by BLOOMBERG

China’s strategy to boost technological self-reliance won’t stop its economic integration with Japan and South Korea, but the inward shift increasingly will put it in competition with its key trading partners, according to Moody’s Investors Service.

Booming trade has helped power China’s development since it joined the World Trade Organization in 2001. For the next phase of the country’s development, President Xi Jinping proposed a “dual circulation” strategy last year under which “internal circulation” will be the mainstay of the economy, with “external circulation” as a complement.

The recent five-year plan fleshes out the strategy, aiming to boost R&D spending by at least 7% per year over the next five years and raise the contribution from core digital economy industries to 10% of gross domestic product by 2025, from 7.8% last year.

China already is South Korea’s top export destination — taking one-quarter of the country’s shipments in 2019 — and the second largest for Japan, absorbing 20% of its exports, according to Moody’s.

At least initially, the dual-circulation strategy will mean greater access for Japanese and Korean companies in high value-added sectors, Moody’s wrote in a research note. Coupled with China’s huge market potential, that will further deepen the countries’ economic integration.

“We expect China to continue to increase its imports for some critical technology goods or attract direct investments from Korea and Japan to localize production intended for the Chinese market,” analysts led by Lillian Li wrote.

Cooperation and Competition

Closer economic ties could help all three countries address structural issues such as aging populations, rising labor costs and slowing productivity. Japan’s and South Korea’s security ties with the U.S. could cause friction, but “even if heightened geopolitical tensions complicate the relationship between the three countries, it will not reverse the ongoing economic integration,” Moody’s wrote.

Longer term, though, China’s reliance on imported components is expected to decline. Key sectors the government wants to enhance include integrated circuits, advanced machinery, medical and transportation equipment, aviation and robotics — areas where China could be in direct competition with South Korea and Japan over the next five to 10 years, both locally and in other export markets.

“Japanese and Korean companies in some high-tech sectors will benefit from China’s growing demand for their products but competition is likely to grow from Chinese companies, which enjoy strong policy support from the government,” Moody’s wrote.