A dual-cycle business model to lift the future world

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[Photo by Cai Meng/China Daily]

Over the past 20 years, the economies of developing countries have grown much faster than those of the traditional developed economies of Europe, North America and Japan. According to calculations by the Organization for Economic Co-operation and Development, 72 “economies identified in the Belt and Road Initiative, not including China, fell from 26.6% of world GDP in 2000 to 30, 2% in 2008, and 32.3% in 2017.

During the same period, the share of the United States in world GDP (measured in purchasing power parity) increased from 20.6% in 2000 to 15.3% in 2017. The share of the 18 lowest countries wealthiest in the European Union, not counting the United Kingdom, grew from 19% in 2000 to 12.6% in 2017. During the same period, the Chinese economy grew from 7.4% to 18%. , 3% of world GDP.

As the developing world’s consumption capacity grows rapidly, China’s national economy is changing. Decades of rapid wage increases have created a huge consumer market. In addition, high-tech sectors and other higher value-added sectors are growing rapidly.

A likely decline in the US trade deficit is another coming shock to the global economy. A substantial portion of US consumption has long been financed by international lenders through the trade deficit. International lenders are unlikely to continue funding such deficits over the next decade, so US consumption is expected to grow very slowly or even decline.

In collaboration with international partners, China established the BIS and the Asian Infrastructure Investment Bank to promote the future development of new developing countries and facilitate trade between them. These are big steps towards harnessing the opportunities of a changing global economy.

At a symposium with business leaders in July, President Xi Jinping called for greater progress in reform and opening-up, including in science and technology, while drawing fully leveraged the strength of the country’s huge domestic market in the face of rising protectionism, a sluggish global economy and a weakening international market.

Xi ruled out the possibility of China closing its doors during the process, saying that instead, the country will fully unleash the potential of its domestic demand, allow better connectivity between domestic and international markets, and make better use of both markets and resources, in order to achieve more vigorous and sustainable development.

And, in his opening speech at the fifth annual meeting of the AIIB Governing Council, Xi said that the bank “must provide public goods for our region and beyond, promote regional economic integration and contribute to make economic globalization more open, inclusive, balanced and beneficial for all “.

This “dual cycle” business model combines the advantages of China’s large consumer market and technological capacity with the advantages of opening up markets across Eurasia, thereby enabling industries to benefit from trade, specialization of production and economies of scale.

The idea that China’s growth is based on large trade surpluses is wrong and outdated. The trade deficit surplus rose from 1% to 2% of GDP in the early 2000s to around 10% in 2008, but it declined in 2012 to 2% and is close to zero today.

This means that China’s growth is based on domestic demand and current trade in goods and services, not on purchases financed by large international debt. This change was made possible by a combination of investments in infrastructure and technology, rapid wage increases and reforms that have significantly improved the business climate in China.

The BIS has been criticized for creating too much debt. But this debt is used to build infrastructure that improves productivity. The majority are placed in countries which are in desperate need of capital investment and infrastructure. Compare that to loans to support the US trade deficit, which have been spent almost entirely on consumption.

In the short term, China’s rapid recovery from the pandemic has made its consumer markets essential for both domestic and international producers. A recent Wall Street Journal article concluded: “In earnings calls for the (second) quarter, senior executives from some of America’s best-known brands chose China for saving what had otherwise been a difficult three months. .

For example, the US shoe company Skechers saw an overall decline in quarterly sales of 42% from the previous year, but saw some relief after growth of 11.5% in China. French luxury goods company LVMH posted an overall sales decline of 38% in the quarter, but recorded a 65% sales increase in China.

Of course, the longer-term shift towards rising GDP in China and the Eurasian BRI countries, combined with the stagnation of the United States and the Eurozone, is more important than the short-term effects of the virus. . China’s dual-cycle model, which emphasizes domestic demand in China and trade with rapidly growing developing countries, is a necessary economic policy to face the future world.

Wang Huiyao, president and founder of the Center for China and Globalization and adviser to the State Council, in an interview with China Daily, said the BIS has built a solid foundation to support the expansion of infrastructure necessary for trade: paths railway, 5G, tourist facilities, ports and other infrastructure. He suggested that the multilateral BRI could be modernized with lending facilities from the AIIB, ideally by working in consortium with the World Bank, Asian Development Bank, African Development Bank and other international institutions to form a multilateral alliance of infrastructure banks to have joint projects and financing, to make it more efficient with greater joint international participation.

Wang also said that China’s trade will be redirected to the BRI and other markets. “Outgoing companies should pay attention to multi-regionalization, multilateralisation, diversified development. At present and in the future, the foreign investment configuration of companies may focus more on outside countries. United States, such as European Union countries, ASEAN countries, Japan and South Korea, African countries, Latin American countries, etc., to expand the business space in developing countries and reduce the risks induced by international political uncertainty.

The world economy has evolved rapidly over the past 20 to 30 years. As recently as 2000, the only economies that “mattered” were the United States, Western Europe and Japan. This is certainly not true today and will be even less so over the next decade, as China and many other developing countries will continue to grow much faster than traditional developed countries.

Each country will have to adapt its economic model to reflect this new reality. The creation by China of the BIS and the AIIB combined with the new dual-cycle economic model are very good and necessary steps to adapt its economy to the new world.

The author is a senior commentator for China Daily.


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