A Grim Reform Outlook Clouds Trade Talks

Every quarter Rhodium Group and the Asia Society Policy Institute produce the China Dashboard, a research project which attempts to assess Beijing’s implementation of structural economic reforms based on measurable outcomes, rather than just commitments. China’s enactment of market-oriented reform is critical for its economic trajectory and its interactions with advanced economies, including the United States. The Winter 2019 edition of our China Dashboard is now live. Our findings this quarter are grim.

Implementation of economic reforms is inadequate to stave off international pushback to China’s economic model or engender confidence about the US-China trajectory as negotiations resume in Washington this week. Reforms are not moving forward decisively in 8 of the 10 areas we track, a continuation of our Fall 2018 findings.

Critical benchmarks of fair competition for foreign and private firms are deteriorating. SOEs are advancing at the expense of private firms, and proposed policy solutions focus on increasing Communist Party supervision instead of reform. China’s competition policy regime exhibits substantial shortfalls in areas like transparency and equal treatment, despite several years of regulatory and bureaucratic reform.
The reform impulse is insufficient to put China’s economic trajectory on a more sustainable basis. Efforts to deleverage the financial sector have not led to better credit allocation; far too much capital investment is still spent inefficiently, aggravating industrial dislocations and bad debt.

Posted February 27, 2019
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Not the Usual National People’s Congress

The upcoming National People’s Congress (NPC) is the first major government function in the second of perhaps many terms of the Xi Jinping presidency, and it comes in the 40th anniversary year of the reform and opening period. The Congress will set the tone for policy for the next five years, if not longer.

In terms of short-term objectives, the Congress will likely signal broad policy continuity, with more emphasis on deleveraging and regulatory efforts to reduce financial risks rather than signs of policy support for growth at current rates. Longer-term, however, China’s leaders have built up expectations for economic reforms, and have sent clear signals that the NPC will further empower Party over government. The question of whether a new team of economic officials, including a new central bank governor, will have the mettle to invigorate reforms looms more ominously over China’s economic relations with the rest of the world after the probable extension of Xi’s tenure.

Posted March 4, 2018
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“Squeezing the Water” from China’s Economic Data

Recent data revisions by several northeastern provinces raise new questions about the reliability of China’s economic data. Individually, the data revisions speak to local malfeasance and distorted incentives. Those come as no surprise to us—or to Beijing. The central government has long had processes in place to correct for local distortions when producing data about the national economy.

Nonetheless, the scope and scale of changes announced do shift our understanding of the shape of China’s economic cycle over the past four years. They suggest that industrial activity was somewhat slower in 2014/2015, particularly in China’s northeastern rustbelt, that the size of the national economy is marginally smaller today, and that fiscal conditions in some provinces are even bleaker than currently appreciated.

They also tell us something important about China’s political environment: local governments are currently crying for help in the face of those dire fiscal conditions. We expect to see more revelations of fake data from previous years as deleveraging efforts tighten credit, local budgets stretch, and Beijing pursues efforts to improve its system of national accounts.

Posted February 16, 2018
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