6 ways Chinese policy-making has prepared for trade disruption and geopolitical shocks

For decades, China’s development strategy was to be the “world’s factory,” assembling goods and exporting them to the rest of the globe. But in recent years, the country has undertaken a strategic shift in its development strategy to focus on resilience amid geopolitical instability.

That is according to Markus Herrmann Chen, Founder and Managing Director of China Macro Group (CMG), a specialized European management consulting and research firm, who noted that this shift was the product of a more complex external environment, Chinese domestic economic and political factors, and the COVID-19 pandemic as its final trigger.

Speaking at the World Economic Forum’s Annual Meeting of the New Champions in Tianjin, China, Herrmann outlined the key pillars of this development strategy, which Chinese policy-makers call “Dual Circulation.” He also described how the Forum’s recently launched Industry Intelligence data can help map out the complex interactions among global industries, trade policies, geopolitics and more.

As shown by Industry Intelligence, global investment is in flux across dozens of fields, from advanced manufacturing to education or communications. Policy-makers around the world are developing strategic frameworks to ensure that domestic industries are better insulated from global trade shocks while still reaping the benefits of global commerce.

Chinese leaders frequently refer to “changes unseen in a century,” a term coined in 2017 by the Chinese Communist Party after witnessing Brexit and Donald Trump’s first election, and since then systematically used to frame strategic rationales of policy actions. Major decisions at the Party’s “Third Plenum” in July 2024 were part of China’s year-long preparations for Donald Trump’s reelection and subsequent trade shocks — and have set a framework for how the country can navigate the years to come.

In the Chinese context, Herrmann broke the “Dual Circulation” strategy down into six key pillars:

1. Industrial upgrading

Industries throughout China are working to upgrade their capacity and efficiency. Leaders are placing a strong emphasis on the role of state-owned enterprises in times of uncertainty and as key actors in achieving strategic national goals. The government is also making use of industrial guidance funds, an industrial policy instrument that channels investments into private companies to support the development of sectors and capabilities seen as critical and strategic.

2. Market governance

As China’s economy continues the market-oriented reforms that have been gradually ongoing since the 1980s, leaders are also placing a new emphasis on market governance. This governance, sometimes called the “visible hand,” has included broad market regulations and standardizations across key aspects of China’s economy, for example concerning intellectual property, monopolization and the social credit system.

3. Opening-up

China has accelerated its opening-up to the world, both inbound and outbound. For example, authorities have unilaterally removed tariffs for goods from African countries, dropped all foreign direct investment restrictions in the manufacturing sector and introduced visa-free pilot schemes. Moreover, China has set out to actively align with high-level international economic standards, as seen by a recently issued central government policy to conduct a compliance review of its domestic regulations’ compliance with WTO rules.

4. Social rebalancing

“Dual Circulation” places a top-level policy focus on China’s social equity and labour protection issues, with the goal of better balancing development regionally across the country and across societal strata, especially through redistribution. Herrmann said that he believed, when looking back on President Xi Jinping’s governance period in 30 years, “a key legacy will be that he elevated social policy to the same level as economic policy.”

5. Domestic demand

Making domestic demand the core of China’s economic growth is a new top-level policy priority, with the aim of insulating the country’s economy from external geopolitical or trade shocks and reducing dependence on fixed asset investments or net exports as GDP drivers. Levers to increase household consumption may include frequently discussed reforms such as liberalizing residency laws and expanding social security coverage, or emerging ideas like elevating personal income tax thresholds or increasing the basic pension for rural residents.

6. “De-risking”

Under the “Dual Circulation” model, Chinese policy-makers for the first time instituted a principle that explicitly allows for a balance between China’s development and security interests, accepting the trade-offs that each entail. This broader and more abstract equivalent to the EU’s concept of “de-risking” has seen China push for more technological self-reliance, including onshoring of critical inputs and securing access to key external supplies to cater to its needs such as technological, economic, food or energy security.

The intersections of global trade, politics, social development and technology — as mapped out in the World Economic Forum’s Strategic Intelligence platform — are only going to become more varied and complex.

These six policy pillars collectively represent China’s attempts to deepen both its own resilience as well as its connectivity within the global economy to ensure it can continue to develop especially amid this uncertain external environment.