Core viewpoints

The "two cycles" help to optimize China's industrial structure and supply chain structure, and boost capacity vitality through supply-side structural reform and factor marketization reform. however, in the short term, its impetus to the economy is more reflected in the partial demand-side policies, such as promoting residents' willingness to consume, promoting effective investment, reducing taxes and fees and releasing the vitality of enterprises. It is estimated that under optimistic expectations, the "two cycles" can pry up to 3.7% of economic growth.

What is "two cycles"?

The concept of "two cycles" mainly refers to the new development pattern with the domestic great cycle as the main body and the domestic and international double cycles promoting each other, which is under the external environment of rising protectionism, the downturn of the world economy and the shrinking global market. The CPC Central Committee has made a major strategic plan to promote the development of China's open economy to a higher level.

Why should we promote the "two cycles"?

In the current environment of global economic slowdown, signs of anti-globalization and rising trade protectionism, over-reliance on external demand may lead to systemic risks such as overcapacity, capital outflow, slowing economic growth and higher exchange rate fluctuations. "two cycles" (especially the internal cycle) are needed to stabilize growth. At the same time, taking into account China's huge population base, broad potential for domestic demand and sufficient policy space, China also has the basis for the development of internal circulation. Therefore, the "two cycles" came into being.

How to develop the "two cycles"?

On the one hand, the domestic great cycle requires both supply and demand: on the demand side, we should pay attention to stabilizing the basic market of employment and deeply tap the potential of consumption; on the supply side, we need to rely on the supply-side reform of "entity + finance". At the same time, we will deepen the market-oriented reform of factors and make up for the shortcomings of the supply chain.

On the other hand, the significance of "domestic great cycle" lies more in "preventing risks" and "making up for deficiencies". It focuses on ensuring the stable operation of the domestic production chain and supply chain in extreme cases, rather than abandoning the international division of labor completely. what's more, it does not mean the shift of the strategy of opening up to the outside world, and the follow-up still needs domestic and international circulation to ensure the smooth operation of China's economy. Therefore, it is necessary to broaden the "circle of friends" of foreign trade. It is also necessary to promote industrial upgrading to ensure the core competitiveness of "made in China".

How much effect does the "two cycles" have on the economy?

In the long run, the "two cycles" will help to improve total factor productivity and potential economic level, but in the short term, due to the stickiness of production factors, economic structure and global industrial layout, its driving effect on the economy is more reflected in policies such as promoting consumption, expanding investment, reducing taxes and fees, and so on. It is estimated that the pull effect of the "two cycles" on GDP under optimistic expectations is about 3.7 per cent.

What is the impact on the bond market?

Under the policy framework of "two cycles", the impact of strong stimulus policies such as traditional infrastructure and real estate on the bond market will be weakened. On the other hand, with the continuous improvement of China's supply chain and the continuous release of potential demand, the performance-to-price ratio of RMB assets is expected to continue to improve, and the continuous inflow of foreign capital will also become an important support for China's bond market.

Conclusion:

The "two cycles" help to optimize China's industrial structure and supply chain structure, and boost capacity vitality through supply-side structural reform and factor marketization reform. however, in the short term, its driving effect on the economy is more reflected in the partial demand-side policies, such as promoting residents' willingness to consume, promoting effective investment, reducing taxes and fees and releasing the vitality of enterprises. It is estimated that under optimistic expectations, the "two cycles" can pry economic growth by about 3.7%.

As far as the bond market is concerned, the current policy pays more attention to the shift between the ecological circle of the industrial chain and economic growth, the probability of continuous increase of strong stimulus policies such as traditional infrastructure and real estate is not high, and the impact on the bond market is relatively mild. On the other hand, giving priority to internal circulation does not mean a comprehensive turn in the process of China's opening up to the outside world. With the gradual improvement of the industrial chain, China still has room for industrial upgrading and factor productivity improvement, and the performance-to-price ratio of RMB assets is expected to continue to rise. the sustained inflow of foreign capital will also become an important support for China's bond market.

What is "two cycles"?

The concept of "two cycles" was first put forward at the meeting of the standing Committee of the political Bureau of the CPC Central Committee on May 14. Then, during the two sessions on May 23, General Secretary Xi Jinping stressed the need to "gradually form a new development pattern in which the domestic and international cycles are the main body and the domestic and international cycles promote each other." In his written speech at the opening ceremony of the 12th Lujiazui Forum, Vice Premier Liu he said that "a new pattern of dual-cycle development based on domestic circulation and mutual promotion at home and abroad is taking shape." at the entrepreneurs' forum on 21 July, General Secretary Xi Jinping once again emphasized the double-cycle development pattern based on domestic circulation.

The concept of "two cycles" mainly refers to the new development pattern with the domestic big cycle as the main body and the domestic and international double cycles promoting each other.This pattern is a major strategic deployment of the CPC Central Committee to promote the development of China's open economy to a higher level under the current external environment of rising protectionism, the downturn of the world economy and the shrinking global market, mainly by upgrading the modernization level of the industrial chain supply chain, promoting scientific and technological innovation, speeding up key technologies and other ways to promote domestic circulation and give full play to the potential of domestic demand, while ensuring the connectivity between the domestic market and the international market. We will make better use of both international and domestic markets and resources to achieve stronger and sustainable development and cultivate new advantages for China's participation in international cooperation and competition under the new situation.

Why should we promote the "two cycles"?

After entering the 21st century, under the double dividend of population and foreign trade, China's economy has made rapid development.Since China formally joined the WTO in 2001, the degree of opening up of China's industry has continued to expand, and the proportion of exports in GDP has continued to rise. by the time of the financial crisis in 2007, the proportion of exports in GDP had risen to 35%.

Under the demographic dividend and foreign trade dividend, China's economy has developed rapidly, the domestic industrial system has gradually matured, the infrastructure has been continuously improved, the income level of residents has been continuously improved, and the overall national strength has been continuously enhanced. At present, China has become the world's largest exporter, the second largest importer (after the United States) and the third largest economic entity (after the United States and the European Union). At the same time, China is also the only country in the world with all the industrial categories in the United Nations industrial classification catalogue.

However, since the outbreak of the subprime mortgage crisis in the United States in 2008, with the slowdown of global economic growth and the rise of trade protectionism, China's overall export dependence has declined, and trade globalization has also encountered bottlenecks.The subprime mortgage crisis in 2008 has dealt a heavy blow to the international trade chain and industrial chain. Some countries have taken trade protection measures to support the production and operation of domestic manufacturing industries. The World Bank has pointed out in its report that from November 2008 to March 2009, 17 countries in the G20 have implemented 47 trade protection measures ("Trade Protection: emerging but worrying trends", World Bank, 2009.3.17).

Since then, although there has been a certain recovery in global economic growth, the haze of trade protection has not been dispelled. In 2011, global trade frictions have further intensified. According to the people's Daily online, the Ministry of Commerce has said that from January to November 2011, China encountered a total of 60 trade investigations initiated by 16 countries around the world. Under the dual constraints of trade frictions and global economic growth slowdown, China's export share of GDP has declined rapidly. At the same time, as developed countries have taken trade protection measures such as tariff increases and export restrictions, the proportion of exports in GDP in the global economy has declined significantly, and trade globalization has also encountered bottlenecks.

In 2020, under the impact of the COVID-19 epidemic, the international trade environment has further deteriorated, and the uncertainty of external demand has also increased.Since the beginning of this year, affected by the COVID-19 epidemic, various countries have taken measures such as suspending production and isolating personnel.At the same time, in order to prevent the cross-border spread of the epidemic, various countries have adopted policies such as blocking borders and restricting logistics, resulting in poor turnover of the global industrial chain and supply chain. International trade has been significantly affected.

Although China has maintained its export resilience through the export of epidemic prevention materials and deepening bilateral trade with ASEAN and other countries, at the same time, considering that the impact of the COVID-19 epidemic on global economic growth is not over, and there is still a fog of trade frictions between China and the United States, the uncertainty of the external environment will become an important test of external demand.

In the current environment of global economic slowdown, signs of anti-globalization and rising trade protectionism, over-reliance on external demand may lead to systemic risks such as overcapacity, capital outflow, slowing economic growth and higher exchange rate fluctuations. two cycles (especially the internal cycle) are needed to maintain the stability of economic growth. In view of China's huge population base, broad potential of domestic demand and sufficient policy space, China also has an economic basis for the development of internal circulation. Therefore, the "two cycles" came into being.

How to develop the "two cycles"?

1. Domestic Great Circulation: both ends of supply and demand work together.

A complete process of social reproduction includes four links: production, distribution, exchange and consumption. as far as the "domestic cycle" is concerned, to maintain the sustainable operation of social reproduction, it is necessary to maintain the stability of a country's industrial chain, infrastructure and production factors. at the same time, we also need to release demand potential to undertake social production.

On the demand side, stabilize the basic market of employment and tap the potential of consumption.Consumption and investment are the two banners of domestic demand, taking into account the declining proportion of investment in China's economy in recent years and its partial supply-side characteristics, the importance of consumption to the protection of domestic demand continues to rise. After the outbreak of the epidemic, the pressure on residents' income and employment is prominent, and residents' willingness to consume is also significantly reduced under the constraints of income expectations and palpitations of the epidemic. Taking into account the inherent requirements of the "domestic cycle" for a country's demand, there is an urgent need to improve residents' consumption will and ability through stable employment and income policies, so as to support "export to domestic sales" while ensuring the domestic cycle of social reproduction.

On the supply side, the supply-side reform of "entity + finance" keeps pace with each other, deepening the market-oriented reform of elements and making up the deficiency of the supply chain.In recent years, with the continuous decline of the "output-investment ratio" of infrastructure and real estate, the historical problems caused by traditional countercyclical regulation have also begun to highlight, such as overcapacity in traditional industries, high macro leverage, rising housing prices and so on. it has even further led to the crowding out of household consumption and financing of small and medium-sized enterprises. Under the policy thinking of "domestic great cycle", the traditional development model is difficult to continue, so there is an urgent need to adjust the industrial structure, expand effective investment such as "two new and one heavy", and at the same time promote the development of "Internet +" new business type, such as e-commerce and live broadcasting. promote industrial upgrading and form a positive interaction between employment and consumption at the same time On the other hand, we also need to increase the support of the financial system to the real economy, prevent the siphon of funds by real estate and infrastructure, and optimize the development environment of small and medium-sized enterprises; at the same time, through the market-oriented reform of factors to promote the vitality of enterprises, to form a virtuous circle of endogenous economic growth. In addition, in order to maintain the safety of the industrial chain, it is also necessary to deepen the industrial chain and supply chain to make up for the shortcomings to ensure the integrity of the domestic economic cycle.

2. Domestic and international double cycle: balance rather than trade-off

The significance of the "domestic cycle" lies more in "risk prevention" and "making up for deficiencies", focusing on ensuring the stable operation of the domestic production chain and supply chain in extreme cases, not abandoning the international division of labor completely, let alone the shift of China's opening-up strategy to the outside world.Looking back at history, from the Silk Road to the great navigation era, and then to the current system of division of labor in international trade, although globalization will encounter many obstacles, global trade has always been an irresistible historical development trend. For China, under the background of the prevalence of trade protectionism, China is not working behind closed doors, but by reshaping the layout of the international industrial chain and trade chain to better serve the domestic cycle. This is also the due meaning of "domestic and international double cycle".

Specifically, on the one hand, we need to broaden the "circle of friends" of foreign trade, on the other hand, we should promote industrial upgrading to ensure the core competitiveness of "made in China".In recent years, as developed countries have promoted the manufacturing industry to fall back to the mainland, the current globalization is gradually characterized by regionalization and localization. under this background, China needs to broaden the circle of friends of "Belt and Road Initiative". We will continue to deepen bilateral trade with ASEAN, Japan, South Korea and other neighboring economies, and broaden the breadth of the supply chain. On the other hand, at present, China's main export commodities are still labor-intensive products. With the disappearance of China's demographic dividend and the labor cost advantages of Vietnam, India, the Philippines and other regions, "made in China" also needs to increase the technological added value of "made in China" through technological innovation and industrial upgrading, and occupy the leading position in the upper reaches of the supply chain.

How much effect does the "two cycles" have on the economy?

In the long run, the "two cycles" will help to improve total factor productivity and potential economic level, but in the short term, due to the stickiness of production factors, economic structure and global industrial layout, its driving effect on the economy is more reflected in policies such as promoting consumption, expanding investment, reducing taxes and fees, and so on.Combined with the above analysis, the "two cycles" help to ensure the smooth operation of a country's economy and the security of the supply chain, improve the resistance of a country's economy to external risks, and optimize China's industrial structure and supply chain structure in the long run. and through the supply-side structural reform and factor marketization reform to stimulate the vitality of enterprises and improve total factor productivity and potential economic level. However, from a short-term perspective, due to the stickiness of factors of production, economic structure, and global industrial layout, its driving effect on the economy is more reflected in the partial demand-side policies, such as promoting residents' willingness to consume, promoting effective investment, reducing taxes and fees and releasing the vitality of enterprises.

First, under optimistic expectations, the "two cycles" will promote a rebound in residents' willingness to consume, with a maximum pulling effect of about 1.3 per cent on GDP.Under the influence of the epidemic, residents' income and employment are under pressure, and residents' willingness to consume is obviously reduced. Considering the pro-cyclical nature of residents' income and employment, the policy focus in the short term is more likely to be more flexible residents' willingness to consume.

Under the optimistic expectation, the policy of promoting consumption will drive residents' willingness to consume back to normal, and "retaliatory savings" will change to consumption. Considering that in history, the center of the difference between the year-on-year growth rate of household income and household expenditure is about 1%, while the current "income-expenditure" gap has reached 8%, which means that there will be 7% room for compensation for current household consumption. It is estimated that under optimistic expectations, household consumption compensation will bring about 1.3 trillion of incremental consumption, and the pull on GDP will be about 1.3%.

Second, promoting effective investment and reducing taxes and fees will be an important starting point to ensure the continuous progress of the "two cycles". The maximum pull to GDP under static forecasts is about 2.4 per cent.In the 2020 government work report, it was pointed out that an additional 3.75 trillion special bonds will be arranged this year, an increase of 1.5 trillion over last year, focusing on supporting effective investments such as "two new and one heavy" construction. Considering that 70% of the new 1 trillion special treasury bonds can be used in the field of infrastructure, under the static forecast, the driving effect on the investment side is about 2.2 trillion. Considering that the amount of 2.5 trillion tax cuts this year is 200 billion higher than that of last year, under optimistic expectations, it is expected that the promotion of effective investment and tax cuts will bring 2.4 trillion incremental funds, and the pulling effect on GDP will be about 2.4%.

What is the impact on the bond market?

Under the policy framework of "two cycles", policies pay more attention to the ecological circle of the industrial chain and the sustainability of economic growth, and household consumption and effective investment will become the main starting points for stable economic growth. the impact of strong stimulus policies such as traditional infrastructure and real estate on the bond market will be weakened."Tiegong machine" + real estate is the traditional countercyclical adjustment idea in our country. The rapid underpinning economy also brings some policy sequelae, such as overcapacity in traditional industries, rising corporate debt, rising house prices and so on. Under the policy thinking of "double cycle" (especially the internal cycle), policy formulation pays more attention to the rationality of industrial structure and the sustainability of economic growth. This is also the reason why recent policies have frequently mentioned stabilizing employment, promoting consumption and expanding effective investment, while emphasizing the lack of speculation in housing.

For the bond market, the second place of strong stimulus policies such as the traditional "iron machine" + real estate means that the process of inflation and asset price recovery will slow, and the disorderly expansion of credit will also be curbed. The impact of counter-cyclical adjustment on the bond market is expected to be weakened.

On the other hand, considering that China's financial market still has room to open to the outside world under the pattern of mutual promotion of domestic and international circulation, with the continuous improvement of China's supply chain and the continuous release of potential demand, China's economy will take into account the dual attributes of risk aversion and growth, the performance-to-price ratio of RMB assets will continue to improve, and the sustained inflow of foreign capital will also become an important support for China's bond market.

At present, the COVID-19 epidemic is still raging overseas, and there is a trend of a second outbreak in the United States, Japan and other regions, while China has already realized the regular prevention and control process of the epidemic and resumed work and production in an orderly manner. according to the World Economic Outlook report released by the International Monetary Fund in June, China may become the only economy with positive economic growth among the world's major economies in 2020. It indirectly highlights China's policy execution and economic growth resilience.

Looking backward, with the further improvement of the domestic industrial chain and the continuous expansion of domestic demand, China's economy will take into account the dual attributes of risk aversion and growth, and the attractiveness of RMB assets to foreign investment will also be improved. the sustained inflow of foreign capital will also become an important support for China's bond market.

Conclusion

The "two cycles" help to optimize China's industrial structure and supply chain structure, and boost capacity vitality through supply-side structural reform and factor marketization reform, but in the short term, due to the stickiness of production factors, economic structure and global industrial layout, its driving effect on the economy is more reflected in the partial demand-side policies, such as promoting residents' consumption will, promoting effective investment, reducing taxes and fees and releasing the vitality of enterprises. Under optimistic expectations, the "two cycles" can pry around 3.7% of economic growth.

For the bond market, on the one hand, under the policy framework of "two cycles", the policy pays more attention to the kinetic energy switch between the ecological circle of the industrial chain and economic growth, and the probability of continuous increase of strong stimulus policies such as traditional infrastructure and real estate is not high. the impact on the bond market is also relatively mild. On the other hand, giving priority to internal circulation does not mean a comprehensive turn in the process of China's opening up to the outside world. With the gradual improvement of the industrial chain, China still has room for industrial upgrading and factor productivity improvement, and the performance-to-price ratio of RMB assets is expected to continue to rise. the sustained inflow of foreign capital will also become an important support for China's bond market.