CHINA PATHFINDER: Q2 2023 UPDATE
China Pathfinder is a multiyear initiative from the Atlantic Council’s GeoEconomics Center and Rhodium Group to measure China’s economic system relative to advanced market economies in six areas: financial system development, market competition, modern innovation system, trade openness, direct investment openness, and portfolio investment openness. To explore our data visualization and read our 2022 annual report, please visit https://chinapathfinder.org/.
China Pathfinder: Will Sluggish Growth Trigger Green Shoots of Reform? Q2 2023 Update by Daniel H. Rosen, Nargiza Salidjanova, and Rachel Lietzow
AUGUST 2023
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n November 2013, Xi Jinping, in his first leadership year, convened a plenary Communist Party economic meeting and unveiled an ambitious reform plan (the so-called 60 Decisions) that included giving a “decisive role” to markets and pruning back the state sector. Nearing the 10th anniversary of the Third Plenum and those Decisions, most are still to be implemented. Without those structural reforms, systemic challenges have grown, including crushing local government debt, an ongoing property sector crisis, continued addiction to investment projects for GDP growth, and falling confidence among both domestic consumers and businesses and foreign investors. Leaders and economists hint that macroeconomic stress is necessitating a renewed push for reform. As of the second quarter of 2023, the rhetoric and pronouncements have started to turn more practical, but concrete actions that have been taken thus far are not sufficient. Must-see improvements include economic research and information openness, no further crackdowns against foreign companies, and improved access to credit for private companies.
China’s Macro Story: Revisiting the Reform Trajectory
consumption—the long-awaited driver of China’s future growth— has not bounced back strongly from the pandemic. Expecting households to “dare to consume” when their children have trouble finding jobs post-graduation, their housing values are falling, and their returns on savings deposits are shrinking implies a misunderstanding of human nature.
The premise behind China Pathfinder is that Beijing’s pursuit of market reform and liberal economic norms is responsible for both China’s growth and its embrace by the global economic ecosystem. The role of marketization in driving China’s growth since 1978 is well documented. Since launching in 2021, our China Pathfinder research has identified a stall in China’s market reform progress, which is at least partly responsible for the growth slowdown now evident.
Until Q2 2023, private Chinese and foreign commentators were surprisingly consistent in arguing that China’s poor 2022 performance was a cyclical problem caused by COVID-19, and that the economy would soon revert to pre-pandemic growth levels of above 5 percent for years to come. Authorities issued Q1 results in striking distance of that (4.5 percent year-over-year) but appeared to fudge a number of statistics to do so. The Q2 results released in July reinforced concerns about data reliability, even while they told a story of faltering growth. While the GDP figure itself was high due to the previous fudging and weakness of 2022—at 6.3 percent—that number was lower than expected.
That failure to reform is bearing bitter fruit as China’s economy endures a major structural slowdown that is difficult to ignore. Business investment is weighed down by an unresolved property crisis, government stimulus is hobbled by overleveraged local finances across the country, and long-standing dependence on exports is provoking a trade pushback abroad. Household
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