Internal Circulation? Dual Circulation? The Chinese Debate about Openness and Reform

Two camps seem to be forming in China on the question about how to confront a dismal external economic environment, caused by the pandemic and the American-led backlash that threatens globalization. The first proposes “internal circulation” in its economic policy, emphasizing domestic consumption and self-reliance; the other advocates greater opening and reform as a way to counter external threats. 

First, according to a Xinhua report, Xi Jinping remarked in a conference with tech entrepreneurs in July 2020: “Under the current external environment of rising protectionism, downturn in the world economy, and shrinking global market, we must focus on getting our own house in order.” He said it is necessary for China to “give full play to the advantages of the super-sized domestic market, and to gradually form a new development pattern in which the great internal circulation will form the principal part, while the circulation between the domestic and international will promote the former.”

An Aggressive Perception of Internal Circulation

Some Chinese officials see Xi’s call for beefing up “internal circulation” as a sign of using self-reliance to respond to the external challenges. Huang Qifan, vice chairman of the Finance and Economics Committee of the National People’s Congress Standing Committee, recommends throwing away the illusion of an invincible America and preparing to fight economically. Although Xi Jinping stated that focusing on internal circulation is not the same as closing the door to the international economy, many Chinese economists take the cue as elaborating on the advantages of a large domestic market and increasing domestic demand.

Huang also believes that emphasizing the internal economic cycle can break the inertia of decades of an externally-oriented economy promoted by all levels of leading cadres and entrepreneurs. While not dismissing the importance of internal-external interaction, Huang argues that emphasizing the internal economic cycle will lead the Chinese government to freshly examine the significance of innovation, investment and consumption to the national economy. He seems to suggest that internal circulation is not proposed as a short-term fix of the problems caused by the pandemic or decoupling. Rather, the time for internal circulation has come as China has grown into a strong economic power. “Look around at all the developed countries,” he writes. “Any strong economy must have internally circulation that makes up 80% of its GDP, while its externally-oriented economy takes up 20% or less.”

Cao Heping, a professor of economics at Peking University, echoes Huang’s argument. He too believes that emphasis on internal circulation, complemented but not eclipsed by international economic interaction, will help China to withstand the double impact of trade protectionism and the pandemic. He maintains that such a strategy is also a corrective to the overt export orientation of the national economy.

Countering Voices

At the same time, there are some voices supporting further reforms to expand the openness of the economy. The call to increase domestic demand is not a recent proposition. Expanding domestic demand mainly depends on improving the economic lot of China’s vast rural population. However, due to the stalling of reforms and persistent rural-urban divide, China’s countryside, according to some reports, is “returning to poverty,” or at least has failed to boost domestic demand. Given the situation, how China can further expand domestic demand remains an unanswered question.

Professor Xiao Gongqin of Shanghai Normal University offers another cautionary tale. From his perspective, China should downplay the ideological conflict with the West and refine its image as a large, tolerant and enlightened power. Xiao, a once-advocate of neo-authoritarianism for the sake of carrying out reform, contends that China must be careful not to fall into a “hedgehog-like self-withdrawal reaction” when it is confronted by mounting outside pressure.

Somewhat contrary to expectation, the Global Times published an editorial on July 27 arguing that national security concerns must not be allowed to dominate all areas of economic and social life, and international interaction. The editorial stated that China must strengthen itself through continuous reform and opening up, the very foundation of China’s national security and prosperity. It is only through such a strategy that China can resist Washington’s radical policies.

Entrepreneur and founder of, Liang Jianzhang, who is also a professor of economics at Peking University, takes the argument for opening and reform further. He argues that the best way for China to counter external hostility is not through tit-for-tat retaliation. Rather, China should further open up and strengthen foreign cooperation in all areas to reach new economic heights and to improve China’s international image. For example, if the United States wants to block WeChat and TikTok, China can do the opposite, by opening access to Google and other international Internet sites. This way, China will see a rise in both its hard economic power and soft power.

An Unclear Path Forward

The debate, although somewhat muted, is continuing between the two positions in the somewhat arcane languages of internal and dual circulation. Fu Yifu from the Suning Financial Research Institute took Japan’s experience at the end of the 20th century as an example. He explained that Japan’s economic transition – its turn toward “internal circulation” – in the face of U.S. pressure has brought many benefits, such as increased disposable income for the residents, a narrowing income gap, continued industrial progress, and enhanced innovation. However, he admitted that turning to internal circulation could be a difficult road. Historically, Japan’s increased reliance on internal circulation has exacerbated the bubble in the Japanese economy and worsened the government’s debt level.

So, when confronted with unprecedented economic challenges, how will China choose?

(Image Source: Global Times)

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Yucong Li

Yucong Li is a Master of Public Policy student at UCSD’s School of Global Policy and Strategy, with a specialization in Program Design & Evaluation and Social Policy. He graduated from Peking University with a Bachelor of Laws in Philosophy, Politics and Economics. Prior to attending GPS, he worked as a research assistant at the Center for Civil Society Studies focusing on social enterprises area. His research interests include the collaboration between government and society, social governance and China-US relations.

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