First-ever China Pathfinder Annual Scorecard finds China has made progress toward market economy norms but falls well short of promised reforms
WASHINGTON, DC – OCTOBER 5, 2021 – The Atlantic Council’s GeoEconomics Center and Rhodium Group today released the first-ever China Pathfinder Annual Scorecard—a groundbreaking study and state-of-the-art data visualization tool examining whether China’s economy is converging or diverging with the world’s leading open market economies. The report was developed to create a credible, shared language on China’s economy in both China and the United States to prevent policy mistakes which could threaten the health of the global economy.
China Pathfinder looks at six key clusters to examine China’s economic trajectory: the financial system, market competition, innovation, trade, direct investment, and portfolio investment. Key findings from the report include:
- Over the past decade, China has made progress toward market economy norms but fell well short of promised reforms. Since 2010, China moved toward market economies in each of the six clusters assessed, but it still ranks last in all but one of these clusters and has not met its self-stated goals. The market economy parity at the core of the 2001 WTO accession deal remains distant. President Xi’s pledge to make markets decisive at the start of his tenure is at risk of failure.
- The biggest shortfalls versus market economy norms are inmarket competition, due to the resurgent role of state-owned enterprises (SOEs) and state planning,and in openness to cross-border purchases of stocks and bonds (portfolio investment). Inadequate market competition will diminish productivity and hence GDP – potentially by trillions of dollars within five years. Failure to liberalize portfolio flows will retard the efficiency of China’s financial system, perpetuating the kinds of debt stress it is saddled with today.
- In some areas, the data show that China has made less progress than thought, including openness to direct investment. For a middle-income economy like China, foreign direct investment (FDI) should increase relative to GDP, but the ratio of FDI to GDP has declined since 2010. Policies to liberalize outbound flows have also been on hold since 2017, leaving China with a much lower outbound FDI stock to GDP ratio than the leading market economies. If China is to converge with market economies, it should be opening, not curbing outflows.
- China has made progress in some areas. In the aggregate, China scores well on trade (its best category in the study). On tariffs, China is only slightly behind the market average and has a higher (i.e., more open) score than the US in 2020 because it reduced tariffs with other nations even as trade wars with the US persisted. Overall, on trade, China ranks ahead of South Korea and is in line with Italy. By this measure, it can be considered within market economy range.
- China is also approaching market economy scores in innovation, now ranking close to Spain or Italy. One of the factors in the innovation scoring is an indicator assessing venture capital as a share of GDP. Here, China ranks behind only the US and the UK – up from essentially zero in 2010.
- The most recent policy signs are strongly at odds with a market-oriented course. While the pattern over the past decade offers encouragement as well as showing major gaps, reform signals have weakened since 2016, and non-market moves have dominated over the past 12 months. By 2021, even perennial reform optimists were shocked by resurgent state ownership and extra-legal influence, limits on private access to capital markets at home and abroad, the overnight shutdown of entire sectors, the unexpected nationalization of private data, and overreach by state planners in shaping the market structure of tomorrow.
- The bottom line from this systemic picture is that China is not on track for convergence with market economies. That would mean that market economy policies for commercial interaction must evolve in a more self-protective direction, and that China’s growth rates will fall and present less growth opportunities for firms. Indeed, declining growth is clearly evident. Private forecasters and China’s own central bank are already downgrading growth assumptions. Without a market-oriented shift, China will struggle to maintain a growth potential that exceeds 3% annually by the middle of this decade.
“Geopolitical tensions have overshadowed the importance of objective economic analysis in recent years, and the seeming opacity of China was a too-easy justification for that,” said Daniel Rosen, founding partner at Rhodium Group and Atlantic Council nonresident senior fellow. “With China Pathfinder, we hope to draw attention back to the real state of ‘systemic rivalry,’ an often invoked but until now unmeasured idea. What our work shows is that China has made great effort to move in our systemic direction – something they are sometimes not given enough credit for – but to date have come up too short for comfort.”
Today’s publication is the first in a series of annual China Pathfinder Scorecard reports assessing the trajectory of China’s economy. In between these annual reports, the Atlantic Council and Rhodium Group will provide quarterly updates that explore, analyze, and provide vital context around the latest economic policy developments in China and their impact on the real economy.
“Understanding China’s economic path is key to better policymaking around the world,” said Josh Lipsky, director of the Atlantic Council’s GeoEconomics Center. “With the launch of China Pathfinder, we aim to start an ongoing conversation about China’s commitment to reform and what it means to be an open market economy in the 2020s.”
The report will be formally launched at a live virtual event today at 9:00am EDT featuring OECD Secretary-General Mathias Cormann and leading economic experts. Visit ChinaPathfinder.org to view all interactive data visualization content and research related to the China Pathfinder project, including today’s report.
The Atlantic Council’s GeoEconomics Center works at the intersection of foreign policy and finance to shape a better global economic future. Rhodium Group is an independent research provider that combines economic data and policy insight to analyze global trends.