Circling around China’s Dual Circulation Policy, part III-Implications for China’s Outward FDI

This piece complements two earlier pieces that, respectively, overviewed China’s Dual Circulation System (DSC) and pondered its implications for inward foreign direct investment (FDI) into China. It specifically focuses on the potential ramifications of the DCS for Chinese outward FDI (OFDI). Prima facie one logically might expect the DCS to moderate Chinese OFDI since its goals include inter alia enhancing China’s indigenous capabilities, insulating China from an occasionally hostile external environment, and increasing domestic consumption and production. In actuality, though, these and other DCS aims do not support the premise the DCS will result in Chinese money shunning the outside world. First, China will require, for the foreseeable future, foreign intellectual property and advanced technological equipment to move up the value chain and build up its own indigenous technology. This will foster investments abroad. Second, China will continue to thirst for energy, minerals, and foodstuffs to support domestic production and consumption and OFDI will be one of logical pathways for it to obtain natural resources. Third, Chinese OFDI provides an important channel for Chinese firms to access new markets for their goods and services, diversify their supply chains and political partners, and reduce production costs. Fourth, China still has a lot of capital that requires higher yielding outlets. Fifth, while stunted of late due to Covid-19 as well as diverse political challenges and economic constraints inside and outside China, China’s Belt and Road Initiative (BRI) continues motoring along multiple tracks. The BRI has and will continue to foster greater Chinese OFDI in infrastructure, manufacturing in special economic zones in places such as Egypt and Ethiopia, and ventures like the Digital Silk Road. All-in-all, as in the case of IFDI, the DCS means much will remain the same. Even so, Chinese OFDI may assume a more security oriented and nationalistic tint.