In a world where geopolitics and business collide on a daily basis, words that start with the letter ‘D’ are in vogue. Decoupling, de-risking, disentangling, divergence – leading to disorder and, some argue, deglobalisation.
It is though another ‘D-word’, China’s Dual Circulation Strategy, that provides the better framing for the environment facing global business today – and for the range of strategic responses that companies can pursue.
When Xi Jinping first announced Dual Circulation Strategy in April 2020, many questioned whether it was something enduring or merely a passing slogan. Its use as a slogan has indeed since faded. But Dual Circulation as a framework and a set of strategic choices remains a constant. At Davos in January 2023, then-vice-premier Liu He used the same Dual Circulation wording that Xi had used three years earlier – all as part of his pitch to say that China was open up again to foreign business.
As a framework, Dual Circulation Strategy marks out clear dividing lines between China’s domestic economy and the rest of the world; between the ‘internal’ and the ‘external’. It sets out how China seeks to manage the interactions between the two, seeking ‘mutual reinforcement’.
This conceptualisation of the economic landscape is simple and evergreen. It applies to any country. It stands in contrast to a world of ‘seamless’ globalisation – which can be viewed as a ‘special case’ where the differences between the internal and the external are small enough to not merit attention and where the direction of travel is towards more integration. ‘The World is Flat’, as Tom Friedman wrote in 2005. Or rather it was. Previously, China sought to enter the ‘great international circulation’. Now it calls out the differences and makes explicit the choice on how to link the two.
And the differences today between the internal and the external are indeed greater. In China, the Communist Party ‘leads everything’; in the rest of the world it does not. Under Xi’s leadership, national security, ideology and the political priorities of the Communist Party play a much larger role in shaping China’s economic and business environment. Increasingly, Xi places national security and economic development on the same footing and emphasises how intertwined they are. The context is more politicised, more uncertain. China’s state media even call this ‘Xiconomics’.
The framework tees up strategic questions: What sort of environment to foster within the domestic economy? What to try to change in the world of external circulation? What priority to put on the domestic vs the overseas? And how to best connect the two?
Both Xi and Liu He have stated that for China today internal circulation should be the ‘mainstay’, placing the focus on expanding internal demand, promoting industrial upgrading, developing a consumption-led growth model, and re-balancing the economy away from exports and real estate investment. These are all long-standing ambitions. Success would bring higher living standards – breaking out of the so-called ‘middle income trap’. Critically too in today’s world, it would reduce China’s dependence on the rest of the world (especially the US) for key technologies and for export-based demand. Increased self-reliance and the elimination of ‘choke-points’ that rely on foreign supply are now high priorities – coupled ideally for Xi with the increased dependence of others on China. Yet success is far from guaranteed. And in recent years, it is Chinese export strength that has again compensated for weak demand at home.
But it is not just Xi who now marks out the domestic from the external more sharply. In the West, talk is of friendshoring, reshoring and working with ‘like-minded’ allies. US policymaking applies a security lens to almost any topic that involves China. Reducing dependence on China and staying ahead are policy priorities in what is framed as an intense technology competition. Industrial policy to support US-based activities, investment subsidies, export controls and bans follows. The European Union seeks to build its own capabilities, reduce dependence on China, screen inbound investment and put in place a diplomatic toolkit against a ‘coercive economic diplomacy’ that is seen to come mainly from China. And the US and EU negotiate on whether their respective policies still allow for cooperation and integration across the Atlantic – or whether there are now sharper dividing lines between ‘American circulation’ and ‘European circulation’ too. Meanwhile, post-Brexit Britain wonders where it fits: and has joined the CPTPP Asian trade deal that at least has smoother economic circulation between the countries involved.
The Dual Circulation framework tees up strategic choices not just for countries but also for multinational companies. In this newly divergent landscape, they need to reconsider their strategies. Be they western companies looking at China or Chinese companies looking overseas, companies need to understand the new dynamics, especially those between China and the West. They need focus on three aspects.
First, success in each region (China, US, EU) becomes more determined by local conditions, by matters of security and politics as well as business economics and market-based competition. Adaptation is key. Local capabilities to gauge what is needed and the local scale to justify required investments matter more. If companies fail to adapt, their market position will weaken, and exit may beckon.
Second, multinationals need to look for ‘mutual reinforcement’ between the different regions, just as Xi does for China. They must remember that, however much they localise, Apple remains an American firm in China and Alibaba remains a Chinese firm in Europe. Multinationals need to strengthen and deploy the global connectivity and resources that they can bring to any one region. They need to keep a focus on complementarities and commonalities. If not, the rationale for being active across different regions start to erode. Especially as compliance costs and reputation risks increase for those operating in both China and the West at the same time.
Finally, as the geopolitical dynamics keep shifting, companies need to stay on top of potential conflicts and contradictions. Previously the activities of western companies in China brought mostly approval at home and a share price boost. Now they are more likely to bring concerns or encounter legal constraints. In the US, Adidas and Nike are under congressional investigation over forced labour allegations relating to Xinjiang. Yet in China, many consumers demand Xinjiang cotton in their products and choose Chinese brands who use it over western companies that do not. At times, it may be impossible to comply simultaneously with the strict letter of the law in the US and China.
The dividing lines between business environments are set to remain sharp, but the impact remains uncertain. How large will the differences become? And will adaptation to this divergence always be possible, desirable or even legal? Restrictions on cross-border data flows for reasons of national security threaten to be an increasing barrier to connectivity. Will contradictory tensions remain isolated examples, limited to certain sectors? Or will they become more pervasive, more debilitating and costly for business operations – forcing more fundamental and widespread change? Companies need to be ready for a range of outcomes – and also, where they can, seek to influence the specifics.
Andrew Cainey and Christiane Prange’s new book—Xiconomics, What China’s Dual Circulation Strategy Means for Global Business—is now available here.
Andrew Cainey is a senior associate fellow at the Royal United Services Institute in London and author of Xiconomics: What China’s Dual Circulation Strategy means for global business. Andrew has 30 years’ experience advising governments, companies and non-profit organisations across Asia and Europe. Andrew was previously the managing partner of Booz & Company’s Greater China consulting operations; the partner leading the Rt Hon Tony Blair’s Asian government advisory practice; and the partner in charge of Boston Consulting Group’s Asian financial institutions practice. He has also been a Senior Fellow with Fung Global Institute in Hong Kong; an Associate Fellow in Chatham House’s Asia-Pacific Programme; a Senior Fellow in the Security and Crisis Management Programme (International Centre) at the Shanghai Academy of Social Sciences; and a Policy Advisor in the Conservative Party’s Policy Unit.