(The Vivekananda International Foundation (VIF) organized a Roundtable on “Xi’s 'Dual Circulation' Amid Trump Storm” on 1 May 2025. The panel included Ambassador Ashok Kantha, Manoj Kewalramani, and Santosh Pai. The discussion was also attended by Dr. Arvind Gupta, Director (VIF), Lt. General R. K. Sawhney (Retd.), Prof. Sujit Dutta and other scholars from the VIF. The following is a report by Esha Banerji)

General

The opening remarks drew attention to the long-standing structural imbalances within the Chinese economy. These are more than internal issues - they are global in scope and consequences. From suppressed domestic consumption to overcapacity in key sectors, these distortions influence the stability of global trade. Drawing on Premier Wen Jiabao’s 2007 critique of the Chinese economy as "unstable, unbalanced, uncoordinated, and unsustainable," a lineage of economic policymaking that has struggled to resolve these core challenges was traced. The 2008 global financial crisis, which prompted a massive state-led stimulus in China of 4 Trillion yuan ($586 billion), only amplified pre-existing vulnerabilities, such as excessive debt and declining returns on investment. More worryingly, total factor productivity, a key indicator of long-term economic efficiency, has either stagnated or declined.

In response to the economic headwinds of the 2010s and the external shocks that emerged in the form of U.S. trade tariffs, China formally launched the dual circulation strategy in 2020. This strategy sought to create two synergistic engines of growth: domestic circulation (driven by local demand and innovation) and international circulation (based on continued trade and investment linkages). However, the practical implementation of this strategy has encountered significant obstacles.

Despite policy efforts, domestic consumption remains muted, contributing only 38–40% to GDP which is substantially lower than the 65% typically observed in developed economies. A major contributing factor is the ongoing real estate crisis, which began in 2021 and previously accounted for 25–30% of China’s GDP. Though the government has attempted to reallocate resources towards manufacturing and innovation, these measures have not meaningfully stimulated domestic demand.

Next, China’s external economic model was explored. It was noted that China’s external economic model continues to generate global imbalances. The country recorded a current account surplus of nearly USD 1 trillion last year, driven by persistent excess capacity. This structural surplus is increasingly exporting deflationary pressures and fuelling geopolitical frictions. Recognizing the severity of these imbalances, China’s leadership began placing greater emphasis on the issue during the Central Committee meeting in September 2023, the Economic Work Conference in December, and the Two Sessions in March 2024. It was suggested that the urgency has escalated due to a range of developments, including a sharp decline in China's trade surplus with the United States, formerly pegged at USD 360 billion.

There is now significant pressure on the Chinese government to implement a more substantial stimulus package and devise targeted incentives to boost domestic demand. There are doubts on whether China can successfully navigate this structural transformation. Without a strategic overhaul of its economic architecture, China is likely to remain heavily reliant on exports. This scenario would perpetuate existing vulnerabilities and ensure that the U.S.-China trade conflict continues as a long-term feature of the global economic landscape.

Macroeconomic Analysis

During the discussion, the dual circulation policy’s political and strategic rationale was underscored. The former emphasizes access to international markets, technology, capital, and talent, with the aim of enhancing China's developmental resilience and reducing strategic dependencies, particularly on the United States. An example was given of China's efforts to diversify agricultural imports post-Trump-era tariffs to reflect this strategic orientation. The second dimension, which is domestic circulation, focuses on invigorating local demand and dismantling internal barriers to consumption. These include bureaucratic and regulatory impediments that fragment the domestic market. The objective is to create a more integrated and efficient internal economy that can act as a buffer against external shocks.

The remarks also centred on recent trade frictions and China's strategic responses. The evolution of Beijing’s narrative since the onset of the U.S.-China trade conflict was traced, noting that China has re-framed the dispute as a long-term “struggle.” This narrative shift is not merely rhetorical; but serves to prepare domestic stakeholders like the consumers, firms, and local governments, for sustained economic hardship and reduced reliance on external systems. This has also dovetailed with a state-sponsored push for local brand loyalty, akin to India’s Swadeshi movement.

Empirically, it was noted, the share of China’s exports to the U.S. has declined from 19% to 15% since the onset of tariffs. This indicates a macroeconomic recalibration, albeit an incomplete one. In terms of policy, recent Politburo meetings signalled a nuanced approach: no large-scale stimulus package has been unveiled, but planned spending has increased through front-loaded issuance of special and ultra-long-term government bonds. Approximately RMB 1.2 trillion in local government bonds and RMB 500 billion in ultra-long-term bonds have already been issued in Q1.

China’s central authorities are directing these funds to maintain employment and initiate infrastructure projects, even if some of them may be fiscally inefficient. This is essential for maintaining economic and social stability, as around 150 million Chinese workers (nearly 20% of the workforce) are tied to export-oriented sectors. It was further explained that while measures such as potential reserve requirement cuts and targeted support for sectors like auto sales, elderly care, and vocational retraining are in motion, their implementation will take time. Importantly, it was stressed that any effective domestic rebalancing would necessitate the stabilization of the real estate sector, which remains central to household wealth and local government revenues. Without a policy shift in this domain, consumer confidence and public spending capacity will remain constrained.

From a macro-fiscal perspective, a structural dilemma was highlighted. While Beijing has committed to increased expenditure, it is concurrently witnessing a decline in tax revenues, leading to a significant budgetary shortfall. The fiscal deficit is expected to exceed the previously announced 4% of GDP target. This growing gap puts Beijing in a policy bind: boosting revenues through fees and land sales risks undermining private sector confidence, while unchecked borrowing threatens macroeconomic stability.

It was concluded that although China can likely absorb the current pressures in the short term, doing so imposes a growing burden on state resources. Interestingly, it was posited that rather than weakening central authority, the external pressure may strengthen Beijing’s hand in breaking down local protectionism. The dual circulation model thus serves not only as a defensive economic doctrine but also as a tool of domestic administrative consolidation. It was cautioned that while China is attempting to diversify its global trade partners, global demand constraints will limit the extent to which it can offset losses in the U.S. market. A full displacement of U.S. exports is unlikely, but even a 50% reduction would be painful, albeit manageable. The long-term efficacy of the dual circulation model will thus depend on China’s ability to balance ideological commitments with economic pragmatism.

Micro-Level Policy Experimentation

While broader structural reforms aim to stimulate domestic demand, various sector-specific initiatives implemented over the past two to three years were grouped to highlight their uneven performance across regions.

The analysis began by underscoring efforts related to wage growth and property reform. Income enhancement among farmers has become a policy priority, especially as the traditional mechanism of rural land sales by local governments is being reassessed. Additionally, domestic tourism has rebounded to near pre-pandemic levels, and further momentum is expected during national holidays such as Labour Day. The service sector, particularly childcare, elderly care, pension systems, and medical insurance, has been another focal point for demand stimulation.

The expansion of personal consumption loans, previously limited to high-net-worth individuals or credit card users, is now being extended more broadly, although their long-term viability remains uncertain. This is of particular interest as it represents a significant shift in Chinese consumer finance policy and indicates a willingness to experiment with credit-based consumption.

Urbanization also emerged as a key policy frontier. Although there is no grand national blueprint, numerous localized initiatives have collectively advanced the agenda of "new urbanization." Companies are encouraging employees to relocate to smaller cities, often with their families, in exchange for reduced salaries—helping firms avoid mass layoffs.

The relaxation of the hukou system ^[1], while informal, is making it easier for citizens to access education and other services across provinces. This transition is also supported by hybrid work arrangements, such as the "3+2" model, which reduces reliance on the previously dominant "9-9-6" schedule (9 a.m. to 9 p.m., six days a week). In this context, these localized shifts are enabling provincial-level decentralization of economic activity. An example of several large state-owned enterprises (SOEs) and private firms which have relocated major operational teams to tier-2 and tier-3 cities, making what initially seemed like a temporary COVID-induced adjustment a more permanent structural shift was given.

An innovative example of micro-level experimentation is the "onsite unboxing" scheme. Under this initiative, consumers receive a 15% discount on electronics if they open and activate the product in-store, thus discouraging bulk purchases by resellers and encouraging genuine end-user consumption. This policy has been rolled out in provinces such as Shanghai, Fujian, Hunan, Heilongjiang, Zhejiang, and Shenyang.

There are also continuing corporate support schemes. Beyond government employee salary hikes, private firms have benefited from subsidies for worker training, transport assistance, and insurance rebates, all designed to reduce unemployment and bolster consumption capacity.

Transitioning to India-China economic relations, the persistent bilateral trade imbalance was examined, which historically has responded only to large exogenous shocks such as the Global Financial Crisis, the first round of U.S.-China tariffs, and COVID-19. The current trade war may result in a similarly significant realignment of trade patterns. The 2018 tariff round led to a sharp drop in India’s trade deficit with China, but this was offset by a corresponding surge in deficits with transshipment hubs like Hong Kong and Vietnam, where imports were rerouted. A comparable trend is likely to emerge in the current scenario.

A critical assessment was made of the post-Galwan public procurement measures enacted by India to limit Chinese participation in government contracts. Despite these policies, Chinese goods continue to enter the Indian market indirectly. Using the Indian Railways as a case study, it was observed that despite formal disqualification of Chinese firms, Indian contractors often procure Chinese components, thereby undermining the intent of the restrictions.

The Engineering, Procurement, and Construction (EPC) sector has demonstrated similar trends. While new contracts with Chinese firms have declined, their annual revenue from Indian projects has remained stable, as Indian firms continue to source equipment and expertise from Chinese suppliers. This undermines India’s broader strategic goal of reducing dependence on Chinese industrial overcapacity.

Further the weaponization of trade tools by China has been duly noted, particularly its export control regime. The April 2024 export restrictions on six rare earth minerals are part of a broader trend where Beijing exercises regulatory control to create global bottlenecks. Although ostensibly aimed at the United States, these measures have had collateral impacts on Indian industries, particularly electric vehicle manufacturers, who are now required to comply with burdensome end-user verification and licensing protocols administered by China’s Ministry of Commerce.

This regulatory architecture, featuring tiered licensing categories, is now well-established and signals a sustained shift in Chinese trade policy. The Chinese definition of "critical" is expanding beyond rare earths to any sector where China has substantial control over global supply chains. This presents long-term risks not only for strategic sectors but also for consumer-facing industries in countries like India.

In light of these developments, the urgency for Indian firms to audit their supply chain vulnerabilities was emphasized. The recent licensing crisis has moved this issue from theoretical concern to immediate policy challenge. Several Indian firms have already flagged serious operational disruptions due to the latest restrictions.

Emerging trends in Chinese soft power engagement with India were also noted. As Hollywood content faces increased restrictions in China due to geopolitical tensions with the U.S., Indian films are being welcomed as a cultural alternative. This policy also aims to stimulate domestic consumption and tourism, with increased visa issuances being one manifestation. These symbolic gestures, while minor in economic terms, underscore China’s evolving approach to mitigating the effects of its external tensions.

A re-evaluation of India’s post-Galwan measures was argued for. While initially effective as a political signal, these policies may now require recalibration to address evolving trade realities and to ensure that they serve long-term strategic interests.

The discussion focussed on China's internal economic challenges and their implications for India. Participants noted China's structural economic weaknesses, including persistent deflation, weak domestic consumption, and an increased reliance on industrial policy. Questions were raised about China’s fiscal space to support both industrial expansion and domestic stimulus, given its reluctance toward welfare-style policies like direct cash transfers. Concerns were also expressed about potential geopolitical repercussions if China is unable to address these issues effectively.
China's geopolitical signalling was described as generally conciliatory, despite sporadic assertive rhetoric. This is interpreted as reflecting anxiety about the relocation of its industrial base to competitors, including India. In the short term, China has fiscal flexibility, but prolonged trade tensions could constrain its budget, particularly with declining revenue. Unemployment in export-driven regions remains a political risk. While not threatening regime stability, it could lead to local unrest, similar to the anti-zero-COVID protests.

China’s rare earth export controls were discussed as part of a larger strategy of weaponizing trade. Though formally targeting the U.S., these restrictions affect India by requiring extensive certification, slowing business operations. This system allows China to map global end-users, creating control points in supply chains for potential future leverage. India, while not the immediate target, is experiencing operational disruptions.

Despite India’s post-Galwan procurement restrictions on Chinese firms, Chinese components continue to enter the market indirectly via Indian contractors. Participants suggested re-evaluating these restrictions, focusing on improved enforcement and greater strategic coherence. They warned that China’s ability to inflict economic pain may be growing, even as India attempts to reduce exposure.

China’s broader retaliatory toolkit mirrors U.S. non-tariff strategies. Measures applied to India have not effectively reduced dependency due to transshipments through intermediaries like Hong Kong and Vietnam. The regulatory architecture imposed by China on rare earth exports—involving certifications from Indian and Chinese authorities—is seen as part of a larger trend of selective trade weaponization.

The discussion highlighted that China's policy tools are not necessarily new but are being implemented with greater scale and technological sophistication. While policy goals like domestic consumption, childcare subsidies, and elderly care have existed for decades, they are now being executed with refined mechanisms, such as targeting connected, energy-efficient appliances. This reflects deeper sectoral policy maturity.

The need for India to audit supply chain vulnerabilities was emphasized. Rare earth restrictions have moved from theoretical risk to practical disruption. Participants called for recalibrated strategies that balance restriction, engagement, and local capacity-building.

Soft power opportunities, such as the popularity of Indian films in China, were also discussed. This could be a platform for cultural and economic engagement. The role of China’s middle class was debated, with some participants arguing it lacks the economic capacity to challenge the Communist Party due to high debt and stagnant wages. Historically, unrest has emerged more from rural populations.

In addressing global realignments, India was advised to avoid reactionary disengagement. Selective openness in sectors that boost productivity, combined with regulatory monitoring, was suggested. Participants stressed the importance of distinguishing between "good" and "bad" dependencies. Full decoupling from China is impractical; instead, India should leverage its large procurement market while protecting strategic interests.

India's dependency on Chinese goods in key sectors like railways and startups was acknowledged, with calls for stricter oversight and risk assessments. While Chinese investment can support innovation, especially in non-strategic sectors, it must be closely regulated in sensitive areas.

India was urged to move beyond symbolic restrictions on low-value imports and focus on higher-stakes sectors. Concerns were raised about Chinese firms' low local value addition and their reluctance to manufacture or transfer technology to India, even when permitted to invest.

Participants advocated for differentiated approaches by sector based on strategic relevance. Blanket bans on all Chinese firms, especially those providing high-capital equipment, could backfire.

The discussion concluded with a strategic overview of India’s evolving posture. Emotional responses to geopolitical tensions, such as complete economic disengagement from China, were deemed inefficient. Instead, a layered strategy was proposed: defend militarily, build economic competitiveness through selective engagement, and recognize that proximity to China offers both risks and opportunities. India must define what economic and political costs it is willing to bear in aligning with either the U.S. or China in specific sectors.

A mature, integrated national strategy involving defense, trade, technology, and industrial actors is required. The goal should not be rigid decoupling but a calibrated, sector-specific approach rooted in long-term national interest.

Concluding Observations

The absence of any meaningful bilateral strategic dialogue was underscored, with past initiatives, including the Strategic Economic Dialogue, yielding limited outcomes and lacking strategic depth. India’s reactive rather than calibrated domestic approach toward China was noted, with a call for a more deliberate and analytical policy toolkit.

While recognizing the adversarial nature of the India-China relationship, there was also an emphasis on pursuing pragmatic engagement. The complexity of the global order and the inevitability of navigating overlapping strategic interests were highlighted. Reopening structured economic dialogues, including trade discussions, was advocated to articulate India’s concerns and explore areas of mutual benefit—while drawing clear red lines. Domestically, a coherent industrial strategy, particularly in manufacturing, was recommended to address structural weaknesses and reduce economic asymmetries with China. A balanced, calibrated, and multi-vector engagement strategy, rooted in national capabilities, was deemed imperative for India’s long-term strategic autonomy.

Refernces

^[1] The Hukou system, or household registration system, in China categorizes residents as either urban or rural, impacting their access to social services and opportunities.

(The paper is the author’s individual scholastic articulation. The author certifies that the article/paper is original in content, unpublished and it has not been submitted for publication/web upload elsewhere, and that the facts and figures quoted are duly referenced, as needed, and are believed to be correct). (The paper does not necessarily represent the organisational stance... More >>