– Article 1:
REVIEW — The Great American Growth Machine And How To Fix It — The U.S. economy
is losing its historic edge, argue Alan Greenspan and Adrian Wooldridge. A few key
reforms are essential to keep them on top.
Imagine that a version of the World Economic Forum was held in Davos four centuries ago. From
across the globe, the great and the good of 1618 gather in the Alpine village: Chinese scholars in
their silk robes, British adventurers in their doublets and jerkins, Turkish civil servants in their
turbans and caftans. They have come together to discuss the great question of who will dominate
the centuries ahead.
The Chinese point to their superb civil service and mighty navy. A Turk boasts that the Ottoman
Empire is expanding westward and will soon hold Europe in the palm of its hand. A plucky Briton
argues that his tiny country has broken with the corrupt, ossified continent and is developing
dynamic new institutions, including a powerful parliament and a new sort of organization, the
chartered corporation, which can trade all over the world. Yet in the entire discussion one region
goes unmentioned: North America.
Four hundred years ago, North America was little more than an empty space on the map — an
afterthought in educated minds and a sideshow in European great-power politics. The entire
continent produced less wealth than the smallest German principality.
Today, the United States has the most powerful economy in the world: With less than 5% of the
world’s population, it still accounts for almost a quarter of global GDP. America has the world’s
highest standard of living apart from a handful of countries with small populations, such as Qatar
and Norway. It also dominates the industries that are inventing the future — intelligent robots,
driverless cars, life-extending drugs. The fact that 15 of the world’s top 20 universities are based in
the U.S., according to the QS World University Ranking, suggests that it is well-placed to dominate
the ideas economy.
The rise of the U.S. to economic greatness is an extraordinary story. But it is a story with a sting in
the tail. Productivity growth in the U.S. has all but stalled in recent years. The number of new
companies being created has reached a modern low. Geographical mobility has been in decline for
three decades. Economists worry that America’s potential rate of growth — the pace at which annual
output can expand without pushing up inflation — is also falling.
Why did America become the world’s greatest economy? Why has it lost its momentum in recent
years? And what light can history throw on the question of whether the U.S. can be as successful in
the future as it was in the past?
The key to America’s success lies in its unique toleration for “creative destruction,” the destabilizing
force described by the economist Joseph Schumpeter in 1942. Creative destruction reallocates
society’s resources from less productive pursuits to more productive ones — from spinning jennies to
factories, for example, or from horse-and-buggies to motorcars.
A range of things, from geography to political culture, have contributed to this enduring preference
for change over stability. Consider the sheer size of the U.S., which has allowed it to suck in millions
of immigrants and construct continent-spanning companies. It has also allowed the country to shift
relatively easily from one industry to another. In Britain, railroads had to make strange loops to
avoid ancient settlements. In America, they could carve a straight line from “Nowhere-in-Particular
to Nowhere at All,” as the Times of London put it in 1874. The U.S. has sometimes paid a heavy
price, both aesthetically and economically, for rapid development, but unlike its European peers, it
has avoided chronic stagnation.
There is also the fact that the U.S. was the first country to be born in the modern world of growth
and perpetual change. The War of Independence began a year before the publication of the greatest
work of free-market economics ever written, Adam Smith’s “The Wealth of Nations” (1776). For
most of recorded history, people had inhabited a society that was static and predictable. Smith
advanced a vision of society in which the market transformed the pursuit of individual self-interest
into the creation of universal progress. Many European countries took generations to come to terms
with this insight (some still haven’t). America was born dynamic.
But size and newness are not enough on their own, or else Brazil would be an economic colossus.
The U.S. possessed two secret ingredients that turned it into a growth machine.
The first is its entrepreneurial culture. Americans admire business people in the same way that the
English admire gentlemen and the French admire intellectuals. Americans are more inclined to found
companies than the people of other countries and are also better at turning small companies into
giant ones. The U.S. was the first country to make it easy to create companies without going cap in
hand to local bureaucrats who had a right to tell them what to do.
This spirit of entrepreneurship was built into the country’s DNA. The U.S. was founded by settlers
who wanted to escape from the restrictions of Europe’s ancient regime: Puritans who wanted to
escape from the grip of established churches, younger sons who wanted to escape from the
consequences of primogeniture, adventurers who wanted to escape from closed societies.
A striking proportion of America’s entrepreneurial heroes have been immigrants or the children of
immigrants. Alexander Graham Bell and Andrew Carnegie were born in Scotland. Andy Grove and
Sergey Brin was born, respectively, in Hungary and the Soviet Union.
The U.S. has also benefited enormously from its founding political structure. The Constitution,
written in 1787 and ratified in 1788, did its best to constrain the ability of politicians to interfere in
the economy. It limits the reach of the federal government by guaranteeing the rights of citizens, not
least the right to property, and by dividing power among its branches and with the states. Though
governmental powers to tax and regulate have grown enormously over the past century, they
remain a world apart from the state control that has long prevailed among America’s chief rivals.
The most remarkable period of creative destruction in U.S. history was the era from 1865 to 1900
when the government confined itself to providing a stable environment for growth. Titans such as
Carnegie and John D. Rockefeller built the world’s biggest and most efficient companies. Railway
barons knitted a continent together into the world’s biggest single market.
Though this great revolution was sometimes brutal, it laid the foundations of an era of mass
prosperity. Carnegie and Rockefeller reduced the price of steel and oil by almost 90%. R.H. Macy sold
“goods suitable for the millionaire at prices in reach of the millions.” Henry Ford trumpeted the
Model-T as “a car for the common man.” Their efforts gave Americans a richer diet than their
European contemporaries and earlier access to innovations such as electric lights, telephones, and
As for the travails of today’s economy, much of it has to do with a retreat from the dynamism of the
past. The Economist recently found that more than three-quarters of America’s major economic
sectors have seen a decline in competition, with the top handful of firms taking an increasing market
share. In 1980, according to the Census Bureau, one in eight companies had been founded in the
past year; in 2015 (the last year for good data), the ratio had fallen to fewer than one in 12.
The financial crisis of 2007-2008 showed creative destruction at its worst. The combination of fear
and herd behavior led people to overreact to bad news and to plunge economies into self-reinforcing cycles of decline. Nor did the federal government’s heavy-handed regulatory response to
the crisis help matters.
Fiscal policy has also hurt the economy. The growth of entitlements such as Social Security and
Medicare has crowded out the funding of long-term investment in the private sector and in crucial
infrastructures such as roads and airports. Millions of baby boomers are retiring and starting to
receive benefits while still quite capable of being productive. In 1965, entitlement spending
amounted to 5% of GDP. Today it stands at 14% and is projected to increase still more as the baby
The relative economic stagnation of the past decade has had serious political consequences,
breeding discontent, and dysfunction in both parties. While President Donald Trump imposes
growth-restricting tariffs and bullies errant companies, Democrats embrace ever more
interventionist plans to make companies embrace “social purposes.”
The threats now facing the U.S. are bigger than in the past. For the first time in its history, the
country confronts, in China, an economic power that is even more populous than itself. But America
still has a chance to solve its problems, not least because it continues to have a unique genius for
The most important item on an agenda for reform is to address the fragility in the American financial
system exposed by the financial crisis. Financial institutions play a vital role in allocating society’s
savings to fund new ideas and new businesses. Consider how venture capitalists have funded Silicon
Valley startups, persuading investors to take long-term risks in return for a stake in a potential
But too many recent financial innovations have been problematic, not least because they are so
sophisticated that even senior bankers don’t fully understand them. They have increased risk by
encouraging financiers to package and sell questionable products, such as subprime mortgages. They
have also encouraged financiers to become rent-seekers, more interested in serving their own
interests than those of the economy as a whole.
In the wake of the crisis, the federal government passed the monstrously complicated Dodd-Frank
Act, which tried to reduce risk in the financial system through regulation. A better approach would
have been to focus on the amount of capital that banks are required to hold in order to operate. In
the run-up to the crisis, banks on average kept about 8 to 10% of their assets as equity capital. If
regulators had forced them to keep 25%, or better still 30%, it would have radically reduced the
probability of contagious defaults — the root of all financial crises. Today, despite Dodd-Frank,
they’ve only increased it to a little over 11%.
Such a move would greatly increase overall confidence in the financial system. It would allow
lawmakers and regulators to repeal the bank-related provisions in the Dodd-Frank leviathan with a
clear conscience because any bank losses would be absorbed by shareholders rather than by
taxpayers. It would also allow them to focus their energies where they are best employed, in
stamping out fraud.
The usual objection to increasing capital requirements is that it would suppress banks’ earnings and
therefore their ability to lend. But a look at history says otherwise. From 1870 to 2017, with rare
exceptions, the net income of commercial banks as a percentage of their equity capital fluctuated
within a narrow range of 5% to 10% a year, regardless of the size of their capital buffers. This
suggests that a gradual rise in banks’ mandated amount of capital would not damage their rate of
return or their ability to lend.
A second crucial reform would be to get entitlement spending under control. Putting the system on
a more sustainable footing could be done by raising the retirement age by a couple of years,
indexing it to life expectancy so that the problem doesn’t keep cropping up — and more importantly,
in the longer term, shifting from a system of defined benefits to one of the defined contributions, as
Sweden accomplished in the 1990s.
Such reforms would assure long-term solvency, release more savings for productive investment, and
bring down the federal budget deficit. Nor would the reforms impose great suffering on America’s
retiring baby boomers. The retirement age was fixed in 1935, when the system was set up, at a time
when life expectancy was much shorter.
America’s problems, in short, are problems of poor policy-making rather than of senescent
technology or a lack of entrepreneurial drive. This does not mean that they are insignificant. Unless
the U.S. changes course, its economy will continue to flag, holding out the unhappy prospect of a
self-reinforcing cycle of low growth and populist rage.
Some economists think that the U.S. is mired in a swamp of low growth. We prefer to think that it is
trapped in an iron cage of its own making. Out-of-control entitlements and ill-considered regulations
are condemning the economy to perform well below its potential. Swamps by their nature are very
difficult to escape. Cages can be opened, provided that you have the right keys — and are willing to
– Article 2:
Bidenomics May Repeat FDR’s Blunder
Liberals hope Joe Biden will be another FDR. But that’s something to fear, as Mr. Biden’s tax
proposals threaten to repeat Franklin D. Roosevelt’s big mistake, which many historians blame for
plunging a recovering economy back into depression.
Roosevelt proposed a wealth tax in 1935, expanded it in 1936, and gave it real teeth in 1937. The
federal government needed to repel the attack on the foundations of society by “economic
royalists,” he argued. John Nance Garner, his vice president, agreed. As a congressman Garner had
been forthright. “We have got to confiscate wealth,” he declared in 1918.
By 1936 the top U.S. personal income-tax rate had been raised to 79%, with a 70% maximum estate
tax. The top federal corporate tax rate, however, was only 15%. In response, wealthy Americans
accumulated profits inside corporations that owned their residences and other assets. Hollywood
actors had their compensation paid to corporations they owned and from which they borrowed
Suddenly, at Roosevelt’s urging, Congress tore up all this careful and legal tax-avoidance planning
with the Revenue Act of 1937. Corporate money was subject to immediate distribution and taxed at
high individual rates. In effect, these were accumulated-wealth taxes, imposed at precisely the
wrong time. The year also saw the introduction of a 1% Social Security tax on the first $3,000 of
The economic pain was swift and severe. The Dow Jones Industrial Average crashed to 114 on Nov.
24, 1937, from 190 on Aug. 14, a 40% decline. Gross domestic product fell by more than 5% between
1937 and 1938. Unemployment, roughly 12% in May 1937, climbed to 20.7% in April 1939. Industrial
production tumbled 33% from the spring of 1937 to May 1938 and didn’t return to its 1937 peak
until late 1939.
Many factors contributed to the decline, including a contraction in the money supply and a doubling
of bank reserve requirement ratios. But taxes, particularly the Revenue Act’s undistributed profits
tax, were the trigger. Without much warning, businesses and individuals had to raise large amounts
of cash quickly by cutting back on workers and investments to pay taxes that would be coming due.
Senate Finance Committee Chairman Byron Harrison was convinced that the tax had proved harmful
and enacted a phased reduction beginning in 1938.
Today the U.S. economy is recovering from a great crash, as it was before Roosevelt’s tax onslaught.
Unfortunately, Mr. Biden doesn’t seem to have learned the right lessons. Should he win in
November, he proposes to cancel the Trump tax cuts, raising the top federal income-tax rate back to
39.6%, and raise the corporate income tax from 21% to 28%. He also promises to limit low capital gains tax rates to the first $1 million in profits and extend the full Social Security tax to income above
In 2011 Stephen J. Entin, then president of the Institute for Research on the Economics of Taxation,
told a congressional committee that the “income tax is heavily biased against saving and
investment” and that the “burden of higher taxes on capital formation falls largely on labor in the
form of lower wages and hours worked.” As in 1937, the effect of Mr. Biden’s proposals would be to
draw funds out of the economy to pay taxes, discourage new investment, hurt wages and hours
worked, and discourage recognizing capital gains.
Mr. Biden’s plan isn’t the only tax increase circulating around the Democratic Party. Sen. Elizabeth
Warren has proposed 2% and 6% wealth taxes on assets valued more than $50 million and $1 billion,
respectively. Wealth taxes have mostly been abandoned in Europe because they are difficult to
administer, facing hopelessly complicated valuation issues and often hitting people with valuable
assets but little cash.
Many blue states are also proposing tax hikes. Progressive New York lawmakers propose raising the
top marginal income-tax rate of 8.82% to 9.62% and 11.85% on the “superrich.” That’s on top of
New York City’s 3.876% income tax. California lawmakers have proposed raising the Golden State’s
13.3% top rate — highest in the nation — to 14.3% and 16.8%, applied retroactively to the start of this
year, in addition to a wealth tax. New Jersey is set to extend its 10.75% top rate to filers earning
between $1 million and $5 million. The Garden State governor’s budget would also make permanent
a 2.5% corporate surtax, creating an 11.5% state corporate tax.
New York is considering an annual mark-to-market income tax, or M2M, in which stocks and other
securities held by residents are valued annually and the gain immediately taxed, rather than waiting
until a sale or exchange. A nightmare to calculate, a state-level M2M would also burden people who
move to another state, resulting in a double tax on the eventual sale of their assets.
Rep. Ilhan Omar and Sen. Bernie Sanders have introduced the Make Billionaires Pay Act. It would
impose a one-time 60% M2M tax on gains in wealth between March 18 and Jan. 1, 2021, by
individuals with assets valued at more than $1 billion. Elon Musk would be bankrupted by the tax
owed on his Tesla paper gains.
Even death offers no escape. The Democratic Party platform calls for raising estate taxes “back to
the historical norm.” It isn’t clear what that means, but a 55% top rate — up from 40% now — with a
greatly reduced exemption is often discussed in liberal policy circles. Proposals to repeal the “step-up in basis” for inherited assets could tax the gain once more, on sale by the heirs, resulting in
Not every tax proposal I’ve outlined will ultimately be enacted. But pass enough of them, and you
can expect a disastrous result. Even though Democratic politicians will claim to only target the
superrich, a deluge of tax increases can send the whole economy right back to the dumps. As in
1937, today America’s economic recovery is fragile. A campaign against the 1% — the new “economic
royalists” — would risk repeating FDR’s mistake.
1ST QUESTION: What seems to be the redeeming feature (see article 1)?. Which could make the
the economic program of the President extremely successful (see article 2)?
Young Chinese Take On Debt And Spend Like Americans — The consumption helps diversify China’s
economy but leads to worries.
Western economists have long said that China needed a base of American-style consumers to bring
the country sustained economic growth. Now China has one: Its young people.
While previous generations were frugal savers — a product of their years growing up in a turbulent
an economy with a weak social safety net — the more than 330 million people born in China between
1990 and 2009 behave much more like Americans, spending avidly on gadgets, entertainment and
The freewheeling consumption is helping China diversify its economy at a crucial time. Beijing has
relied on exports and infrastructure-building to drive growth for decades, but recent signs point to a
slowdown amid tariffs from the Trump administration. The new spending patterns have benefited
Alibaba Group Holding Ltd., Tencent Holdings Ltd., and other tech companies, whose rapid growth
has helped energize China’s economy.
Yet all this consumption has a downside. Household debt levels have risen rapidly over the past
several years, with many young Chinese borrowing money for their purchases.
High levels of corporate and government debt are already longstanding concerns for Beijing. As
household debt climbs, some economists worry the country’s debt burdens overall could become
unmanageable and weigh on China’s growth.
To avoid problems down the road, some economists say, household borrowing will have to slow to
more sustainable levels, adding another headwind to China’s economy. In a worst-case scenario,
they say, the combination of high government, corporate, and consumer debt could exacerbate the
economic slowdown and trigger a broader loss of confidence in China.
Liu Biting, 25 years old, says she spends all of her paychecks each month: 10,000 yuan ($1,400) a
month from her marketing job in Shanghai. About a third goes to rent, and the rest on food, her
sewing hobby, going out music, and other products. So far, she has avoided falling into debt.
Until recently, one of her monthly expenses was a clothing rental subscription that cost $70 a
month. She liked it, she says, because she could “try out a lot of strange clothes.” She discovers
makeup brands on a WeChat account she follows that recommends products, many of them local.
“For my parents’ generation, for them to get a decent job, a stable job, is good enough — and what
they do is they save money, they buy houses and they raise kids,” she says. “We see money as a
thing to be spent.”
Her parents repeatedly ask her how much she has saved in her three years of working. “I say, ‘I’m
sorry, probably nothing.’ All my friends are like this. We have no savings and we don’t really care
Young people have “become the main consumption power” in China, Alibaba chief executive Daniel
Zhang told reporters in November. People born after 1990 made up nearly half the customers during the latest “Singles Day” annual shopping event when Alibaba sold roughly $30.8 billion of
merchandise in 24 hours.
Almost a quarter of car buyers in China are under 30, and that figure is expected to rise to roughly
60% by 2025, says Zhou Ya, head of market research and customer intelligence for Volkswagen
Group China. She says Volkswagen sees Chinese customers under 30 as crucial to its future in the
country. The company is rolling out three entry-level models geared toward young drivers in China’s
less developed cities this quarter.
The spending is also helping power local brands including Heytea, an upscale tea salon, and
Starbucks competitor Luckin Coffee, which raised about $571 million after going public earlier this
Chinese youths are especially more willing to pay for travel. A report last year by Mastercard and
Ctrip.com, China’s biggest online travel website, found that about one-third of China’s outbound
tourists who booked with Ctrip were born after 1990, and they spend more on a single trip than
those born in the 1980s.
Short-term loans from online lenders such as Ant Financial Services Group are helping fuel the
spending. Ant Financial charges rates up to nearly 16% on an annualized basis, depending on the
credit profile of the borrower. A 2018 survey in China by Rong360, a loan recommendation website,
found that around half of respondents who took out consumer loans were born after 1990.
Most had borrowed from multiple lending platforms, the survey found, and nearly a third took out
short-term loans to repay other debts. Nearly half of them had missed payments.
One of the most popular ways to borrow is a Huabei account, a revolving credit line embedded in
China’s Alipay mobile payments network. Huabei has extended loans in excess of 1 trillion yuan, or
more than $140 billion, since its launch in April 2015, a person familiar with the matter said. Ant
Financial, which owns Alipay, declined to disclose any figures related to Huabei.
China’s former central banker Zhou Xiaochuan warned last November that the rise of fintech, while
helping develop the consumer credit market, may “excessively induce” the younger generation to
spend beyond its means.
Yang Huixuan, 22, who graduated from college this year and works in communications for a soccer
club in Nanjing, says she turned to Huabei while in school. She says she often borrowed around $100
a month to pay for meals out, cosmetics, and clothes that she couldn’t cover with the roughly $215
stipend she got every month from her parents. She relied on Huabei’s installment payment function
to afford bigger items like cameras and smartphones.
Huabei is “truly addictive,” says Ms. Yang, “It gives me an illusion that I’m not really spending my
own money.” Ms. Yang says she’s scaling back some now because of higher living costs and because
she’s reluctant to keep turning to her father for money.
An Ant spokesman says Huabei encourages its users to spend responsibly and gives users the option
to set monthly limits to help monitor their own spending.
Easy credit has come from a wave of online micro-lenders and peer-to-peer lenders, which
proliferated several years ago amid loose regulations. Some charged exorbitantly high-interest rates.
Authorities have halted issuing licenses to new online lenders since late 2017 and tightened
oversight to ensure interest rates on some loans are capped at an annual percentage rate of 36%. As
of July, fewer than 800 peer-to-peer lenders remained in operation, from more than 2,600 in early
2016, according to industry website wdzj.com.
The average consumer spending of Chinese credit-card holders between ages 21 and 30 in 2016 was
around $8,820, 39% higher than their average credit line of $6,360, according to data from Oliver
Wyman, a New York-based consulting firm. Consumers can spend more than their credit limits by
taking out additional loans from other channels, such as online lenders, or with subsidies from
Wang Xinyu, 24, says he has about $11,200 in debt spread over six credit cards, much of it accrued
when he was in college and found it easy to swipe cards to pay for everyday expenses.
Mr. Wang, who earns about $600 a month working at a Beijing bookstore, says he now puts his
entire salary toward paying down his debt. He still relies on credit cards to pay for food and rent and
sometimes uses one credit card to pay back another.
Young people in China are being “pushed by the tide of the era” in their reliance on easy credit to
pay for things, he says.
JPMorgan estimates China’s ratio of household debt to the gross domestic product will climb to 61% by
2020. That’s up from 26% in 2010 and higher than current levels in Italy and Greece.
The level in the U.S. is about 76%, after falling from 98% in 2006, according to the International
By another measure — the ratio of household debt to disposable income — China appears to have
already surpassed the U.S. Its ratio reached 117.2% in 2018, up from 42.7% 2008, according to
calculations by Li Ning, a researcher at the Institute for Advanced Research at Shanghai University
of Finance and Economics. The U.S. peaked at 135% in 2007 and dropped to 101% in 2018.
Some economists remain unconcerned by the rise in household debt, noting that default rates with
consumer loans appear relatively low.
One fear, others say, is that China’s slowdown could be exacerbated if young Chinese lose their jobs
or see their wages cut, and have to sharply curtail spending. If they don’t and continue falling into
further debt, they could become even more vulnerable in future years.
As the U.S. saw in the 2008 financial crisis, default rates can shoot up rapidly when growth slows.
This generation “has no idea what a rainy day feels like,” said Dong Tao, an economist at Credit
Suisse in Hong Kong. “Any consumer credit boom will always be tested — no exception,” he says.
He points to mortgage debt as a deepening problem across China’s economy, including for young
people. Mortgage debt outstanding grew from $1.1 trillion in the fourth quarter of 2012 to $3.9
trillion as of June.
Mortgages accounted for about a third of China’s medium- to long-term loans, up from 20% in 2012,
according to the People’s Bank of China.
Parents often help young Chinese to buy a home, which Mr. Tao sees as a danger, with multiple
generations now required to afford a single property. A similar phenomenon occurred in Japan in
the 1980s, he says, sometimes with three generations helping to pay for a mortgage — a sign the
market was overheated. Japan’s economy eventually entered a protracted slowdown as equity and
real-estate asset prices corrected.
China’s slowing job growth adds to the challenge. This year, more than 8.3 million college students
are expected to graduate, compared with around six million a decade ago and only 165,000 in 1978.
Yet some of China’s most desirable employers, like e-commerce company JD.com Inc., have cut jobs
as growth ebbs. Last year, a record 2.9 million individuals took the entrance exam for graduate
Lu Yu, a 26-year-old who works in human resources for the German technology company Robert
Bosch GmbH in Shanghai, says he feels more economic pressure now, including a need to help care
for his parents. He is living with them at home while an apartment he recently bought — with his
parents’ help — is undergoing renovations.
Still, he says he “can’t do mundane jobs that require me to follow the rules” and would like to keep
spending on products “that help improve my living environments, like high-quality towels and
aromatherapy products.” While his parents are reluctant to spend on fine dining and travel, he aims
to travel twice a year, including recent trips to Japan, Cambodia, and Thailand.
“For me, if the money isn’t spent on enriching your spirit and bringing you happiness, then what’s
the point? Are we supposed to live so that we can save money?”
2ND QUESTION: Does this trend appear quite similar to American consumption, or are their
particular differences in your view?
Beijing Sharpens Focus on Domestic Economy — Amid global downturn, frayed ties with U.S., Xi
prioritizes shift away from foreign markets.
For decades, Chinese leaders embraced foreign investment and exports to power China’s economy.
Now, with the world in a recession and U.S.-China tensions deepening, President Xi Jinping is laying
out a major initiative to accelerate China’s shift toward more reliance on its domestic economy.
The new policy is gaining urgency as Chinese companies, including Huawei Technologies Co. and
ByteDance Ltd., face increasing resistance in foreign markets, Chinese officials said.
In speeches to senior government officials since May, Mr. Xi has trotted out the new strategy,
translated as “domestic circulation,” prioritizing domestic consumption, markets and companies as
China’s main growth drivers. Investments and technologies from overseas, though still desirable,
would play more of a supporting role.
The concept remains vague in detail and the notion of empowering Chinese consumers in particular
has been around for some time.
As with many top-level slogans in China, Mr. Xi’s new development model is meant to guide policymakers and local leaders and result in meaningful changes. The goal is to make China far less
dependent on foreign firms, technology, and markets, though doing so won’t be easy, especially
when entrepreneurs are unwilling to expand and households are cutting back on spending.
Detailed policies, Chinese officials said, will be fleshed out in an October meeting of the ruling
Communist Party’s 370 or so top officials when they gather to discuss an economic blueprint for the
five years starting in 2021.
Behind the inward-looking pivot, the officials said, is a realization that fraught relations with much of
the developed world are here to stay. President Trump’s trade war has led China to pour resources
into its own research labs, universities, and companies to try to wean the country off foreign
While the moves have helped China somewhat, they haven’t gone far enough, the officials said. The
the domestic-circulation policy would expand the push, including by encouraging Chinese consumers to
buy more products China currently exports, even though Chinese income levels remain below those
in more-developed countries.
The mission is becoming more important as Chinese companies come under pressure from
Washington and get shut out of foreign markets. The U.S. has threatened bans on ByteDance’s
TikTok app and Tencent Holdings Ltd.’s WeChat. Because of U.S. sanctions, Huawei is running out of
processor chips to make smartphones and will have to suspend production of its own most
advanced chips, the company warned late last week.
The coronavirus pandemic, meanwhile, has caused many countries to rethink their reliance on
Chinese suppliers, causing some manufacturers to consider moving operations elsewhere. A March survey by UBS Group of Japanese, Korean and Taiwanese companies that produce in China and sell
to the rest of the world found 85% had relocated or intended to shift some capacity out of China.
The emphasis on domestic circulation shows “the Chinese government is not optimistic about the
external environment it faces in the medium term,” said Zhang Ming, a senior economist at the
Chinese Academy of Social Sciences, a government think tank.
More inward-turning policies will likely make foreign businesses — already facing restrictions on
market access and pressure to transfer technology in China — feel more unwelcome. But Beijing
figures China’s huge market will remain a draw. According to a new survey by the U.S.-China
Business Council, 83% of more than 100 member companies in the manufacturing, services, energy, and
agricultural sectors count China as either the top or among the top five priorities for their global
The leading development of Mr. Xi’s new model is Vice Premier Liu He, the president’s point man on
economic policies and his chief trade negotiator with Washington, the Chinese officials said. A party
loyalist who has a pro-market reputation among colleagues and Western peers, Mr. Liu had
championed policies that squeezed some private businesses to rein in excess production of steel and
other products. Less-innovative state firms often benefited.
Now, Mr. Liu appears to be trying to use the new development agenda to push through changes he
couldn’t achieve before, the officials said, including some that could make more credit available to
He has instructed China’s securities regulators to speed up plans to make mainland stock markets a
more viable source of funding for Chinese companies, especially those in technology. More public
offerings, such as one by Semiconductor Manufacturing International Corp., are being planned. The
Shanghai-based chipmaker saw its stock surge more than 200% in its debut in July in a new market
known as China’s answer to Nasdaq, called STAR board.
Mr. Liu has also been involved in getting various levels of government to identify companies and
industries at risk of collapse if they are targeted for U.S. sanctions. Those believed to be especially
vulnerable could get more government financing for research and development.
Dan Wang, an analyst at research firm Gavekal Dragonomics, said Chinese firms like SMIC, HiSilicon,
a Huawei subsidiary, and Yangtze Memory Technologies Co., have “made credible gains” in designing
and manufacturing chips over the past year. SMIC, he said, is about five years behind the world’s
most advanced foundry.
On Aug. 4, China’s State Council issued a directive pledging tax cuts and other financial support for
domestic chipmakers and software providers.
China has reduced its dependence on foreign countries in other ways, too. Chinese exports
contributed to 18% of the country’s gross domestic product last year, down from more than a third a
a decade earlier, though that was largely because of rising living standards, which increased domestic
To further stand on its own, economists said, China needs to boost incomes, incentivize private firms
and implement other structural changes. However, efforts to promote the private sector are likely to
run up against Beijing’s goal of expanding the state sector, the foundation of the party’s rule.
“Xi has made it imperative to make the state sector bigger, stronger, and bette
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