The Central Committee of the Communist Party of China (CCCPC) repeatedly used the phrase “new development paradigm” – a series of comprehensive development strategies, including “dual flow”. Some of these strategies aim to move from an economy driven by external demand to an economy driven by the domestic market by encouraging consumption and stimulating domestic demand.

China has encouraged supply reform over the years because domestic supply has failed to meet demand, especially in high-quality areas such as medical care and education. Therefore, as recently raised by the CCCPC, the idea of ​​dual circulation and domestic circulation as a pillar is to increase consumption and production in China’s own economy, and combine this inward-oriented strategy with supply reform for build a positive cycle.

The heavy price of China –we The trade war and the Covid-19 pandemic have forced China to reflect on industrial and supply chains, which are frequently disrupted or deficient, such as in the trading of computer components such as microchips and central processing units. . This is a new arena of competition between China and the we, and we need to think about how to compensate for these chains with financial means in the event of disruption. Putting more effort into financing industrial and supply chains could facilitate China’s domestic circulation. Another important issue is regional coordination. the CCCPC could facilitate national circulation through its formulation of regional coordination strategies such as the development of the Guangdong-Hong Kong-Macao great bay region, the integration of the Yangtze River delta and the coordinated development around the metropolitan region of Jingjinji in Beijing. Tianjin – Hebei.

China’s Vice President Wang Qishan said last year that finance should steadfastly serve the real economy by establishing a positive cycle. In traditional terms, the international cycle refers to trade and investment, while in the new development paradigm it also includes the circulation of factors of production, namely the interaction of capital.

Another factor is labor: in the world market, the movement of labor from China to other countries is still relatively low. Although there are many overseas students and Chinese nationals overseas, more efforts are needed to attract top international talent to China.

Data exchange

The dual circulation of data is also a major subject. Data sovereignty and the flow of data between countries are entirely new topics. How to achieve a dual circulation, the two reinforcing each other in terms of factors of production. Technological innovation now plays a central role. Trade frictions between China and the we evolved into a technological war that hampered the exchange of innovation. China must think about how to expand its technological exchanges with other countries in such a context; Europe, Japan, the Republic of Korea and member countries of the Association of Southeast Asian Nations are prime candidates.

Why are we proposing a new development paradigm? The concept is in accordance with the natural law concerning the economic development of large countries; only large countries can develop an economy based primarily on internal strength. In such a context, China must find a number of new internal driving forces. the CCCPC has already published the 14th five-year plan (2021-2025) for national economic and social development and long-term goals until 2035, which declares that China has entered a phase of high-quality development and that a new development paradigm should be formed.

The external environment and the current situation must also be taken into account. The strategic rivalry between China and the we has resulted in national security concerns, which are
rarely discussed by the financial sector. Financial openness
can trigger risks, but risks can be controlled and managed by calculating their probabilities and developing hedging instruments.

National security is always an uncertain risk, difficult to quantify and more difficult to estimate its probability. In the face of threats to national security, a widely held opinion is that finances should be opened with more caution.

Some believe that uncertainty and even the risk of war will arise as conflicts escalate between countries, so we must protect ourselves and avoid opening up, otherwise we will experience greater external shocks. Rather, we should strengthen financial openness in the context of potential threats to national security, and it should be a two-way opening that reaches a deeper and broader level. Greater financial openness can attract international capital and investors, which could mitigate the risk of war or national security threats between China and other countries – especially with the we. In other words, the risks of financial openness can effectively help us cover uncertainties about national security. With greater insecurity, finance is expected to open up on a larger scale, including institutions, markets, investment projects and the internationalization of the renminbi.

In general, the majority of the risks associated with opening up financial markets come from foreign capital, which can cause intense price fluctuations and affect Chinese capital markets and real estate. In fact, we should be more open to ‘hot money’ – funds flowing from country to country in search of short-term profit on exchange rate changes or interest rate differences. expected. This will help mitigate national security risks. There is a need for financial companies to develop risk management tools and for regulators to improve the exchange rate mechanism to allow more flexibility; in turn, this should help alleviate the impact of any problems related to foreign capital. In addition, taxation in the form of value added tax and an increased transaction tax can reduce the inflow of speculative capital. Likewise, a departure tax could discourage its exit in the short term. Undoubtedly, industrial orientation policies are also useful.

Room for improvement

The opening of Chinese financial markets will also imply the expansion of the offer of Chinese companies abroad. This includes the overseas listing of Chinese companies and the further internationalization of the renminbi. In the face of uncertainties about global security, we might focus less on the internationalization of the renminbi and more on the special drawing rights of the International Monetary Fund. Specifically, we should study and promote the digitalization of currencies and adopt all major currencies including the we dollar.

Finance must serve national circulation as a pillar of the new development paradigm. Even though the Chinese financial system has accomplished a lot, there are still many areas in need of work.

The first is the development of financial services that can promote consumption. The current financial system pays more attention to the production and circulation of services, which could be improved by adding more consumer credit, thereby increasing non-wage income. Insurance could also be strengthened as this industry is still relatively small in China. The second is the promotion of financial services on the supply side, which is also necessary for domestic circulation. Indirect financing and a predominantly banking financial system are not enough to promote the desired innovation that the economy needs. For this reason, capital markets could serve as a service system to promote innovation. The last is coordinated development. Governments must serve as facilitators for the development of regional economies through the construction of city poles and the integration of various regions, as we have already seen in the Grande Baie region and elsewhere.

This article is part of the FIF China 2021 Report, which draws primarily on content provided by the China-based think tank, the International Finance Forum, and is published in association with Central Banking.