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Thursday, July 30, 2020
The Future of BRI and 'Inner Circulation'
Chan Kung / Tony Pan

On May 14, 2020, a meeting of Politburo Standing Committee (PSC),a committee consisting of the top leadership of the Chinese Communist Party (CCP), proposed for the first time that the super-large-scale market advantages of China and its domestic demand potential should be given additional attention. This is with the purpose to build a new development pattern where both the dual-cycle of domestic and international circulations to promote each other, as mentioned by the Chinese President Xi Jinping in the annual parliamentary meeting Two Sessions. At the opening ceremony of the Lujiazui Forum on June 18, Vice Premier Liu He emphasized the new pattern of dual-cycle development led by domestic circulation, and where there is mutual promotion between international and domestic cycles. The same idea has been reiterated by President Xi Jinping at the Beijing Entrepreneurs Forum on July 21.

This is an obvious major strategic adjustment in 2020 under the changes of complex geopolitical situation. Although the central leadership clearly intends to avoid the public opinion that "China's economy is once again closed for development", considering the current status quo, especially the geopolitical situation and domestic financial conditions, the future development focus of China's economy will inevitably see a certain degree of contraction. As a geopolitical analytical and research institution, ANBOUND has previously proposed the policy recommendations for strategic responses such as "Golden Waterway of the Yangtze River Economic Belt", "Urban Renewal", and "Comprehensive Construction of a Consumer Society". However, as a strategic participant of the "Belt and Road Initiative" (BRI), an unavoidable question that we ask is, what will happen to the BRI under "internal circulation"?

Regarding the origin, development and digression of the BRI, a detailed analysis through a special policy research report has been produced by ANBOUND earlier, with the best policy recommendations that we could give in the context of 2019. Although the BRI has deviated somewhat from its initial strategic goals, we still firmly believe that, as the first strategic plan in China's history to utilize geopolitical means in resolving domestic economic problems, the BRI is of strategic significance. However, under the reality of the current international environment, it has to be admitted that the BRI is caught in the middle of geopolitical tug-of-war with a largely uncertain future.

Although less than a year has passed since then, the international environment today has undergone huge changes as compared with 2019. China and the United States have entered into a total and complete confrontation resulting in a total decoupling. At the same time, the attitude of Western countries towards China have become increasingly clear, leaving only the matter of time and strategy. China also faced difficulty in implementing the BRI in accordance to its original plan due to the impact of the COVID-19 pandemic on the country's economy, the decline in foreign exchange reserves and the existence of large-scale debt risks as well as other international factors. According to official data from the Ministry of Foreign Affairs of China, 30-40% of projects in countries along the BRI are currently at a standstill. Due to issues with Hong Kong and the rapid deterioration of Britain-China relations, Britain may even withdraw from the Asian Infrastructure Investment Bank. Therefore, the overall situation appears to be rather pessimistic for China.

Those who know ANBOUND's past research on the BRI would know that we have proposed three possibilities for China's handling of the BRI in the future: (1) maintaining the status quo, (2) abandoning it strategically or, (3) undergoing structural reforms. It is now time to take a serious look at the value of ANBOUND's forecast and analysis.

For the first possibility. i.e. "maintaining the status quo", this means that the BRI will continue to maintain the original investment scale and strategic direction. Yet in reality this will be neither economical nor realistic, and it is ultimately unsustainable. Concerning the second possibility, that is "abandoning the BRI strategically", seeing as China is under pressure, this seems increasingly possible. Yet, this would also mean China's total international failure, and therefore would have extremely huge political costs. Even if the BRI is terminated with a "silent ending", it will still be the same end result. The last remaining option is "structural reform", which is a geopolitical option that may become the best choice under the background of the overall contraction of China's policy priorities.

A more flexible and promising option in the current geopolitical circumstance should be the construction of a common market. In the previous scenario, the ideal state of affairs for China was the international, systematic establishment based on common trade and legal standards led by China. As the environment of China and other countries has undergone substantial changes, such scenario of building a common market system has become difficult to achieve. The cost is now too high and China's existing resources can no longer handle it. In this case, it is a reasonable option for the strategic focus of the BRI to shift to the construction of a common market participated by multiple parties in the world, including China whose role is more of a participant than a leader.

Under the impact of the COVID-19 pandemic, the world has encountered severe economic crises in 2020/2021. It is then natural for the BRI to make adjustments in response. The first of which is to maintain the size and openness of the global market. The construction of a large world market has positive significance, and this is one of the key measures to maintain the stability of the global economy. If this is not done, the global economy will further deteriorate, impacting the employment and income of all countries globally. When this happens, the financial sector will also be impacted, causing more serious depression consequences in the future. Secondly, as China is a crucial part of the world market, the Chinese market will remain open and integrate into the world market, so that the size and market capacity of China's economy will become one of the key forces in supporting the world market at a time of economic crisis.

Such adjustment has not only solved the structural reform of the BRI, but also adjusted the structure and investment of Chinese resources based on objective reality. Additionally, this is consistent with the strategic concept of "internal circulation". What is essential is that the two cycles, i.e. the internal and external circulations, both inside and outside of China, should be integrated and mutually supporting. When China's economy improves, the openness of the market increases, the scale of the world market will be enlarged, and the absorption of world goods will increase as well. This will assist other countries in handling the economic crisis caused by the COVID-19 pandemic. It is also beneficial for the integrated development of the Chinese market and the world market.

Consequently, looking at the current BRI on the basis of emphasizing the "inner circulation", the global infrastructure construction tide should be appropriately cooled down, the Chinese capital should also shift to global procurement of consumer goods and production materials. China needs to further open up its capital market in order to absorb more world capital, thereby welcoming world capital to share the growth potential of the Chinese market. Naturally, China's economic policy should also take some decisive measures, i.e. adjusting the focus of the layout, giving attention on the construction of the consumer market, and promoting the expansion of market size. China should also step up urban renewal, create more job opportunities and increase the income of social groups. In addition, it should also further consolidate as well as expand the scale of the market foundation.

The BRI is facing a critical moment of reorganization and adjustment given the changes that the world is facing. The completion of the Chinese market is equivalent to the expansion of the total scale of the world market. This is the key to the integration and development of the Chinese market and the world market, as well as the key to BRI's structural reform. Although the world is ever-changing, grasping the logic of development, seeking development opportunities, and breaking linear thinking has always been the mission of geopolitical research and an important direction for the future reform of the BRI.

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