HKUST Business School Magazine

Biz@HKUST Biz@HKUST 12 13 // Cover // Thought Leader Dual Circulation Transition At a time when the environment for international trade is becoming more vulnerable, China is moving ahead with its “dual-circulation paradigm”. Leading Chinese economist Justin LIN, a former HKUST scholar, explains why China is highlighting domestic demand as the main driver of growth in the new paradigm. Although it’s one of the world’s fastest growing economies, China was unable to dodge the wrath of COVID-19. As if that wasn’t destructive enough, the country remains in a contentious relationship with the world’s largest economy – the US. It feels like China is being tested on all fronts. While its “V-shape” economic rebound is a strong testament to the speed at which China took control of the pandemic, the ongoing tensions with the US, and the spillover effects of that, will continue to pose challenges for the country in the coming years. So says Professor Justin Lin, former Chief Economist at the World Bank, and now the Dean of the Institute of New Structural Economics at Peking University. “China will inevitably confront other natural and geopolitical challenges in the coming years amid these profound changes that we haven’t seen in a century,” says Lin. So, while China’s swift and effective response towards COVID-19 resulted in a second quarter rebound in 2020 which showed a remarkable 3.2 percent growth, and then a further 4.9 percent growth in the third quarter, it doesn’t mean China can rest on its laurels. It must deal with the ramifications of the US-China tensions which will far outlive the pandemic. The tensions between the two countries stem from many factors, including a US trade deficit with China, former US President Donald Trump’s penalty tariffs on China’s imports, a frothy exchange during the first high-level talk between the Chinese and US officials under new US President Joe Biden, and restrictive measures against Chinese companies in the name of intellectual property protection, just to name a few. Amidst rising tensions between the two nations, Lin believes that China can still pursue its forward-looking policies and suggests that it is probably best to stay open while tapping into an eight percent annual growth potential, which translates to around six percent growth before 2030, and four percent growth before 2050. If this is achieved, he says, China would have reached three new milestones. Firstly, by 2025, China’s per capita GDP will have exceeded US$12,535, meaning that the country has graduated to a high-income country. Secondly, China might have replaced the US as the world’s largest economy in nominal terms. Thirdly, China’s per capita GDP may have reached 50 percent and its total size will be two times that of the US by 2050. Lin says that by the time that this happens, the two countries will have no choice but to “live in peace for common development”. He explains that the regional income disparity in China means that the per capita GDP for Beijing, Tianjin, Shanghai and the coastal provinces, which amounts to a population of 400 million, will be the same as the US. “This means that the technology level of that part of China will rival the US. The US will lose superiority in terms of technology,” he says. China has another one billion people living in its central and western regions with a per capita GDP that is one third of that of the US. “They are still in the process of catching up and will grow faster than the US. In this scenario, the US will lose the possibility to overturn the power balance and will find that it is better to grow with China for its own benefit,” Lin adds. A shift away from an export-oriented economy To understand how China intends on achieving its economic goals, it is important to look closely at the intended development of the Chinese economy, namely the “dual A bigger economy means a bigger capacity for domestic absorption, and as the world’s second largest economy, China can rely on a domestic economy Justin Lin Dean of the Institute of New Structural Economics at Peking University