What Washington Means by China's 'Economic Liberalization Seems to Have Slowed or Reversed'

By Daniel Rosen

Daniel Rosen is Founder and China Director at Rhodium Group and serves as a Wadsworth Fellow with the Asia Society Policy Institute. This post was originally published on LinkedIn

Complexity, non-transparency and internal disagreements have made consensus on whether China is reforming its economy – and if so in what direction – nearly impossible. To remedy this our team at Rhodium Group developed The China Dashboard in partnership with the Asia Society Policy Institute. The project has a simple design: gauge China’s implementation of its self-stated reform goals in the 10 policy domains it judges essential to long-term growth potential. These indicators reflect outcomes in the economy, not just pledges in the bureaucracy, no matter how high up.

We released the Winter 2018 edition of the Dashboard last week. Unfortunately the results were not pretty: we find that Beijing continues to prioritize high growth by deferring implementation of its comprehensive economic reform program. The bulk of Chinese reform priorities – 8 out of 10 areas of the Dashboard – show little or no forward movement. Telling signs include enduring local fiscal gaps, below average cross-border investment, and large high capital-output ratios.

Still, Beijing deserves credit where credit is due. I wanted to use this short LinkedIn post (my first!) to discuss the two areas of ten we monitor where China actually is making progress: innovation and the environment.

First, our analysis shows that China is having real success in lifting the share of its national output coming from innovative industries. The weight of innovative industries as a share of all industrial sector value-added (IVA) in China continued a trend of steady growth led by the automotive sector, reaching a new peak in 3Q2017 according to our indicators:

 

These numbers suggest China will catch up to the 2011–2014 levels of U.S. contribution from innovative industries to the industrial structure in less than a year.

This progress is the result of two key factors: 1) aggressive R&D and subsidy programs to promote innovative industries, and 2) a sharp drop in the contribution of less innovative sectors to IVA as a result of the government’s push to cut overcapacity in heavy industry. (This suggests the current pace of rapid change may be misleading and fleeting, and that China’s innovative IVA may even fall in coming quarters if overcapacity cuts slip down the policy agenda). For now, this looks like a glaring success.

The second area where Beijing deserves credit is environmental policy. To gauge environmental progress, we track measures of air and water pollution. Lower levels indicate improved conditions. Our findings show that China’s air quality is improving in major cities, and while water quality has gotten worse, that outcome can be attributed to short-term weather conditions. With overall environmental enforcement being meaningfully stepped up, air quality should continue a positive trend, and be joined by water in the near future.

 

The Dashboard does show backsliding in many other reform areas. I don’t think this proves that China is in a full retreat from reform and opening. But the challenge for Beijing is not just avoiding retreat: it must increase forward movement to put the economy on a more sustainable growth path.

To learn more about our other reform clusters, explore the full Winter 2018 update here: http://chinadashboard.asiasociety.org

The Dashboard will be updated quarterly, and we aim to ensure accessibility. This project must bring non-economists to the table, not just reach new heights in data gymnastics. Your feedback is welcome!