This Quarter's Summary - Spring 2019
After a year jockeying for leverage in their trade negotiations, the United States and China stumbled into major tariff escalation in May 2019. Debate devolved into recriminations: was there really a deal to break, and if so who broke it? To answer these questions, we must analyze China’s movement toward or away from the implementation of its economic reform commitments in response to the economic stress of the past year.
China is facing tremendous economic challenges. Economists have warned for a decade that reliance on ever-growing debt levels to fuel expansion would have to end, and when it did, GDP growth would fall. Having grown the banking system to 45% the size of global GDP, from little more than 5% a decade ago, the marginal return on further investment in China has been greatly diminished. The question is whether Beijing intends to fix this low-productivity situation by stepping-up market reforms or by reverting to state planning.
China’s leaders insist that nothing about its “reform and opening” policy has changed in recent years. But the China Dashboard indicators we evaluated to track policy directions suggest that many reform objectives have gotten bogged down or even reversed in recent years. Today’s reform challenges are increasingly difficult and structural. As China’s economy grows more powerful and competitive globally, it must increasingly converge with the levels of economic openness of other advanced economies. That has simply not been happening.