ISBN-13: 978-1-61977-195-6
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PATHFINDER: 2022 ANNUAL SCORECARD
Atlantic Council - Geoeconomics Center
TABLE OF CONTENTS
About China Pathfinder
MISSION
PARTNERS
AUTHORS
ACKNOWLEDGMENTS
RESOURCES AND CONTACT
Foreword
Executive Summary
Introduction
Chapter 1: China in 2021: External
Pressures and Internal Shocks
1.1 MAIN INTERNAL AND EXTERNAL
DEVELOPMENTS THAT SHAPED THE DATA
1.2 UPDATES TO RESEARCH DESIGN
AND METHODOLOGY
Chapter 2: Historical Baseline and
2021 Stocktaking
2.1 FINANCIAL SYSTEM DEVELOPMENT
Definition and Relevance
2021 Stocktaking: How Does China Stack Up?
Efficient Pricing of Credit
Direct Financing
State Ownership in Top Ten Financial Institutions
Financial Institutions Depth
Financial Markets Access
Composite Score
A Year in Review: China’s 2021 Financial
System Policies and Developments
2.2 MARKET COMPETITION
Definition and Relevance
2021 Stocktaking: How Does China Stack Up?
Market Concentration
SOE Presence in the Top Ten Firms
Foreign Direct Investment Restrictiveness
Rule of Law
Composite Score
A Year in Review: China’s 2021 Market Competition
Policies and Developments
2.3 MODERN INNOVATION SYSTEM
Definition and Relevance
2021 Stocktaking: How Does China Stack Up?
National Spending on Research
and Development
Venture Capital Attractiveness
Private versus State-Funded Innovation
Triadic Patent Families Filed
International Attractiveness of
a Nation’s Intellectual Property
Strength of IP Protection Regime
Composite Score
A Year in Review: China’s 2021
Innovation Policies and Developments
2.4 TRADE OPENNESS
Definition and Relevance
2021 Stocktaking: How Does China Stack Up?
Goods and Services Trade Intensity
Trade Barriers: Tariff Rates
Restrictions on Services Trade
Restrictions on Digital Services Trade
Composite Score
A Year in Review: China’s 2021
Trade Policies and Developments
2.5 DIRECT INVESTMENT OPENNESS
Definition and Relevance
2021 Stocktaking: How Does China Stack Up?
FDI Intensity
Direct Investment Restrictiveness
Composite Score
A Year in Review: China’s 2021 Direct
Investment Policies and Developments
2.6 PORTFOLIO INVESTMENT OPENNESS
Definition and Relevance
2021 Stocktaking: How Does China Stack Up?
Internationalization of Debt
and Equity Markets
Portfolio Investment Restrictiveness
Composite Score
A Year in Review: China’s 2021 Portfolio
Investment Policies and Developments
Chapter 3: Conclusions
and Implications
Glossary
Appendix: Overview of Methodology
PATHFINDER: 2022 ANNUAL SCORECARD
About China Pathfinder
Mission
China Pathfinder is a joint initiative from the Atlantic Council
GeoEconomics Center and Rhodium Group that measures China’s
economic system relative to advanced market economy systems.
Few people, even within the circle of China experts, seem to agree
about the country’s economic system, where it is headed, or what
that means for the world. The goal of this initiative is to shed light
on whether the Chinese economic system is converging with, or
diverging from, open market economies. Over the course of two
short decades, China has risen from the world’s sixth-largest economy, with a gross domestic product (GDP) of $1.2 trillion in 2000, to
the second largest, boasting a GDP of $17.7 trillion in 2021. China
now intersects with the interests of all nations, businesses, and
individuals. With China’s past and future systemic choices impacting the world in both positive and negative ways, it is essential to
understand its global footprint. The hope is that China Pathfinder’s
approach and findings can fill in some of the missing puzzle pieces
in this ongoing debate—and, in turn, inform policymakers and business leaders seeking to understand China.
Partners
The Atlantic Council is a nonpartisan organization that galvanizes
US leadership and engagement in the world, in partnership with
allies and partners, to shape solutions to global challenges. The
Atlantic Council provides an essential forum for navigating the economic and political changes defining the twenty-first century by
informing its network of global leaders. Through the papers it publishes and the ideas it generates, the Atlantic Council shapes policy
choices and strategies to create a more free, secure, and prosperous world.
Rhodium Group is a leading independent research provider.
Rhodium has one of the largest China research teams in the private sector, with a consistent track record of producing insightful
and path-breaking analysis. Rhodium China provides research,
data, and analytics to the private and public sectors that help clients understand and anticipate changes in China’s macroeconomy,
politics, financial and investment environment, and international
interactions.
Authors
This report was produced by Rhodium Group’s China team in collaboration with the Atlantic Council GeoEconomics Center. The principal contributors on Rhodium’s team were Daniel H. Rosen, Nargiza
Salidjanova, Rachel Lietzow, Ryan Featherston, and Boyuan Chen.
The principal contributors from the Atlantic Council GeoEconomics
Center were Josh Lipsky and Niels Graham.
Acknowledgments
The authors wish to acknowledge a superb set of colleagues and
fellow analysts who helped us strengthen the study in group review
sessions and individual consultations. These individuals took the
time, in their private capacity, to critique the indicators and analysis in draft form; offer suggestions, warnings, and advice; and help
us to ensure that this initiative makes a meaningful contribution to
public debate. Our gratitude goes to Bert Hofman, Scott Johnson,
Jacob Kirkegaard, Wendy Leutert, Jeremy Mark, Barry Naughton,
Tom Orlik, Dexter Roberts, Scott Rozelle, Stephanie Segal, Hung
Tran, Yang Yao, and Pepe Zhang.
The authors also wish to acknowledge the members of the China
Pathfinder Advisory Council: Steven Denning, Gary Rieschel, and
Jack Wadsworth, whose partnership has made this project possible.
Resources and Contact
This report is written and published in accordance with the Atlantic
Council’s intellectual independence policy. The authors are solely
responsible for its analysis and recommendations. The Atlantic
Council, Rhodium Group, and its donors do not determine, nor do
they necessarily endorse or advocate for, any of this report’s conclusions. This report is published in conjunction with an interactive
data visualization toolkit, at http://chinapathfinder.org/. Future quarterly and annual updates to the China Pathfinder Project will be published on the website listed.
PATHFINDER: 2022 ANNUAL SCORECARD
Foreword
When the Atlantic Council and Rhodium Group first embarked on
the China Pathfinder Project, we believed that policymakers, in both
the East and West, would benefit from creating a shared language
on China’s economy. What we did not foresee was how urgently
that language would be needed.
In the one year since we published the inaugural China Pathfinder
scorecard, the ground beneath Xi Jinping’s feet has shifted. The
Chinese property sector, so fundamental to the growth of the
world’s second-largest economy, is teetering. The Party’s zeroCOVID policy is straining the economic, political, and social fabric of the country. Foreign companies, as well as governments, are
increasingly skeptical about their investments in the Chinese market. A year ago, the question we asked in this report was whether
sustained 6 percent growth was no longer realistic. Now, the question we are asking is whether China’s economy might be heading for a hard landing.
What a difference a year can make.
That is true for China, as well as the rest of the world. We designed
China Pathfinder as a multi-year project to track the progression—or
regression—of the Chinese economy over time and compare it to
the world’s largest open market economies. While it is true that the
study of the other largest economies was never the primary objective of this work, our research can pinpoint when they start moving away from open-market norms.
Inside these pages you will find new data and analysis which confounds conventional wisdom—both about China’s economy and the other largest economies in the world. This data can help make sense of a tumultuous year. From the War in Ukraine to the ongoing pandemic there are forces weighing on China’s economy which the leadership can only partly influence. It can be difficult to parse out which dynamics are cyclical and which are a product of crisis
response. But we believe this report helps deliver an answer: The damage done to the Chinese economy over the past year cannot be undone quickly. The framework of China Pathfinder enables us to see how systemic the problems are.
Policymakers should recognize 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.
This shift presents challenges and enormous risks for Beijing, Washington, London, Brussels, Tokyo and beyond. It also presents an opportunity to move past the failed policy decisions of previous years and approach economies as they stand—not as we imagine them.
That is why the mission of creating a shared language on China’s economy—and developing a clear way to understand China’s economic system—is more important than ever. We thank the dedicated teams from the Atlantic Council and Rhodium Group that have led this research and we thank each of you for your engagement in this critical work.
Josh Lipsky
Senior Director, Atlantic Council GeoEconomics Center
PATHFINDER: 2022 ANNUAL SCORECARD
Executive Summary
China Pathfinder compares China’s economic system to those of market economies. This juxtaposition is important at a time when questions are mounting about Beijing’s economic trajectory, and both policymakers and businesses around the world are assessing how to respond and position themselves. This report looks at six components of the market model: financial system development, competition, innovation system, trade openness, direct investment openness, and portfolio investment openness. Our annual scorecard situates China in relation to ten leading market economies to establish a data-centered benchmark for discussion and analysis.
We supplement the annual report with quarterly updates that zero in on the most important policy developments in China. This approach is designed to encourage a more constructive discussion of policy shifts taking place in Beijing, from the recent crackdown on technology companies, to the “dual circulation” strategy, and debate over “common prosperity.”
Key Findings
• China’s progress toward market economy norms slowed in most areas in 2021, though not enough to undermine the market opening efforts that took place since 2010. On our innovation system and trade metrics, China saw real progress in 2021 compared to its 2010 benchmarks, scoring higher than several OECD economies. In trade, China even improved on its 2020 performance. China’s financial system development, market competitiveness, and openness to investment, however, have stagnated; in these areas, the gap between China and market economies remains the largest. In upcoming reports, we hope to shed light on whether China’s economic performance is just temporarily reflecting the government’s aggressive steps to contain the COVID-19 pandemic, or if Beijing is diverging from market thinking in a more structural way.
• Most of the OECD economies we track show a slight divergence from open market norms since 2010. For instance, Australia, Italy, and Spain saw some backsliding in their financial system development and market competitiveness, while German and South Korean markets saw a lapse in openness to foreign direct investment. Portfolio investment openness was the only bright spot, where all economies (except the UK) deepened portfolio markets or reduced cross-border restrictions compared to 2010. Intervention by governments in response to the pandemic played a role in the recent drift away from market openness. While most advanced economies are now moving on from the pandemic, ongoing geopolitical tensions in 2022, such as the war in Ukraine, could complicate their post-pandemic recovery.
• In innovation, China had a higher composite score than Canada, Italy, and Spain. It also surpassed the open economy average in venture capital investment intensity. However, this progress comes with caveats. The role of the state in determining where innovation takes place—via government guidance funds and subsidies—and Beijing’s crackdown on technology companies risk undermining the innovation gains that China has made in recent years. Looking ahead, there is a risk that weakening foreign investment in China could chip away at the country’s innovative potential.
• China’s composite score in trade comes closest to those of market economies, exceeding South Korea and Italy’s scores. But, here too, there are caveats. First, China’s remarkable competitiveness in goods trade is counteracted by its high barriers in digital services trade, where its score has declined in recent years. Second, non-tariff barriers cloud China’s trade landscape, benefiting domestic champions and hurting foreign players.
Third, the US-China trade war continues to undermine confidence in deepening two-way trade for the long run. Thus, we saw China’s MFN tariff rate increase since 2020 (though it is still lower than it was in 2010), and while the US and the EU countries lowered their MFN rates, their tariffs on Chinese exports have not decreased. Finally, China’s economic growth continues to rely on exports; this is increasingly problematic given the domestic COVID-related disruptions and the relatively rapid recovery in China’s trading partners, which will drive a decline in demand for Chinese goods.
• China’s investment openness has decreased since 2020, with a small slump in cross-border equity and bond volumes, as well as a drop-off in outbound FDI volumes. Though China’s restrictions on direct investment and portfolio investment have not changed, other factors such as the crackdown on technology firms and zero-COVID lockdowns have discouraged investment. As China’s scores in both areas of investment openness have been the furthest from market economy norms since 2010, the latest signs don’t do much to alter the dim picture.
• President Xi Jinping will be confronted with important policy choices at the conclusion of the 20th Party Congress. Xi is widely expected to earn a third term as leader at the congress, freeing his hand to take bolder action in the face of formidable economic challenges. This could provide an opening for 2013-era market reform promises to reappear on the agenda. But while unfinished policy reform work is plain to see, few analysts in or outside of China can point to evidence of impending market reform acceleration.
Policy Implications
• China’s reform intentions are more important than ever. Concern about China’s economic course is deepening due to zero-COVID policies, property sector distress and rising tensions over Taiwan. We are at a crucial moment when foreign firms are reassessing their presence in China and making decisions that will affect economic relations for years to come. Questions are being raised about whether China is “investible.”
• A course correction—if it occurs—will take time. Even if China recommits to market reform, fixing the misallocation of resources and dealing with vested interests will take China’s leaders years, and will mean weaker growth in the short to medium term as structural adjustment takes place. For foreign policymakers, an understanding of how market economies are changing visà-vis open market norms is needed for the effort to hold China accountable. This would require foreign governments to be strategic in their responses to Chinese practices, but avoid sacrificing liberal market norms, or emulating China’s non-market playbook.
• Government and business stance towards China is best based on a balanced assessment. Many foreign policymakers—and some firms—are competing to show who’s toughest on China. That’s problematic in two ways. First, it risks intensifying frictions with China, without a basis of data-driven analysis and benchmarking. Second, it wastes limited resources on matters that may have less severe economic consequences, while issues of concern go potentially under-resourced or unaddressed. Where Chinese divergence from open-economy norms harms market economy interests, policymakers should respond. Where it doesn’t, they should hold their fire.
• As the traditional divide between trade, technology, and security challenges melts away, policy and business decision making will become more complicated. With policymakers scrutinizing China’s tech policies or its human rights record, foreign companies doing business in China or with China will find it increasingly difficult to reconcile competing demands from their home governments and China. Rising restrictions in data flows, for example, and tighter investment screening reflected in the 2021 China Pathfinder scoring, are just a few examples of this trend. This will have important implications for supply chains across a range of goods, and for companies’ long-term planning such as making investments or retaining talent.
FIGURE 1: 2021 ANNUAL ECONOMIC BENCHMARKS
Source: China Pathfinder
Introduction: Do China’s Economic Challenges Make Market Reform More Likely?
When our inaugural China Pathfinder Annual Scorecard was completed in October 2021, China was growing at an annualized rate of 8 percent and its leaders expected the economy to continue to expand at a rate of nearly 6 percent going forward. A sharp slowdown was dismissed as far-fetched, imaginable only in the worstcase scenarios of the People’s Bank of China. And yet, one year later, the World Bank is forecasting that China’s economy will expand by just 2.8 percent in 2022. Major investment banks have lowered their forecasts to 3 percent. In the second quarter of 2022,
China reported that gross domestic product (GDP) rose by just 0.4 percent compared to the same period last year. The 2022 outcome will certainly land outside the range leaders preferred, and that alone has drawn attention from observers (inside and outside of China) accustomed to seeing official goals inevitably achieved.
China’s slowdown is unfolding ahead of an important, twice-a-decade Party congress (October). If available tools could have been used to improve this year’s economic performance, they likely would have been. In some areas, including the regulation of technology firms, leaders have tried to comfort anxious investors and entrepreneurs, but the signals have not been full throated support for market mechanisms. Could a deepening economic downturn force China to pivot back to reform and opening? Many analysts are skeptical that it would, but the possibility cannot be ruled out.
Officially, Beijing attributes the slowdown in growth to its restrictive zero-COVID policy that it deems necessary to safeguard public health. But the bigger structural shock—and the reason why the usual stimulus tools are not working—is a reckoning in the real estate sector that has been building for years. China’s leaders tolerated real estate bubbles over the past decade in order to turbocharge growth. Now defaults are causing property construction and sales to plunge. Since China has come to rely on the sector to drive roughly a quarter of its growth, the property reckoning is sending tremors across the financial system and the broader economy. Consumers, investors and parts of the Chinese leadership have been taken by surprise—despite persistent warnings about the country’s debt-fueled property expansion.
In 2014, the precursor study to China Pathfinder, Avoiding the Blind Alleyargued that if Beijing did not persist with market-oriented reforms, China would hit a dead end (the title of the report draws on language that Chinese President Xi Jinping himself was using at the time). We defined that outcome as potential growth below 2 percent. Another Rhodium Group study, Credit and Credibility,predicted in 2018 that the stability of China’s financial system would begin to show cracks by mid-2021 if remedial steps were not taken.
1 Daniel H. Rosen, “Avoiding the Blind Alley: China’s Economic Overhaul and Its Global Implications,” Asia Society Policy Institute and Rhodium Group, October 2014. https://asiasociety.org/files/pdf/AvoidingtheBlindAlley_FullReport.pdf
2 Logan Wright and Daniel H. Rosen, “Credit and Credibility: Risks to China’s Economic Resilience,” Center for Strategic & International Studies, October 2018. https://www.csis.
org/analysis/credit-and-credibility-risks-chinas-economic-resilience
We could not foresee the added shock of COVID-19 at the time, but the sharp slowdown in growth that concerned us then is now unfolding before everyone’s eyes.
Market reforms are not a miracle cure for all of China’s economic ills. And on their own, they cannot deliver high GDP growth or the “high quality growth” that Beijing hopes to achieve. During the implementation phase, reforms typically lead to a period of lower-than-potential growth, as economic actors adjust to new realities.
Considering China’s reform backlog and the risk of crisis now inherent in any effort to implement reform (given the extent of debt risks that have been allowed to build up), we expect anemic growth to be with us for a while, regardless of how the government responds in the months ahead. It is important to bear this in mind as the 20th Party Congress gets underway this month. Some analysts conjecture that once the congress is over, and Xi has secured a third five-year term (breaking the tenure limits which generations of Chinese leaders observed following the excesses of the Mao era), he will be free to take the steps necessary to put Chinese growth back on a stronger and more sustainable footing. It is important to understand, however, that party congresses have rarely been triggers for big shifts in economic policy. If a change of course were to emerge from the meeting, new policies would need to be developed and implemented—and would likely take years to filter through to the real economy. Regardless of what happens at the 20th Party Congress, China faces a prolonged period of weaker growth.
While we wait to see whether the Party Congress leads to change, the suppression of any real public debate over the proper economic course has become a serious problem for China. Experts who criticize the government’s current path or express opinions that diverge from the official line have seen their social media accounts frozen. In some cases, they have lost their jobs. Access to some economic data has been restricted and doubts about the quality of official statistics are on the rise. By squelching talk of economic risks, Chinese authorities may be hoping to prevent a loss of business and consumer confidence, but the lack of transparency has only deepened the uncertainty about China’s trajectory. Dissent, after all, is difficult to conceal, even in the Chinese system. It can be seen in the protests against investment losses, in the boycotts against mortgage payments for homes that may never be delivered, and in social media posts from businesspeople worried about the darkening economic outlook.
The question is whether China can avoid a hard landing, and if one occurs, will it push the Party leadership to recommit to reform and opening, or push them in the opposite direction—toward even greater political control. There is nothing preordained about China’s choice, or inevitable about the economic outlook that will result from it. China has chosen a more market-friendly path before—even if it has repeatedly backtracked when the going got tough. The challenge is to discern China’s direction in the face of flawed economic data, an increasingly strained diplomatic conversation (what EU top diplomat Josep Borrell has called a “dialogue of the deaf”), and disinformation campaigns that undermine trust. The goal of China Pathfinder is to support policy and business decision-making, with an objective framework that tries to make sense of China’s economic system and where it is headed.
The outline of this report is as follows:
Chapter 1 provides essential background on our goal of benchmarking China’s economic trajectory, introduces our research design, and relates economic developments in 2021 and 2022 to the Pathfinder framework.
Chapter 2 takes stock of China’s proximity to open market economies in 2021 for each of our six clusters, as well as a historical comparison to 2010.
Chapter 3 summarizes the key findings and discusses implications for policymakers and business leaders, with a focus on advanced economies
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