In spite of the huge domestic market and rising household consumption, it is not easy for the outward-led economy to shift inward for its main growth, Wang said. “It will take time for the domestic market to adapt and mature for internal circulation. Only when consumption, investment and foreign trade, particularly exports, achieve a virtuous cycle can a system featuring healthy domestic and international circulation be accomplished,” he said.
First, there are challenges in boosting domestic demand so export-oriented goods can be sold at home. Domestic consumption is yet to recover from the impact of the pandemic. Total retail sales of consumer goods in the first half of the year dropped 11.4 percent year-on-year. Many businesses in the services sector where people need to gather in crowds, such as live performance venues and cinemas, are still not open or are operating at a reduced capacity.
The domestic demand has a ceiling even without the pandemic, Wang said. Further exploiting the market means boosting demand, so it will require measures such as persuading Chinese consumers to spend more, when their natural inclination is to save money, particularly when the economic outlook is uncertain.
“It touches on deeper concerns about the level of social reform such as building a sound social security system, improving the healthcare system, and enlarging middle-income groups by raising incomes,” Wang said.
Huang Qifan, vice director of the China Center for International Economic Exchanges, an association for economic exchanges and consulting, wrote in an article published by the Liaowang Institution, a think tank established by the State-run Xinhua News Agency, that the key lies in boosting jobs and increasing people’s incomes. “Employment and income are the preconditions for discussion,” Huang wrote.
Building a sound domestic demand system also demands deeper reforms on the supply side, particularly in pushing forward market-oriented flow and allocation of the factors of production. “There are still chokepoints hindering the market-oriented allocation of capital, land, technology, data and other factors of production,” Cui said.
He cited China’s auto industry, which is struggling with a slide that started in 2018. “In spite of boasting the largest consumer market, the automobile industry is not concentrated enough and lacks international competitiveness,” Cui said. Local protectionism is seen as one factor, particularly for new energy vehicles, which has resulted in a fragmented market instead of a unified and fully competitive one. This has prevented strong players from standing out.
“We should further push market-oriented reforms, break the shackles of local protectionism and stimulate an optimized allocation of resources in which the market plays a decisive role, to spur the emergence of enterprises with global competitiveness,” Cui said.
Wang said that the threshold for the entrance of foreign products and factors of production remains high in some fields. “Establishing smooth domestic circulation needs as a first step the breaking of these barriers and deepened opening-up to embrace foreign products, factors and investment,” he said.
In reiterating a strategy which focuses on the domestic economic network, Chinese President Xi Jinping said at the entrepreneurs meeting that China must update its supply chain, give priority to innovation in science and technology and accelerate research in key technologies.
Technology is regarded as crucial in completing the supply chain and making the domestic market self-sufficient, particularly against the rising risks of technological decoupling. “The competition in science and technology will grow fiercer in the wake of the pandemic, as we can see from the US’s attack on Chinese tech companies. It is urgent to accelerate the innovation-driven development strategy [raised in 2012] and enhance China’s competitiveness in science and technology,” Huang said.
China’s R&D spending has continued to rise in recent years, climbing to nearly 2.2 percent of GDP in 2018, close to that of many developed countries. But the spending in fundamental research that requires long-term investment accounted for only 5.5 percent of R&D funding, far below the average 15-20 percent in many innovation-oriented countries. “In improving the weak links [in technology], China needs to spend more in fundamental research and raise the proportion to around 15 percent,” Huang suggested, also calling for more efforts in realizing technology transfers.
Developing the domestic market also requires better connectivity with the outside world rather than closing the door, according to Huang. Against rising protectionism and unilateralism, Huang believes that China should be more open to the world, encourage imports, open more fields to foreign investment and improve the business environment.
“This will not only diversify the supply system but also attract more capital to China and help it fill the gaps in its supply chain,” he said. “An efficient and stable chain will not only drive domestic circulation, but also help stabilize the benign circulation of the global economy.”