China’s economy struggles with multiple problems and without robust reforms, Beijing is likely to face a threat to the growth prospects in the coming years, hurting its global position, according to a new report.
“The economic malaise that policymakers in Beijing are staring down now is not caused by cyclical factors like COVID, but by a failure to reform the country’s economic system,” the report noted.
It pointed out that “the Chinese economy is suffering in part because the [Chinese Communist] Party continues to prioritize ideology over economic dynamism.”
The report tracks China’s economic yearslong performance along over 25 economic indicators and compares its economic system to those of market economies. It uses a quantitative framework based on six components: financial system development, market competition, modern innovation system, trade openness, direct investment openness, and portfolio investment openness.
As the report’s title indicates, China’s economy is facing numerous troubles, such as a troubled property market, an aging population, a deteriorating domestic business sentiment, and declining direct foreign investment.
The report showed China’s troubled property sector kept hitting the economy last year, which forced authorities to implement “temporary steps,” including 16 measures to support the real estate market. However, it said that this approach did not address the root of the problem, only targeting “more on stability than market liberalization.” Because the package offered extensions for repaying bank loans and relaxed lending restrictions for property developers.
Moreover, foreign investor confidence is low, and foreign investment has declined, which is a warning sign as China’s economy still relies on foreign capital, know-how, and technology for growth. Businesses from the United States, EU, and Japan are stripping China as their favorite investment destination.
In addition, the rising state ownership in key industries and unpredictable regulatory developments have hit China’s domestic business environment.
Structural Reform Needed
The report repeatedly indicated the root problem of China’s economy, its “persistent structural reform gap” that results in “lagging behind top OECD economies in most market dimensions.”It expects that “in its current trajectory, China’s economic growth will continue to grind ever slower. This slowdown will impact Beijing’s ambitions for indigenous high-tech development, exacerbate local fiscal crunches, and have spillover effects for other countries who depend on China as an export or import market. The slowdown will also begin to diminish perceptions of China’s state-led economic system.”
“In the past, Beijing was able to kick the policy can down the road; today, they are at the end of that road and need to address the present problems,” the report noted.
Due to its current weak performance, Beijing’s ambition to dethrone the United States as the world’s largest economy by the end of the 2020s “will not happen in this century, let alone this decade.”
The report calls for Beijing to implement robust reforms, including stopping setting the GDP growth rate target, privatizing some state assets, and reforming the pension system, among others.
Unvestiable and Decoupling
As China’s economy struggles, foreign investors find its investment environment has become more challenging, sometimes hostile, and consider decoupling from the country.During her visit to China, Raimondo highlighted several key issues faced by U.S. firms, including new challenges such as unclear fines and uncertainties surrounding a new anti-espionage law and ongoing problems like intellectual property theft and competition with Chinese companies that receive government subsidies.
Chinese authorities raided U.S. due diligence firms Bain & Co., Capvision Partners, and Mintz Group. China also banned the sales of chipmaker Micron Technology to key Chinese domestic industries.
U.S. companies view such challenges as a “push factor” to move away from China.
