in other countries.”

From a pessimistic point of view, an almost imperial scenario is emerging: Consolidating the domestic economy, increasing consumption and prosperity and strengthening China’s position vis-à-vis its competitor, the USA, will be achieved through increasing exploitation of nature and people in other countries. This “new development model” for China also leads to an intensified dependence on internal political stability in the Silk Road countries, where considerable social and ecological distortions are caused not least by Chinese investments. Interventions by Beijing are increasingly visible already, be it politically by strengthening governments that are sympathetic, or by paramilitary security forces against attacks on Chinese investments and citizens, with authoritarian regimes acting as natural partners.

With its dual circulation strategy, China’s economic policy is attempting to reconcile resilience against external economic or political risks with the on going need for integration into global production and supply chains. At the same time, the politicisation of international economic relations is intensifying. They become subordinated to the imperatives of domestic political stability, national security and the fulfilment of the ‘Chinese dream’ of ‘national renewal’ as the ‘Middle Kingdom’. The DCS underlines the wider aspiration for a “Sinosphere”, for China’s central role in its periphery, which despite some opportunities is becoming increasingly dependent on Beijing in the face of asymmetrical power relations.

Thus, besides the geopolitical, increasingly militarised conflict between the USA and China[12], there is an escalation of overlapping spheres of interest with regional hegemonic powers such as Russia in Central Asia, India in South Asia, Europe in Africa or Japan in Southeast Asia – and thereby an increased potential for multipolar conflicts. The “dual circulation” could thus also become a maelstrom.

Translated with www.DeepL.com/Translator (free version)

[1] European Union Chamber of Commerce in China und Mercator Institute for China Studies, Decoupling. Severed Ties and Patchwork Globalisation. 14.01.2021

[2] Uwe Hoering, China’s Long March 2.0. The Belt and Road Initaitive as development model. Hamburg 2018. Download PDF file

[3] For a rather comprehensiv overview of DCS see Stewart Paterson, For, by, and from the Party: Defining the parameters of Dual Circulation. hinrich foundation, 14.09.2021

[4] James Crabtree, China’s Radical New Vision Of Globalisation In: Noema magazine, December 2020

[5] DCS is not an elaborated strategy, but rather a label or umbrella term for a conglomerate of measures and goals.

[6] South China Morning Post, 13.12.2021

[7] In Chinese economic terminology, primary redistribution refers to wages and direct income, while secondary distribution stands for direct financial transfers to households.

[8] Dirk von der Kley und Niva Yau, How Central Asians Pushed Chinese Firms to Localize. Carnegie Endowment for International Peace, 15.10.2021

[9] Quoted in: Paul Goble, Beijing Changes Its Approach to Economic Expansion in Central Asia. in: The Jamestown Foundation, Eurasia Daily Monitor, 28.10.2021.

[10] Evelyn Goh und Nan Liu, Chinese Investment in Southeast Asia, 2005-2019: Patterns and Significance, SEARBO Policy Briefing, August 2021.

[11] See Merics, Global China Inc. Tracker, China is securing battery metals on the global stage. 16.12.2021.

[12] Uwe Hoering, Mare Nostrum. Die Konflikte um das Südchinesische Meer, in: Wissenschaft & Frieden, 4/2012, S. 22-24.

This post is a translation of my article ‘Abschwung verhindern, Macht sichern: China imperial?’, published in Blätter für deutsche und internationale Politik, 2/22, 29-32.

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