NEW YORK, October 22, 2014—China’s economic reform program announced in November 2013 has begun to bring China closer to an advanced, market-oriented economic model that can deliver a potential GDP growth rate of 6% through 2020, according to a new study by the Asia Society Policy Institute in collaboration with Rhodium Group.
The study, the most comprehensive analysis of the reform program to date, finds that China is moving ahead in most reform areas with urgency, but warns that the country must overhaul its approach to governance in order to achieve its economic potential.
“President Xi Jinping’s economic reform program marks a watershed moment for the country. This study confirms that China’s economic overhaul is real, and it will help a new, modern China to emerge,” says Josette Sheeran, President and CEO of the Asia Society.
The study, “Avoiding the Blind Alley: China’s Economic Overhaul and Its Global Implications,” was written by Daniel H. Rosen, founding partner of Rhodium Group and a Jack Wadsworth Fellow at the Asia Society Policy Institute.
“We conclude that the best-case scenario is also the most likely: that China will enact its plan of economic reform, making a potential GDP growth rate of 6% possible in 2020. If reforms stall, productivity gains and investment volumes will shrink, leaving China with GDP growth of just 1% to 3%,” Rosen said. “The actual outcome will mean the difference between a healthy global economy and one that struggles to fulfill its growth potential.”
The study presents a thorough and systematic assessment of the proposed reforms announced at the Third Plenum of the Central Committee of the Communist Party of China in November 2013, as well as the progress that has been made to implement them. It finds that China’s reform plan is broadly consistent with the policies and practices familiar in advanced market economies – a finding that challenges some views that the program is incoherent.
The report finds that implementation of policy and administrative changes is underway in each of nine major reform areas, with some areas showing a fast pace and notable results and others exhibiting initial changes and some uncertainty about what changes are still to come.
The most significant changes so far have come in two critical areas. The first is China’s financial system, which needs to have key prices such as bank deposit rates and currency exchange rates freed from political intervention, as well as a more open market for financial services providers. The second is the fiscal relationship between Beijing and local governments, which has long deprived local governments of needed funds and forced them to make up the difference by selling land and taking on debt.
China’s competition policy and treatment of its state-owned enterprises, which include some of the country’s largest firms, show that China is removing some of the obstacles that will allow market forces to play the “decisive role” in the economy that President Xi and other leaders have called for. However, the path toward a level playing field for all companies, especially foreign firms, has not been charted clearly.
The study finds that the proposed economic reforms could transform China into a modern regulatory state, with bureaucrats and administrators empowered to enforce the rule of law and due process. Achieving that transformation, however, will depend on major reforms to China’s system of governance.
In a series of policy recommendations, the report outlines steps that policy makers and business leaders outside China can take to advance the reform program and to prepare for the economic changes it will bring about. These recommendations include:
• Defining and tracking economic metrics to gauge the progress of reform
• Demonstrating support for reform, with programs to help China build the capacities need to institute its new economic policies
• Setting policies that will help them prepare for shifts in China’s economic structure and significant improvements in its productivity and competitiveness
• Involving China in international economic institutions and in reshaping global economic norms
• Recognizing that China understands that it must reform out of self-interest, and lessening the emphasis placed on reform as part of international negotiations
The executive summary and full report are available at AsiaSociety.org/ChinaEconomy.
About the Asia Society
Founded in 1956 by John D. Rockefeller 3rd, Asia Society is the leading educational organization dedicated to promoting mutual understanding and strengthening partnerships among peoples, leaders and institutions of Asia and the United States in a global context. Across the fields of arts, business, culture, education, and policy, the Society provides insight, generates ideas, and promotes collaboration to address present challenges and create a shared future. Asia Society is a nonpartisan, nonprofit institution with headquarters in New York, major centers in Hong Kong and Houston, and offices in Los Angeles, Manila, Mumbai, San Francisco, Seoul, Shanghai, Sydney, and Washington, D.C.
About the Asia Society Policy Institute
The Asia Society Policy Institute is the hub of a non-partisan, Asia-centric global network of experts who create solutions that advance the prosperity, security, and sustainability of Asia. With top-level advisors, fellows, and the premier Asia-wide network of experts, the Asia Society Policy Institute provides a unique platform for policy development. It boasts a truly Asia-wide scope; participation from business and policy leaders on equal footing; and the application of Asia Society’s world-leading convening and research capabilities to the pursuit of prosperity, security, and sustainability across Asia.
About Rhodium Group
Rhodium Group (RHG) combines policy experience, quantitative economic tools and on-the-ground research to analyze disruptive global trends. Its work supports the investment management, strategic planning and policy needs of the financial, corporate, non-profit, and government sectors. RHG has offices in New York, California and Washington, and associates in Shanghai and New Delhi.