Strengthening the mainstay

Building a unified domestic market necessary to lay a solid foundation for the new 'dual circulation' development paradigm

The Fifth Plenary Session of the 19th Central Committee of the Communist Party of China proclaimed that China would "smooth domestic circulation and promote domestic and international 'dual circulations' that complement each other by expanding consumption and the scope of investment".This represents a major adjustment to the way China participates in the global division of labor and a major shift in China's economic development pattern. China's 14th Five-Year Plan (2021-25) will foster this new "dual circulation" development paradigm with domestic circulation as the mainstay and domestic and international circulations reinforcing each other. The new development paradigm is a strategic decision based on the current stage and conditions of development in China and with full consideration given to economic globalization and changes in the external environment. It will exert great influence on the Chinese economy in the following ways.

First and foremost, spurring domestic demand by bolstering income distribution reform and creating a unified market will be high on the agenda.
As of now, China's domestic demand totals approximately 100 trillion yuan ($15.2 trillion), second only to that of the United States. While the total amount seems quite large, the per capita amount has room to be further increased. There are three problems pertaining to China's domestic demand. First, the proportion of demand for consumption in domestic demand is lower than the world average and much lower than that of developed countries, where household consumption demand accounts for roughly 60 percent to 70 percent of their GDP, even 80 percent in some countries, compared with a meager 60 percent in China, which means the demand for investment accounts for a high proportion of China's domestic demand.

Another problem is that government spending and State-owned enterprise spending accounts for a high proportion of China's domestic demand, while consumer spending accounts for a relatively small proportion. Finally, the structure of China's domestic demand is quite imbalanced, resulting in slower domestic consumption growth compared to economic growth. That's because the low-income group can't afford to buy more, the high-income group's marginal propensity to consume is decreasing and the middle-income group－the major driving force of consumption growth－has yet to expand.

Domestic demand is a powerful tool for China to participate in global competition in the future. Only by unswervingly expanding domestic demand, especially household consumption expenditure, can China really transform from being the "world factory" to the "world market" and leverage its super-large market to underpin domestic growth and boost global economic recovery. Currently, China's domestic demand is mostly from investment－mainly by the government and State-owned enterprises－rather than household consumption, creating a structural problem in dire need of a solution.

With regard to income distribution reform, the focus is not simply reducing government spending but changing its expenditure structure. Government expenditure should prioritize increasing public services and social welfare to improve social welfare conditions and reduce income inequality to encourage people to spend more.

Second, building a unified market will become a prioritized fundamental reform for China during the 14th Five-Year Plan period.

According to the communiqué of the Fifth Plenary Session of the 19th CPC Central Committee, China will nurture a strong domestic market and establish a new development pattern. A strong, unified market is important in that it's the key to smoothening domestic circulation and letting China play a critical role in promoting international circulation, as stated in the new "dual circulation" development pattern. If the market is fragmented or dysfunctional, it can hardly become the backbone of internal circulation, let alone connect internal and external circulations.

To start with, China's product market is well-developed but the country's factor market has witnessed laggard development, especially in terms of land, high-end workforce and capital markets. This has, to a great extent, hampered China's industrial structure adjustment and the development of modern industrial chains, blocking the internal circulation.

Slow progress in the construction of a unified domestic market has made it difficult to advance internal circulation. For instance, some Chinese business people prefer being engaged in foreign trade to doing business in the home market, as the domestic market is plagued with problems such as high transaction costs.

The new globalization strategy can hardly be realized without a unified market at home. Take the automobile industry as an example. According to the economies of scale curve, an annual output of over 2 million vehicles will result in more profits, but few Chinese automakers can reach that scale. The reason is simple: each region protects its local auto plants. Therefore, despite the super-large market scale, the market is fragmented, making it impossible to prop up internal circulation, not to mention supporting external circulation and connecting internal and external circulations.

Against this backdrop, China has been promoting a number of regional development strategies as part of its national development strategy, such as the coordinated development of the Beijing-Tianjin-Hebei region, integrated regional development of the Yangtze River Delta, Guangdong-Hong Kong-Macao coordinated development and the co-development of the Chengdu-Chongqing economic circle as well as coordinated development strategies for the central region and for the Yellow River Basin. Elevating regional development strategies to be part of a national strategy aims at boosting regional economic integration, which is based on market unification. When all the aforementioned regions realize integrated and coordinated development, a nationwide unified market will gradually take shape if China further promotes opening-up between different regions. As the next step, China should prioritize the construction of regional unified markets and then gradually build a strong, unified nationwide market, thus laying a solid foundation for the country's new "dual circulation" development paradigm.

The author is head of the Yangtze Industrial Economic Institute at Nanjing University. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.