In 2020 over 22,000 new semiconductor companies were registered in China. A new gold rush had started as entrepreneurs and businesses – from the private and state sectors alike – charged in to make money and reduce China's dependence on imported semiconductors. “Here's a new way to tell whether a Chinese company is a major player: ask the CEO if the firm is designing its own microchips,” wrote Zeyi Yang, a journalist for Protocol. The money poured in – from both state and private capital. For some, such as home appliance companies Gree, Midea, TCL and Haier, chips played an important role in product manufacturing. Huawei had made an early start. In 2004 it had established a separate company, HiSilicon, to focus on chip-making. For others, there was no clear link. They lacked the business need and had little experience but were committed to “making it big” and keen to access government or private funding on offer. And, alongside the 20,000 new companies, stood SMIC, Semiconductor Manufacturing International Corporation. Founded in 2000 as a wholly foreign-owned company, by 2020 SMIC's main shareholders were state-owned yet it was also publicly listed. SMIC had not lived up to hopes that it would challenge Taiwan's TSMC (Taiwan Semiconductor Manufacturing Company) as a global semiconductor leader. Would this mix of state and private capital, policy priority, entrepreneurialism and intense competition lead to success this time?

Semiconductors are but one sector of the Chinese economy, albeit one at the centre of China's ambitions and the push and pull of US– China relations. Away from the abstractions of economic theory, the realities of China's economic growth recipe are messy and seemingly contradictory, yet historically effective in aggregate: state ownership and private; giant corporations and small businesses; competition, coordination and coercion.

It was ever thus. In 2007 the then premier, Wen Jiabao, described China's economy as unstable, unbalanced, uncoordinated and unsustainable. His concerns were overinvestment, reckless lending, excessive liquidity, unbalanced foreign trade, inequality between cities and the countryside, inefficient energy use, wasteful allocation of resources and environmental ruin.

Two years after the spread of the Covid-19 pandemic, President Xi Jinping started 2022 in expansive mood, speaking at the Davos World Economic Forum by video link from Beijing:

Xi's vaulting ambition shone through. His choice of words was considered and deliberate. Many listeners would not though have grasped their full meaning. This would have required a grounding in the phraseology used by the Communist Party of China (CPC). And, as always, reality has a way of bringing aspirations down to earth.

Despite Xi's appeal to remove barriers, Covid-19 had indeed brought barriers and walls. As he spoke, international travel in and out of China remained at minimal levels and subject to lengthy quarantine, even as travel was recovering quickly in the rest of the world. And, only three months after Xi's Davos speech, he was to order walls and barriers to be built within China too, as stringent lockdowns took effect in Shanghai and other cities in attempts to stave off the omicron variant. Since the arrival of Covid-19, China and the West had been separated, moving to different rhythms dictated by the spread of the virus. Physical separation fuelled increasingly separate information streams, perceptions and attitudes.

Although Xi spoke of opening up and integration, his true ambition was more nuanced – contradictory, even. Xi seeks a China separate from the world and yet connected with it. His Davos speech mentioned the integration. It did not mention the separation. China seeks self-reliance, so that it does not depend on others, while also gaining the benefits of links to the world and, ideally, having others become dependent on China.

On 14 May 2020, following a meeting of the Politburo Standing Committee of the Communist Party of China (CPC), Dual Circulation was announced to the world as a “new development programme of mutual benefit through domestic– international dual circulation”. In other words, it highlighted the delineation between the domestic and the international economy. A month earlier, at a meeting of the Central Financial and Economic Affairs Commission, Xi had spoken in private of a “new development dynamic that focuses on domestic economic flow and features positive interplay between domestic flow and inter-national engagement”.

In October 2020 Han Wenxiu, assistant head of the CPC Central Financial and Economic Affairs Commission office, said that “the proposal for a new development programme that takes the domestic market as the mainstay while letting internal and external markets boost each other is the CPC's practical application of the objective laws of economic development. This is a proactive step, not a passive response; a long-term strategy, not an interim measure.”

Ask different analysts – both in China and overseas – what Dual Circulation Strategy really “is” or really “means”, and there will come a range of answers. It marks a closing of China to the world, as China seeks to decouple. Or it is really nothing new. It articulates a new form of globalization. Or it is a passing slogan of no import. Some may also observe that mentions of Dual Circulation in policy speeches peaked in 2020 and 2021, and argue that Party rhetoric has moved on to other phrases, such as Common Prosperity and High-Quality Development. Yet the key priorities of Dual Circulation remained clear in Xi's work report to the 20th Party Congress in October 2022. There is indeed much ambiguity about Dual Circulation – not just about the specifics, but also about the nature of the term. Is it best seen as a slogan (perhaps already past its sell-by date), a set of guiding principles or a series of policies and plans? “Dual Circulation” is by no means the only ambiguous phrase in the China policy lexicon. Such ambiguity is almost a defining feature of Chinese policy terms. It runs through discussions on Common Prosperity and the Belt and Road Initiative (BRI) too.

At the opening of the 13th National People's Congress in Beijing, the then premier, Li Keqiang, presented the 2022 Government Work Report, which laid out policy priorities for the coming year. China analysts scurried away to count mentions of “Dual Circulation” and of “Common Prosperity”, a term that had achieved even greater prominence in 2021. Those looking came back almost empty-handed. Instead, Xinhua described the term “High-Quality Development” as “grabbing the spotlight as one of the catchphrases”. At times in China, policy pronouncements seem no more than an alphabet soup of disconnected phrases, falling in and out of fashion. It can be hard to understand which represent lasting priorities and which are simply slogans of the day.

“Dual Circulation” is but one term among many mentioned in policy speeches. How do these different terms fit together? What is the mix between slogan and substance? The consistent element is the central – or, in the phrasing of CPC discourse, “core” – role of Xi Jinping. Rather than an alphabet soup of terms, think of them as pieces of a jigsaw puzzle of Chinese economic policy that together make up Xiconomics. In addition to Dual Circulation, six more jigsaw pieces help make sense of the context, objectives and overall policy agenda of Xi Jinping and the CPC. Fitted together, they highlight the differences between China's domestic environment and the rest of the world. These very differences demonstrate the distinction between the internal and the external. For foreign businesses, they provide substance to the cliché that “China is different” that goes beyond differences in consumer preferences and competitive environment. They reinforce the importance of Dual Circulation as a framework with which to assess the economic and business landscape.

THE CHINA POLICY PUZZLE

This chapter describes these six additional pieces and attempts to fit them together. The first is a simple fact: the CPC rules China and Xi Jinping rules the CPC. Although no individual's hold on power is guaranteed, Xi is widely acknowledged as the most powerful Chinese leader since Mao Zedong. Second is a phrase, the “Great Rejuvenation of the Chinese people”. Xi uses this expression to place his CPC agenda for China in the broad sweep of history. The third piece is the new definition of success for China's development. In the language of Party ideology, Xi Jinping has changed the “principal contradiction” that all policy must address.

On 23 July 2021 China's State Council issued new rules banning for-profit companies from tutoring in core curriculum subjects and banned foreign investment in the sector. No new licences were to be issued and all existing operators were instructed to register as non-profits. Overnight the share prices of US-listed Chinese commercial education providers fell 60 per cent. Stocks such as New Oriental Education and TAL Education traded more than 90 per cent below their record highs of March 2021. Bloomberg reported that investment analysts were scurrying to read the collected writings of Xi Jinping,1 the three volumes of his book The Governance of China. After all, in 2018 Xi had already written: “The conscientious [education] industry cannot turn into a profit-seeking industry. The off-campus training institutions must be regulated by the law so that they can return to the normal track of educating people.” China's regulatory environment was perhaps not so opaque and uncertain after all.

Were all the clues hiding in plain sight? Could the crackdown in the educational sector have been foreseen? In part, yes – although the world is not that simple. Official speeches, books and other writings, many delivered by Xi Jinping or bearing his name, provide a wealth of information on both the rationale and specifics of Chinese policy direction. These materials are frequently designed expressly to provide guidance to Party officials at all levels across China about the priorities and principles that should guide actions and implementation at the local level. In a sense, The Governance of China provides the foundation for the governance of business in China, for the role that business is expected to play and the way that it is expected to operate.

Party publications are important too. One particularly significant journal is Qiushi (求是: Seeking Truth), the CPC's principal official journal. Qiushi states that it “serves as an important ideological and theoretical medium for guiding the work of the entire Party and the country as a whole”.2 Many foreign business leaders and analysts underestimate the seriousness and intent behind such statements. Indeed, the often dry, even turgid, style can be off-putting.

In October 1978, at the very start of China's reform and opening up, Deng Xiaoping visited Japan. Among those he met was Konosuke Matsushita, founder of Matsushita Electric (later renamed Panasonic). Although he continued to talk of China's self-reliance, Deng asked Matsushita to help with foreign technology and investment: “China will embark on a modernization drive. While mainly relying on ourselves, China is considering drawing on foreign technology and investment. Can you give a little help to our modernization efforts?” Matsushita replied, “I will do everything to help”. In the early 1980s Matsushita exported manufacturing equipment to China and transferred technology in over 150 projects, including televisions, refrigerators, washing machines, air conditioners, compressors and motors. Forty years later, to the month, Tesla came to a transformed China to buy a plot of land in Shanghai for US$140 million and build a factory to serve China's booming EV market.

HOW MULTINATIONAL BUSINESS DEVELOPED IN CHINA

From 1979 onwards China offered multinationals the promise of a new low-cost manufacturing location. Special economic zones such as Shenzhen, Zhuhai and Xiamen were established in the southern and eastern provinces of Guangdong and Fujian. These led the way in offering favourable regulations, tax incentives and other policies to attract foreign investment. Depending on the region and the industry sector, foreign-invested enterprises enjoyed preferential treatment over Chinese companies. The benefits included tax reductions, reduced customs duties, simplified procedures for enterprise registrations and visa provisions and streamlined entry and exit provisions. In the automotive sector, Volkswagen (VW) was among the first foreign multinationals to emphasize China. Volkswagen first entered China in 1978, and in 1984 it signed a joint venture agreement to manufacture engines and Santana cars. Although the planned engine production was mostly for export, the cars were to be sold to government buyers and for use as taxis. But in 1984 Volkswagen saw only limited local market potential. Asked about the prospects for China as a major automotive market, the VW chairman stated, “We’re convinced this will not happen in the next twenty-four years.” Twenty-four years later China was the world's second largest market in terms of units, and in 2009 it overtook the United States to become the world's largest market in volume terms.

“True ambidexterity is about having the people within the organization who have the mindset, skills and maturity to respond positively to different circumstances,” argues Michael Fraccaro, formerly an organizational development leader in HSBC Asia-Pacific. The essence of ambidexterity is about embracing opposites. It is about transcending an either/or view and remaining flexible enough to view challenges from different perspectives.

The year 1865 was a formative one for HSBC, the Hongkong & Shanghai Banking Corporation Limited. In March it opened for business in Hong Kong, helping to finance trade between Europe and Asia. In April it opened in Shanghai, and in July it was London's turn. The company was born from one simple idea: a local bank serving international needs. Ambidexterity was built in from the start. HSBC has always been committed to developing global managers, flexible enough to adapt to any culture of its 60 plus subsidiaries. Since 1865 HSBC has had a continuous presence in mainland China, albeit sharply curtailed under Japanese rule and the Mao years of the People's Republic. In 1984, as China reopened, HSBC became the first foreign bank to receive a banking licence since 1949.

Now, after decades of growth in China and globally, some are questioning again where the limits of HSBC's ambidexterity lie. In the United Kingdom, it was widely criticized for its public support of the Hong Kong National Security Law in 2020. In 2022 HSBC's largest shareholder, China's Ping An Insurance, made the case for splitting HSBC in two – separating the East from the West. Ping An argued that a split would create shareholder value through better focus on distinct markets and reduced capital requirements. It would also allow individual investors in Hong Kong to receive their valued dividends, without the risk of Bank of England intervention, as had happened during Covid-19. Some commentators saw a political agenda too: a Hong-Kong-listed HSBC Asia might be more amenable to influence from Beijing and the CPC. HSBC managers rejected the case for a split. They argued that HSBC's global connectivity brought greater value. Does HSBC need to choose between China and the West, or is much of its inherent business value based on the ambidextrous linking of the two?

“If Dual Circulation can be pictured as a number eight, then the Hainan Free Trade Port (FTP) is the intersection of the two circles (of internal and external circulation),” declared regional Party secretary Shen Xiaoming in December 2020. As so often in China, an intangible concept (the linkages between the external and the internal) is made tangible in a physical location. Hainan's development as a free trade port is touted as the physical embodiment of how China would like to structure these links. Operational since June 2020, Hainan FTP is the most open region in China for foreign investment. Customs procedures are split into two stages: the requirements on imports from the rest of the world (“first-line procedures”), which will be increasingly relaxed by 2025; and a second line of checks, on exports from the zone to the rest of China. The declared main aim of the Hainan FTP is to use external circulation to serve internal circulation. Offshore duty-free shops allow Chinese consumers the benefits of duty-free shopping while the revenues are still earned in China. A further ambition is to attract foreign education and health providers and so remove the need for Chinese to travel overseas in order to gain access. Beyond this, there is a plan to attract high-technology companies, for example in the seeds, deep-sea and aerospace sectors, in order to accelerate capability-building in Chinese companies. Most foreign investment interest has come from large multinationals such as Tesla, GE and Itochu. Foreign companies are once again gaining access to China's market while building capabilities in China that, directly or indirectly, benefit Chinese companies too.

China's plan is that internal and external circulation will “mutually reinforce one another”, according to Han Wenxiu, deputy director of the Office of the Central Economic and Financial Affairs Commission. The imagery is of virtuous cycles of mutual benefit. Yet, after decades of increasing connectivity between China and the rest of the world, the Covid-19 pandemic cut links. It brought into sharp relief divergent approaches between China and most Western economies. Stark separation between the internal and external suddenly seemed a better description of the world.

Beijing 2015: Li Xiaolin, chair of the Chinese People's Association for Friendship with Foreign Countries, declares that Andorra is a particularly valued partner of China. Andorra La Vella 2017: Andorra Telecom announces that it will work exclusively with Huawei to upgrade its high-speed internet access and to provide public Wi-Fi access across Andorra's capital. In 2019 China and Andorra celebrate 25 years of bilateral relations. Li's mention of Andorra, with a population of 77,000, was to make a point. China takes an interest and sees opportunity in every corner of the world. In 2017 Xi Jinping announced to the 19th Party Congress that China was ready to enter the centre stage of global affairs.

In the economic sphere, China is now the leading trading partner of 120 countries – more than any other country. China led the world as a source of outbound foreign direct investment in 2020, even excluding FDI flows out of Hong Kong. Although China's recent arrival to the world of outbound investment means that its total stock of overseas investments lags behind the United States, it already ranks at the level of Japan, Germany and the United Kingdom.

Over the past 20 years multinationals have seen China's economic presence in the rest of the world grow rapidly. First, imports from China offered competition in markets around the world as well as providing new sourcing opportunities for foreign companies themselves. Then, at the exhortation of Zhu Rongji in the 1990s, Chinese companies started to “go out” themselves, to establish operations overseas, invest and make acquisitions. From 2005 to 2017 acquisition activity intensified as Chinese companies bought foreign companies, so as to secure access to resources and advanced technologies or simply to capitalize on business opportunities. From 2013 onwards China's Belt and Road Initiative heralded a drive to increase infrastructure links and trade, supported by extensive lending from Chinese state-owned banks.

Just as many Western companies have struggled to succeed in China, however, so Chinese companies have often struggled in foreign markets. In 2020 Zhou Lihong, chairwoman of the China Chamber of Commerce to the European Union, said that the Chinese business community would like to see less “red tape” and fewer regulatory barriers in doing business in the European Union.

Doing business in and with China – never easy – has become much more complicated, volatile and controversial. In 2017 Xi Jinping declared that China had entered a “new era”, in which “Xi Jinping Thought on Socialist Economy with Chinese Characteristics” would be the sole guiding principle for financial and economic decision-making. “Xiconomics”, for short. In 2020 Xi Jinping announced Dual Circulation Strategy as China's new development pattern, with the priority on China's domestic economy. Business too had entered a new era.

Until recently multinational companies had enjoyed rapid growth and profits in many sectors of the Chinese economy. They did this by adapting to the local context, providing products that Chinese consumers value and demonstrating to the government how their operations supported China's development. This was all part of China's increasing integration in the world economy. What mattered much less was the ideology of the Communist Party of China (CPC), questions of national security and, indeed, in which country a multinational was headquartered. To the extent that shareholders and governments back at home had a view, they supported expansion in China.

Much has now changed in this world. The China context too has transformed. China remains the world's largest market in sector after sector and is the world leader in renewables, electric vehicles and digitization. But the business environment is more uncertain – and, especially for those who have faced Covid-19 travel bans – more opaque. Business leaders now need to know how Party ideology and national security fit into China's economic ambitions. Xi Jinping's leadership pervades all questions of policy and business climate. Geopolitical tensions increase the complexity. Governments, investors, customers and employees outside China no longer automatically support investment in China. Doing more business in China can cause problems back at home, but many multinationals earn sizeable revenues and profit in China. They see further growth potential, while developing alternatives to China takes time and effort even where it is an option.

Uncertainties abound. At the time of writing it is hard to disentangle the economic impact of Covid-19 lockdowns from more deep-seated problems in the real estate sector and elsewhere. At the 20th Party Congress, held in October 2022, Xi Jinping was officially confirmed in his third term as leader.

For Mao Zedong, in his 1937 essay On Contradiction, contradiction played a central role in all matters of ideology, politics and policy. Mao argued that contradiction was the source of all movement and life in universe and society. This is not contradiction in the sense of logical inconsistency. It is, instead, the coming together of opposing forces, out of which a unity or synthesis arises that allows for progress. Eighty years later, at the 19th National Congress of the CPC in October 2017, Xi Jinping stated a change in the principal contradiction facing Chinese society. “What we now face is the contradiction between unbalanced and inadequate development and the people's ever-growing needs for a better life,” Xi announced. “The evolution of the principal contradiction represents a historic shift that affects the whole landscape and that creates many new demands for the work of the Party and the country.” By resolving and managing the tensions in this “contradiction”, China is to achieve greater prosperity and strength. This is by no means an easy task, and it has not become easier in the last few years.

As outlined in Part I, Dual Circulation Strategy provides both the framework and a series of strategic choices for China's future economic development. It makes a sharp distinction between the realm of internal circulation, in which Xi Jinping and the CPC “lead everything”, and the world of external circulation. Dual Circulation prioritizes the internal and lays out a vision for mutual reinforcement between the internal and external. A look back over the past 150 years described how Chinese leaders consistently grappled with the questions of how to engage with the rest of the world and the meaning of self-reliance. Dual Circulation marks an adjustment rather than a radical change, but it is still a distinct shift from the years of “reform and opening up” in a globalizing world. The economic logic of Dual Circulation is just one of many pieces in what Chapter 3 described as the China policy puzzle. The role of Xi Jinping and of the CPC makes the development of the Chinese economy more than a matter of economic concepts alone.

In 2011 the CEO of a US multinational met a senior Chinese official in a Shanghai Starbucks store. “What impresses you the most about China?” asked the official. “The speed of change. How fast everything moves. How it changes,” replied the CEO. “Really? Do you think so?” teased the official. “But we have been talking about the same policy challenges for many years – the need to have more consumption, the need to upgrade our economy and innovate, the need to reduce reliance on debt finance, the ageing population. Not much is changing. And yet – look outside. People are satisfied; things are working; everyone is getting richer. We have time and space to resolve our issues,” the official concluded.

The strategic choices that Xi Jinping announced for his Dual Circulation Strategy in 2020 were in fact not so new. Xi highlighted the need to strengthen China's own technological capabilities and to expand domestic consumer demand as the mainstay of China's future growth. Yet 14 years earlier, in 2006, the messages had been the same. China's future growth was to be based on home-grown “indigenous innovation”, and the growth of China as a consumer market. Even then the internal was to be favoured over the external. Xi's policy is more continuity than change.

A report by the Carnegie Endowment for International Peace at that time observed that, “in recent years, China has paid more attention to furthering the development of domestic Chinese standards and tech-nologies. It has done so largely to upgrade the country's industrial base, thus retaining more added value, but it has also done so to secure a seat at the table where global standards are set.”1 The 2006 Medium and Long-Term Programme for Science and Technology (MLP) set criteria for the accreditation of so-called national indigenous innovation products (NIIPs). These NIIPs would receive preference in public pro-curement. The plan included technologies such as biotech, information technology, advanced materials and manufacturing, energy technology, marine technology, laser technology and aerospace technology.

Now, more than ever, doing business with China presents uncertainty. This uncertainty is not limited to China alone. How relations between the West and China will evolve is also unclear. Michael Green and Scott Kennedy of CSIS, a Washington, DC, think tank, observe that “global companies that have thrived on doing business with China are not well prepared to adapt to this new normal or to try and stem the tide”. When talking with companies, Green says that he found “an unexpected combination of overconfidence and resignation in their views”. In fact, this may not be so unexpected. Uncertainty evokes an emotional response as often as a push for rational analysis. “Common wisdom from the psychologist's perspective is that people do not like uncertainty, especially about the future, and that it generates a negative response.” Psychologists call this “ambiguity aversion”. Faced with uncertainty, some multinationals understandably take a “wait and see” approach to investment in their China business. For the largest investments, this makes sense in the depths of Covid-19 lockdowns. But uncertainty is not going away, and companies need to decide in order to succeed.

The track record of experts in predicting China's future is not good. “China cannot grow into an industrial giant in the 21st century. Its population is too large and its gross domestic product too small.” So wrote Bruce Nelan in an October 1992 edition of Time magazine under the title “How the world will look in 50 years”. Twenty years later the situation had already changed, with China serving as the “factory of the world”, providing multinational companies with low-cost manufactured goods. In 2014 distinguished Harvard professors Regina Abrami, William Kirby and Warren McFarlan could still pen an article with the title “Why China can't innovate”. Many still asserted that “China [was] largely a land of rule-bound rote learners” that could only imitate, not innovate. The argument was based largely on an assumption that those working within the constraints of an authoritarian regime could not innovate. Eight years later China was producing technology innovations across a range of industries and is likely to move ahead in others before too long.