China’s Stunted Transformation
China has run into major road blocks as it has attempted to implement its "dual circulation" growth strategy. Its success in managing the challenges it faces could be the difference between a global recovery and a global recession.
HONG KONG – China’s growth model is undergoing fundamental change. After decades of relying primarily on external demand to drive growth, the government has embraced a “dual circulation” model, driven by both internal and external demand. The goal is to make China’s economy more resilient and less vulnerable to external shocks, but the structural transformation has run up against major roadblocks.
When Deng Xiaoping launched his “reform and opening up” in 1978, China pursued a development strategy modeled after successful East Asian economies like Japan and South Korea: welcome foreign direct investment, expand cross-border trade linkages, leverage low labor costs to bolster the manufacturing sector, and take advantage of external demand to drive growth. Over the last four decades, FDI flows – about two-thirds of which came through Hong Kong – enabled China to transform Guangdong and other coastal provinces into global supply-chain hubs.
As industrialization progressed, incomes and wealth increased, and Chinese workers became consumers of both goods and services. As a result, the foreign-trade-to-GDP ratio declined, from a peak of 67% in 2006 to around 35% today, though China still relies on the jobs provided by its export industries.
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