End of the Line: The Cost of Faltering Reforms

The current cycle of China Pathfinder is coming to a close at a critical time for China’s economy. After delaying major policy moves in 2023, China announced a major slate of reforms at the long-awaited Third Plenum of the Chinese Communist Party in July 2024. It faces enormous challenges: 2023 saw lackluster growth, continued property sector woes, and growing foreign pushback against manufacturing overcapacity and the treatment of foreign firms. China’s reform experience in 2023 and its successes and failures set the stage for the new reforms.

To track Beijing’s reform efforts to date, China Pathfinder compares China’s economic system to those of market economies. Using six components of the market model—financial system development, market competition, modern innovation system, trade openness, direct investment openness, and portfolio investment openness—we established a quantitative framework for understanding China’s progress or regression on reform. China’s outsized role in the global economy and the necessity of reform to maintain the country’s growth make this work key to understanding China’s future trajectory.

Key findings

• Compared to its own 2010 baseline, China has improved. In all of the clusters analyzed by China Pathfinder, China has narrowed the gap with the Organization for Economic Co-operation and Development (OECD). However, further progress has been elusive, and our indicators suggest China has hit limits on convergence with the OECD. This gap will likely remain in the coming years.
• In market competition—especially seen in the presence of state-owned enterprises in the economy, but also more broadly—China is unwilling to make the concessions to the traditional role of the state in its economy necessary to achieve more durable structural reform.
• China’s progress stalled in several areas tracked by China Pathfinder. These include innovation, as China’s fiscal constraints began to have a meaningful impact on its technological and development capacity by some metrics. They also include trade, where security concerns and geopolitics (including uncertainty over data and security rules) weigh on China’s trade openness. Even as China exported more and more in 2023 and became increasingly important for marginal economic growth, services trade has been affected.
• In a narrow sense, China saw some progress in dealing with financial challenges in 2023. Beijing prevented debt emergencies in the property sector and local government financing space from triggering a general financial crisis; the resulting slowdown in credit (and cleanup) was reflected in an improvement of China’s financial system reform score. Its composite cluster score surpassed that of several OECD countries for the first time since 2020. However, such achievements are modest compared to ongoing problems: poor-quality financial intermediation, declining capital productivity, and deviations from market financial regulatory principles.
• Developed market scores continued to decline on average in several categories, including innovation and market competition (marginally). This shows some reform backsliding and a resurgence of industrial policy (and geoeconomic security policy) in the OECD, even as most countries remain well ahead of where they were in 2010.
• There are more data obstacles now to analyzing China’s economy than in 2019, including data lags and delays that hamper study and have a chilling effect on open discussion of economic problems in China. But alternative data—and a rise in frank domestic and international economic commentary—are improving these conditions.