Despite China’s vows, market-reform progress remains ‘stagnated’, report finds

But China has outperformed large developed economies in terms of openness to trade, according to the latest China Pathfinder assessment
‘This is not the Chinese economy of the past decade,’ policy expert says, calling it ‘weaker and more fragile’

China's economic recovery

Connor Mycroft

Published: 12:00am, 13 Oct 2022

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China’s progress in implementing market reforms has become “stagnated” in key areas, including competitiveness and openness to investment, according to findings outlined in an updated assessment of China’s economic development.

Although the country’s progress has been “undeniable” by specific metrics, headwinds from the US-China trade war and fears over an exodus of foreign investment have dampened outlooks, according to the latest China Pathfinder report published by the Atlantic Council and Rhodium Group on Tuesday.

“Policymakers should recognise a new reality: this is not the Chinese economy of the past decade. While China remains a heavyweight, it is undeniably weaker and more fragile than before the pandemic,” said Josh Lipsky, senior director of the Atlantic Council’s GeoEconomics Centre.

The report’s release comes amid a rise in observers’ concerns over China’s apparent inward turn as the nation copes with a slumping economy and increasingly strained geopolitical tensions with the West.

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With the 20th party congress just days away, the report said policymakers should make a “clear statement” on their intentions for market reforms and reopening the economy.

“The Party’s zero-Covid policy is straining the economic, political and social fabric of the country,” the report said. “Foreign companies, as well as governments, are increasingly sceptical about their investments in the Chinese market.

“We are at a crucial moment when foreign firms are reassessing their presence in China and making decisions that affect economic relations for years to come.”

The report, which gauges China’s market system against those of 10 leading open economies in the Organisation of Economic Cooperation and Development (OECD), found that the country was still performing well in some of the six measured categories.

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In openness to trade, China outperformed large developed economies such as Italy and South Korea. Furthermore, despite a fall from last year’s report, China continued to surpass countries such as Canada and Spain in innovation, and had exceeded the overall average in terms of venture capital investment intensity.

However, the largest gaps remain in the country’s financial-system development, market competitiveness, and openness to investment. The latter, which measures the ability of foreign firms to invest within the country, as well as the ability of domestic companies to invest abroad, was noted for being far outpaced by the OECD economies.

China’s officials, for their part, have made numerous statements in recent months to shore up confidence in the country’s economy and to reiterate their commitment to reform.

In September, Premier Li Keqiang reiterated that the country would continue to deepen its reforms by nurturing a business environment that is international, market-oriented, and governed by the rule of law.

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“China will adhere to the basic national policy of opening up, and the door to opening up will only open wider and wider,” Li vowed while speaking with representatives from the Japanese business community.

However, even if policymakers signal a shift at the 20th party congress, or in the months to come, any tangible structural changes would still take “years” to be realised, the report said.

Furthermore, external and internal economic challenges are expected to continue plaguing China’s efforts to reinvigorate growth and market activity.

“Regardless of what happens at the 20th party congress, China faces a prolonged period of weaker growth,” the report said.