For those unfortunate investors who saw a “buy opportunity” after China’s recent announcement of stimulus measures: You might want to closely study the newly released annual report of the Atlantic Council’s China Pathfinder Project, an impressive four-year effort of our GeoEconomics Center in collaboration with Rhodium Group. The report is titled “End of the line: The cost of faltering reforms.”
First, the news:
Investors walloped Chinese equities yesterday as the pullback continued from the market rally inspired by China’s stimulus measures. The benchmark Shanghai Composite index fell more than 6 percent. That followed Tuesday’s plunge of the Nasdaq Golden Dragon China index, which tracks US-listed Chinese companies, by 6.85 percent, its biggest drop since October 2022. Hong Kong’s Hang Seng index continued to fall as well yesterday, by 1.4 percent, after its 9 percent drop on Tuesday.
In short, reality is sinking in after the misplaced euphoria that followed China’s announcement of its major stimulus package on September 24. The problem with what China announced is that it didn’t do anything to address the reality that Chinese leader Xi Jinping doesn’t believe in the market or economically sensible reforms, and thus investors shouldn’t believe in him.
After delaying major policy moves in 2023, China announced a major slate of reforms at the Third Plenum of the Chinese Communist Party in July 2024. More recently, the People’s Bank of China took the largest steps since the start of the pandemic to stabilize the economy by offering new funding and interest-rate cuts. Still, China faces enormous challenges that thus far have gone unaddressed: lackluster growth, continued property-sector woes, and growing foreign pushback against manufacturing overcapacity and the treatment of foreign firms.
The China Pathfinder Project, in summarizing its key findings, states: “In nearly every area we have tracked—financial system development, market competition, innovation, trade, and direct and portfolio investment—China’s progress has stalled or, in some cases, backslid. The initial hope that China would adopt more transparent and market-oriented policies has given way to a reality in which systemic state intervention and opaque decision-making continue to dominate.”
It goes on: “The lack of clarity around China’s decision-making is now seen as a source of global economic risk. The Chinese Communist Party’s growing role in the economy stifles the private sector’s dynamism and fosters a dangerous environment of uncertainty for investors. The decline of the property sector and the correlated focus on manufacturing have raised alarm bells worldwide about a second China trade shock.”
In her exclusive reporting on China Pathfinder, the Wall Street Journal’s Lingling Wei writes in her weekly newsletter: “As China faces its worst economic downturn in decades, Xi has fortified the country against foreign influence. It remains to be seen whether he can take a page from the Chinese classic ‘Journey to the West’—a Ming dynasty tale about a monk’s pilgrimage to collect knowledge in foreign parts—and venture out of his comfort zone.”
I’m not betting on that, and neither should you.
Frederick Kempe is president and chief executive officer of the Atlantic Council. You can follow him on X: @FredKempe.
This edition is part of Frederick Kempe’s Inflection Points newsletter, a column of dispatches from a world in transition. To receive this newsletter throughout the week, sign up here.
Further reading
Wed, Oct 9, 2024
End of the line: The cost of faltering reforms
Report By
The China Pathfinder project examines whether China’s economy is converging or diverging with the world's leading open market economies.
Wed, Oct 2, 2024
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China's slowing economic growth, declining imports, and rising emphasis on import substitution are reverberating globally, impacting trade partners and reshaping geopolitical and economic dynamics.
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The US confronts two global threats: China-Russia and itself
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The disruptive dangers of the Chinese-Russian combination can only be contested and contained by steady, confident, far-sighted US leadership alongside partners and allies.
Image: A customer pays attention to the stock market at a stock exchange in Hangzhou, China, on October 8, 2024. (Photo by Costfoto/NurPhoto)