China Pathfinder: Q1 2022 Update

China Pathfinder is a multi-year initiative from the Atlantic Council’s GeoEconomics Center and Rhodium Group to measure China’s system relative to advanced market economies in six areas: financial system development, market competition, modern innovation system, trade openness, direct investment openness, and portfolio investment openness. To explore our inaugural data visualization and read our annual report and updates, please visit the China Pathfinder site.

China’s leaders spent the first months of 2022 in damage-control mode, as a host of economic problems and new pandemic-related challenges piled up. With the entire city of Shanghai under a zero-COVID lockdown, the crackdown on technology firms ongoing,  and the property sector deteriorating, good economic news was scarce. The lockdowns alone—not considering the less dire zero-COVID measures—have affected more than 25 percent of China’s population, hitting consumption and manufacturing across the country and triggering a broad public outcry. On the geopolitical front, Beijing’s ambiguous positioning on Russia’s invasion of Ukraine raised the prospect of secondary sanctions, amplifying the risk calculations for foreign businesses in China. Foreign capital, meanwhile, has been flowing out of China amid a mounting debate about whether the country is becoming “uninvestable.” With the 20th Communist Party Congress scheduled for November, China’s leadership will be firmly focused on ensuring stability and growth this year, pushing reform down its list of priorities.

Quarterly Assessment and Outlook

The Bottom Line: In the first quarter of 2022, Chinese authorities were active in three of the six economic clusters that make up the China Pathfinder analytical framework: financial system development, competition policy, and portfolio investment openness. There were fewer developments in the innovation, trade, and direct investment clusters. In assessing whether China’s economic system moved toward or away from market economy norms in this quarter, our analysis shows a distinctly negative shift.

Figure 1 reflects the direction of China’s policy activity in the domestic financial system, market competition, and innovation system, as well as policies that impact trade, direct investment, and portfolio investment openness. This heatmap is derived from in-house policy tracking that weighs and evaluates the impact of Chinese policies in Q1. Actions are evaluated based on their systemic importance to China’s development path toward or away from market economy norms. The assessment of a policy’s importance incorporates top-level political signaling with regard to the government’s priorities, the authority of the issuing and implementing bodies in the Chinese government hierarchy, and the impact of the policy on China’s economy.

A Look at Q1 Trendlines

State intervention to shape market outcomes and boost growth defined policymaking in Q1 2022. In March, China’s leaders met for the so-called “Two Sessions”—important annual meetings where policy priorities are set for the coming year. The Government Work Report for 2022 sent conflicting signals: an aggressive target for gross domestic product (GDP) growth of “around 5.5 percent,” but only modest measures to support this target. The Chinese government insists that growth must be strong this year, but the prospect of delivering on this aim is fading with COVID lockdowns impacting the most important cities in the nation, and household demand and factory supplies curtailed.

Financial System

Beijing backpedals on holding real estate developers accountable but increases controls on how capital is allocated. Financial system policy centered on at-risk real estate firms this quarter. Overall, Beijing is not providing significant concrete support for property developers, but is using heavy-handed interventions to try to prevent a credit crunch in the sector. The People’s Bank of China (PBOC) and China Banking and Insurance Regulatory Commission (CBIRC) encouraged Chinese asset management companies (AMCs), such as China Huarong Asset Management Co., to support troubled real estate developers by absorbing bad loans and taking over suspended projects. The PBOC issued window guidance (an unofficial method to align banks with the government’s lending growth targets) to prevent banks from calling in their property developer loans.

The 2022 Government Work Report stated that the PBOC, CBIRC, and Ministry of Finance may take financial stability promotion to new heights by raising several hundred billion renminbi (RMB) for a fund to bail out financial institutions. These policies exacerbate the moral hazard in China’s real estate sector in numerous ways: they encourage AMCs to engage in transactions with risky developers that are unlikely to be profitable; incentivize large developers to add leverage; and ensure limited liability from high-risk lending practices. The property mess has been a long time coming, but this year, temporary fixes will take precedence over meaningful steps to tackle problems in the sector because political priorities come first.

Elsewhere in the financial system, CBIRC announced it would set up a “traffic light” system for investment. Though the announcement was light on details (beyond promising to strengthen oversight of high-leverage and monopolistic behavior), related government messaging provides additional context. This marks the latest step in the government’s campaign on capital expansion in select sectors or, as the People’s Daily described it, the “disorderly expansion and barbaric growth of capital.” In the same piece, the People’s Daily said the goal of managing capital was to “guide and urge companies to obey the party’s leadership.” Investors are unlikely to welcome another attempt by the government to tell them where they should put their money. Certainly, Beijing’s tolerance for over-investment in property does not inspire confidence.

Market Competition

The tech crackdown, which accelerated in the summer of 2021, continued in Q1 2022 with the state’s increased scrutiny on China’s innovative industries (Figure 2). The Cyberspace Administration of China (CAC), which has emerged as a super-regulator over the course of the crackdown, summoned various tech chief executive officers (CEOs) in January to lecture them on the importance of following state guidance. According to the CAC, CEOs raved about the session and agreed to be more cognizant of their social responsibility. An example of the growing influence of regulators in the business decisions of private companies was Tencent’s announcement in Q1 2022 that it would reorganize its film unit to produce more patriotic content instead of Hollywood blockbusters. Companies are increasingly unsure about how to follow Beijing’s ideological guidance while simultaneously achieving market-driven results.

The CAC also began implementing new regulations that steer enterprises toward using algorithms to “promote socialist core values,” increase the spread of “positive energy,” and effectively deal with “illegal and bad information.” How to deal with algorithms and their pervasive influence on social discourse is an ongoing conversation worldwide. In the Chinese context, however, this new wave of regulation coincides with the tech crackdown and tightening state control over how firms and individuals share information.

The only development in the tech regulatory space that can be seen as a bright spot was on the data front: the Ministry of Industry and Information Technology (MIIT) revised draft rules issued in Q4 2021 on corporate data security, removing an outright ban on exporting “core data.” While the regulations still leave the government in control of data rules, the revision points to a less restrictive approach. Even so, the real impact will depend on how the regulations are implemented.

China’s small and medium-sized enterprises (SMEs), chronically starved for capital, received another boost from the government, which may have a positive impact on market competition. SMEs have been hit particularly hard by disruptions to the economy resulting from structural problems and COVID outbreaks. Based on anecdotal reports of SME failures and data showing deeply negative new business registrations, the outlook for healthy market competition could be badly impaired by myriad business failures. To alleviate these risks and support SMEs through the current tempest, China—like countries throughout the world during COVID—has sweetened emergency measures to help enterprises. The 2022 Government Work Report included plans for a tax cut and tax rebate in 2022, amounting to 2.5 trillion RMB. The tax reduction supports manufacturing, small and low-profit enterprises, and self-employed businesses. The report includes a temporary provision for small-scale taxpayers to be exempted from value-added tax (VAT). These measures should promote cash flow to small businesses and encourage investment. This policy is both pro-growth and pro-market, as it reduces market distortions and enables small firms to compete on a more even playing field.

Openness to Investment

This quarter has seen major shifts in the portfolio investment space, with investor confidence in China declining. After net inflows totaled a record $138 billion in 2021, portfolio outflows surged in Q1 2022: Net holdings of onshore bonds and equities fell by $36 billion and $16 billion, respectively, in the quarter (Figure 3). Though narrowing US-China yield spreads were a big factor, other drivers of these outflows included concerns over the tech crackdown, falling GDP growth expectations, and growing political risks tied to China’s stance on Russia.

Long-term investors have based their bullish China bets on Beijing’s commitment to a gradual liberalization of finance. Recent signals have offered reasons to doubt that commitment, and these “passive” investors are now rethinking their assumptions. To be sure, there have also been some inflows recently, but these were mostly short-term in nature. With interest rate spreads between China and the United States closing quickly as Washington raises rates, we are seeing a reversal of flows for investments of less than one year in duration.


US-listed Chinese firms saw their shares decline steeply over the span of a few months (Figure 4) amid long-simmering questions about access to auditing information and indications that firms could be delisted as early as 2024 under the Holding Foreign Companies Accountable Act. At the time of publication, the SEC has provisionally identified 128 companies as at risk of being delisted, and the list is evolving. The China Securities Regulatory Commission (CSRC) went so far as to modify a decade-old rule restricting the sharing of financial data by offshore-listed firms. Throughout the quarter, Chinese regulators talked up the prospect of a breakthrough with US regulators, although there has not been a positive outcome yet. While the rule modification is a positive step, the core conflict has yet to be resolved, as the Public Company Accounting Oversight Board (PCAOB) has insisted on nothing less than full access to audit information for all listed firms.


Special Topic: The Improbable 5.5 Percent Growth Target

At 5.5 percent, the Chinese government’s GDP growth target for 2022 was seen as a stretch even before a new round of COVID-related lockdowns was imposed in the waning days of Q1. Beijing’s subsequent insistence on upholding the target suggests that political objectives will trump reform priorities in the run-up to the Communist Party Congress in late 2022. China’s ambiguous stance on the Russian invasion of Ukraine—voicing support for an end to the conflict, yet blaming NATO for it—has added to the geopolitical risks surrounding China’s growth outlook.

Real Estate: No Easy Reset

Property is by far the most important sector in China—representing up to a quarter of the country’s GDP. At the end of Q1 2022, all indicators pointed to a meaningful contraction in residential construction activity and sales (Figure 5), with numerous private developers in or at risk of default. In 2021, total property sales amounted to 18.2 trillion RMB, or 16 percent of GDP. With housing prices and sales volumes in decline, developers must prepare for a 2 trillion RMB reduction in annualized sales revenue. The sales decline is more than four times as large as China’s last market correction in 2014–2015. Even with the decision on April 27 to turbocharge infrastructure investment, it is unlikely that we will see growth in overall investment levels in 2022 given the ongoing weakness in the property sector.


Tech Crackdown: No End in Sight

The costs of Beijing’s tech crackdown go beyond reduced valuations: employment and new business formation have also taken a hit. Employment data scraped from Maimai, a job networking platform, shows steep declines in new hiring in the sectors targeted by the crackdown (gaming, ride-hailing, social media, and e-commerce) starting in July 2021 (Figure 6). Hiring in these sectors fell at a greater rate than the steep 8.2 percent year-on-year decline seen in the overall economy in the second half of 2021. In previous economic downturns, ride-hailing and other gig economy sectors absorbed displaced workers. This is no longer the case.


Despite efforts to support “hard-tech” industries, hiring, and business formation are showing mixed results in these sectors as well. One might hope that tightening measures in education and e-commerce would free up capital and labor for more strategic sectors like robotics or biotechnology. But, based on some business formation indicators, hard-tech sectors have not offset the lackluster growth in sectors directly affected by the crackdown. The continuing regulatory crackdown is dragging growth down further at a time when confidence is already strained. Regulatory goals are hindering the vitality of certain sectors and undermining China’s ability to meet its growth objectives.

Zero-COVID Lockdowns: Is There a Breaking Point?

In Q1 2022, 45 Chinese cities—including Xi’an, Tangshan, Dongguan and, critically, economic powerhouses Shenzhen and Shanghai—faced lockdowns due to COVID-19 outbreaks. In the major cities alone, around 97 million people had endured in-home lockdowns by the end of March. The response to the outbreak is now the most significant drag on the economy, with “dynamic clearing” hitting consumption. Official GDP statistics for Q1 suggest the economy performed well—an assessment that strains credulity.

Economists at the Chinese University of Hong Kong estimate that lockdowns will cost China at least $46 billion per month in lost output, the equivalent of 3.1 percent of GDP. While the Government Work Report pledged to promote a consumption recovery, the zero-COVID policy is making that impossible. The Baidu migration index (Figure 7) shows that restrictions are preventing the domestic movement of people for work and travel. This undermines services sector activity, household earnings, factory output, and consumption spending.


Looking Ahead

The government’s upbeat growth story is being sorely tested by economic realities on the ground. Despite significant headwinds, including the property sector contraction and lockdowns, China reported an improbable 4.8 percent growth rate for Q1 2022. This has raised questions about the credibility of China’s data among observers in the country and beyond. After the data release, the International Monetary Fund, banks, and private analysts cut their own China growth forecasts.

Lockdowns will raise economic costs in the months ahead. The Shanghai government’s inability to manage a citywide lockdown sent economic and political shockwaves across the country. Hoarding is taking place in preparation for future lockdowns, adding to food inflation and aggravating supply chain stress. Xi’an and Shanghai officials were put in a nearly impossible situation by the leadership in Beijing, and their struggles, in turn, will make it harder for authorities in other cities to maintain public confidence. As the broader Chinese public has witnessed the extremity of these lockdowns, fears of a repeat situation will send residents scrambling to escape in advance. Even if Shanghai’s outbreak comes under control, future outbreaks will be far more difficult to control.

With growth decelerating and fewer attractive policy options available to China’s authorities, might Beijing be tempted to reopen the reform debate? Our expectation is that policy flexibility will remain limited in the run-up to the Communist Party Congress in November. But, the worse the economy gets, the greater the need for China’s leaders to adjust their course.

US Policy Options to Reduce Russian Energy Dependence

Russia’s invasion of Ukraine has brought into stark relief the national security consequences of European reliance on Russian natural gas and global reliance on Russian oil. Russia accounts for more than a third of all natural gas consumed in Europe and is the second-largest oil exporter in the world, which is constraining US, European, and other allies’ responses to Russian aggression in Ukraine. This note outlines specific policy options available to the US government to reduce EU and global dependence on Russian energy, while continuing to reduce greenhouse gas (GHG) emissions.

Key points

The current energy landscape

  • Natural gas: When it comes to natural gas, Europe needs Russia more than Russia needs Europe. Europe (broadly defined) relies on Russia for 34-38% of its current natural gas needs. Gas plays a critical role in European energy security at present, providing flexible capacity for peak winter heating and industrial production. Gas sales to Europe are a meaningful source of Russian export revenue (accounting for 1.5-1.6% of GDP in 2020 and likely 2.3-2.6% of GDP in 2021) but significantly less important than oil export revenue, which reached 11% of GDP last year. Reducing dependence on Russian gas is critical for European energy security but less likely to on its own compel Moscow to change course.
  • Oil: Reducing Russian oil export revenue would put greater economic pressure on Moscow but also presents significant risks for oil consumers in the US and elsewhere in the world, with implications for the global economic recovery. Russia exports 7.4 million barrels a day of oil—11% of all internationally traded oil globally. Markets were already relatively tight before Russia invaded Ukraine, and complete elimination of Russian supply—an amount three times larger than Iranian oil exports in 2011 when those sanctions were adopted— would be massively disruptive (as indicated by the recent run-up in global oil prices).

Short-term US policy options

In the coming months, the most pressing priority is to reduce European natural gas demand and identify alternative sources of gas supply. While most of this burden falls on European policymakers, there are concrete actions US policymakers can take to lend support. The US will play a more central role in the effort to reduce Russian oil revenue (and global dependence on Russian oil exports), while limiting the impact on global oil prices through its expertise in administering financial sanctions.

  • Reducing European dependence on Russian gas: Options for delivering large-scale reductions in European gas demand over the next 6-9 months ahead of the 2022/2023 winter heating season are largely limited to a) redirecting existing LNG supply from other parts of the world to Europe, b) maximizing the use of existing non-gas power generation resources, and c) implementing an aggressive demand response program. Some of these measures may increase GHG emissions, but the effect will be small (less than 0.1% of total global emissions) and temporary. The US can help support European efforts through diplomatic engagement with LNG importers, by providing manufacturing and technical support for a widespread European demand response campaign in buildings, and by ensuring that gas-price driven reductions in European industrial production have as limited an economic and national security cost as possible.
  • Reducing Russian oil revenue while minimizing global price risk: US policymakers have a more central role to play in efforts to reduce Russian oil revenue at as little cost as possible to consumers in the US and around the world. The US ban on oil imports from Russia currently being considered in Congress would have a modest impact—both on Russian revenue and global oil prices—as the US only accounts for 9% of Russian oil exports. Were Europe to follow suit the impact (and risk) would be much larger—more than half of Russian oil exports go to Europe, with a large share being shipped by pipeline (and thus harder to quickly replace). The most important role for US policymakers in the weeks and months ahead is to steward the new sanctions regime, leveraging the Treasury Department’s deep sanctions expertise, including implementation of the 2011-2015 Iranian oil sanctions. There are important differences between that situation and the current crisis, but the Iran sanctions playbook still has a lot to offer on how to effectively reduce Russian oil export revenue while limiting the increase in global oil prices.

Medium-term US policy strategy

While short-term options to reduce dependence on Russian energy are largely limited to the redirection of existing supply and reductions in demand, investments in new energy capacity starting today can substantially improve the options available over the next 5-10 years. Here the most attractive US policy options for reducing dependence on Russian energy will also reduce GHG emissions, helping both the US and Europe stay on track to meeting their international climate commitments.

  • Reduce US oil and gas demand to reduce economic vulnerability and diversify European supply: Accelerating clean energy deployment reduces US economic vulnerability to supply disruptions in Russia or elsewhere in the world and frees up oil and gas for export to Europe and other allies. For example, in our modeling of a policy pathway to the US’s 2030 climate target—a combination of federal clean energy tax incentives and grant programs, and additional actions by the executive branch and subnational actors—we find significant associated energy security benefits. US oil expenditures fall by up to 24% by 2030 compared to current policy, and US oil and LNG exports increase by up to 29% and 15% respectively.
  • Scale US production of emerging low-carbon alternatives to Russian oil and gas: Providing Europe and other countries with alternative sources of oil and gas will only go so far in reducing Russian economic leverage. There are a number of options available to US policymakers to significantly accelerate the research, development, demonstration and deployment of the low-emissions technologies that will be most effective in substantially reducing European dependence on Russian gas while still meeting their climate commitments. These include technology investments in hydrogen, sustainable aviation fuels, long-duration electricity storage and advanced battery technology, and manufacturing and deployment incentives to get these technologies to scale.
  • Directly support an accelerated energy transition in Europe: Alongside investments in scaling the production of key low-emissions technological alternatives to Russian oil and gas in Europe, the US can directly support the export and installation of those technologies. This can include grant programs, loan guarantees, technical assistance and trade and project finance—a Marshall Plan of sorts for energy. This could be particularly important if the current confrontation with Russia proves economically costly for Europe and limits their ability to entirely self-finance their own energy transition.
  • Use the anti-Russia coalition to secure critical material supply chains for a low-carbon economy: While in general, low-carbon alternatives to current oil and gas markets provide more price stability and economic security, new clean energy technologies do come with some of their own security risks given their reliance on critical minerals like lithium, cobalt and nickel. Diversifying global supplies of these critical minerals over the next few years will be crucial to securing the clean energy economy. The current coalition of countries countering Russian aggressing in Europe is an excellent group to develop a coordinated international strategy, once the immediate crisis has passed.
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Beijing’s Russia Reckoning

Russia’s military aggression in Ukraine and the concerted Western response to it are forcing hard choices in Beijing. Regardless of how China balances its support for Russia and its long-term interest in ensuring access to the global financial system, Beijing’s decisions in the coming months will be carefully scrutinized. So long as the G7 consensus on sanctions against Russia holds and the United States can credibly threaten secondary sanctions on Chinese institutions, China is likely to prioritize those institutions’ continued access to US dollar and euro financing. This means it is likely to encourage its big banks to comply with the financial sanctions aimed at Russia and tread carefully in helping Moscow navigate export controls on key technologies. Beijing will want to avoid becoming a bigger target for Washington. While there is some space for China to continue non-dollar trade with Russia through banks that are less exposed to sanctions, there are limits to how much Beijing can ease Moscow’s economic stress through trade.  

Over the past week, we have witnessed a remarkably robust Western response to Russia’s invasion of Ukraine, including growing European support for cutting Russian institutions off from the SWIFT network, the freezing and seizing of the assets of Russian elites, and most significantly, the decision to extend financial sanctions and asset freezes to the Central Bank of Russia (CBR).

In the coming weeks, China must decide to what degree it will try to work around G7 sanctions in defiance of Western objectives as it tries to stay engaged with the Russian economy. On Wednesday, we received the clearest answer to this question so far from Beijing: Guo Shuqing, chairman of China’s banking regulator, stated that China opposed “unilateral” sanctions and would continue normal trade and economic relations with affected parties. China traditionally defines unilateral sanctions as those imposed outside of the United Nations, but given the robust sanctions that have been erected via G7 coordination, Beijing may be singling out US secondary sanctions and leaving the door open to counter-sanction moves down the line.

Beijing would clearly prefer to pursue a third way somewhere between the binary choice of supporting Russia or refusing to do so. That middle path involves quietly maintaining existing channels of economic engagement with Russia, as Guo’s remarks suggest, while minimizing the exposure of China’s financial institutions to Western sanctions.

The problem for Beijing is that maintaining economic and financial engagement with Russia will be hard to conceal under the current sanctions architecture. Moreover, the White House appears to be putting Beijing on notice that it intends to enforce secondary sanctions with the strategic intent of undermining the Eurasian entente. If the Biden administration follows this path, Beijing may have to consider a more aggressive strategy for countering secondary sanctions on Chinese institutions that continue to do business with specially designated nationals (SDNs) and blocked persons in Russia.

Chinese banks are already acting cautiously due to the risk of sanctions, with Bloomberg reporting that the Industrial and Commercial Bank of China’s offshore units and the Bank of China are restricting USD-denominated letters of credit for transactions between Russian and Chinese firms. Coal trading firms are apparently doing the same, awaiting policy guidance on these transactions. Beijing will need to tell them soon what they are allowed to do and what they should avoid.

Beijing faces a number of difficult choices in responding to the recent barrage of sanctions which we detail below.

Central Bank Sanctions

By far the most significant step thus far was freezing the assets of the Russian central bank, effectively leaving China as Russia’s main potential source of foreign exchange to defend the ruble and Russia’s financial system amidst significant capital outflows. Beijing will presumably allow the CBR to continue trading and accessing the portion of its foreign exchange reserves deployed in Chinese markets. That totals around $90 billion, according to the CBR’s January 2021 annual report, or 14.2% of Russia’s total reserves. The data shows that $81 billion of that Russian money in China — or almost all of it — is in RMB-denominated holdings.

It would be one thing for the CBR to access those reserves and trade in Chinese financial markets, but quite another for Beijing to allow the CBR to sell RMB-denominated assets for US dollars or euros. This could expose the Chinese entity involved in providing that foreign currency to sanctions. We expect that this would be a bridge too far for Beijing. The alternative—expanding an existing 150 billion yuan ($23.7 billion) RMB swap line with the CBR for trade settlement in energy or other areas—would also be seen as an aggressive deepening of China’s financial relationship with Russia, and would be difficult for Beijing to conceal.

Blocking Sanctions and Energy Carveouts

The United States, European Union member states, the United Kingdom, and Canada have also announced that they are cutting off some Russian banks from the SWIFT international payments system, including VTB and VEB. For now, it appears that their list excludes Gazprombank, key for energy transactions, and Sberbank, which has already been blocked from accessing dollar payments through the US financial system. The sanctions include carveouts for energy trade as the Western coalition (notably Europe) tries to mitigate the blowback on their own economies. There is plenty of room for the list of financial targets to expand in response to an escalation of Russia’s military aggression in Ukraine.

Even with these sanctions in place, Chinese firms can still conduct transactions, particularly those denominated in rubles or RMB, with Russian firms through other banks. However, despite a years-long push to increase the proportion of China-Russia trade denominated in home currencies, trade is still overwhelmingly invoiced in US dollars and euros (88% of Russian exports)[1]. Russia has replaced most of its dollar-denominated invoicing, but with euro invoicing, rather than RMB.

This composition can shift, of course, but it would require China to take steps to increase both RMB trade settlement of Russian exports (no problem for Beijing) and Russian imports denominated in RMB (which is more complicated). This would hypothetically create a “closed loop” of RMB and ruble-financed trade. However, that approach is unlikely to be sustainable beyond the short term, as traders would bear heavy risks from variation in prices, potentially ballooning trade imbalances if Russia’s position evolves to depend even more on China for all its imports, and the inability to properly hedge against shocks. As imbalances emerge, continuing this closed loop would require Chinese banks to bear the credit, currency, or sanctions risk from trading with Russian counterparties: it is improbable they are willing to do that, making a substantial increase in RMB-denominated Russia-China trade unlikely.

Figure 1

China can be expected to employ banks with less international exposure to maintain some level of trade with Russia. China’s transactions with Iran, for example, took place via the Bank of Kunlun, which was sanctioned in 2012. This was acceptable for China because the smaller lender did not have extensive linkages in the international financial system or large volumes of USD-denominated assets. If China wants to continue trade with Russian counterparties, it could use a similar approach, using smaller city commercial banks that could bear the brunt of US sanctions without risking extensive collateral damage to the rest of China’s financial system. It would then be up to the US Treasury to determine how many resources to devote to pursuing these banks’ counterparties.

Export Controls and Restrictions

Chinese executives will also have to contend with the threat of secondary sanctions on companies that supply Russia with technology using US-origin inputs, which sell sensitive dual-use goods, as well as the financial institutions which facilitate such transactions. For most established China-based technology firms, many of whom are already squarely in Washington’s crosshairs, the Russian market is not substantial enough to risk losing access to US technology over, and we expect these firms to tread cautiously.

For example, China’s largest export category to Russia is phones, accounting for 8% of overall bilateral trade worth $5 billion in 2021. This amounts to just 2.1% of China’s global phone exports, which total $220 billion. This trend also holds at the company level. Xiaomi in 2021 led the Russian market in total sales, generating some $1 billion in revenue from phone sales in the country. This accounted for just 3% of its estimated $30 billion in phone sales in the same year. For computers, the second largest Chinese export to Russia, Russian imports in 2021 amounted to $3 billion, a paltry 1.65% of China’s $181 billion in global computer exports.

Similarly, direct sales of integrated circuits (ICs) to Russia are minimal, comprising only $300 million of China’s total $108 billion in 2021 IC exports. Chinese semiconductors are exported to Russia as components in a variety of goods, including cars (2.5% of total exports), electric generators (2%), and televisions (1%). Notably, the current Foreign Direct Product Rule (FDPR) application against Russia focuses on military-industrial applications and has explicit carveouts for consumer electronics. While many consumer products may avoid inclusion in sanction-prone dual-use applications, major technology players in China that are still heavily reliant on US inputs may exercise more caution, while smaller consumer electronics firms could see a market opportunity in Russia’s growing economic isolation.

Beijing is painfully aware of how secondary sanctions against Iran ensnared a Huawei subsidiary in the Meng Wanzhou case as part of a broader pressure campaign against the Chinese telecom company over national security concerns. US application of the FDPR dealt a heavy blow to Huawei and exposed China’s vulnerabilities.

Even as China has poured resources into industrial and self-sufficiency policies to mitigate this risk, it remains dependent on US-origin technology inputs, particularly in the semiconductor space. Beijing does not want to see the United States apply FDPR to critical firms like Semiconductor Manufacturing International Corporation (SMIC), which already sits on the Department of Commerce Entity List. Still, Beijing could decide to invoke its Anti-Foreign Sanctions Law in defiance of US secondary sanctions, forcing its companies to choose between complying with US or Chinese law and creating the potential for bigger disruptions in high-technology value chains.

RMB Settlement

There has been some discussion that the international use of the RMB could expand in response to sanctions, but that possibility is remote. The basic constraints of China’s trade surplus and capital controls (as well as the present restrictions on outbound travel) prevent large volumes of RMB from leaving China and entering the international financial system. The internationalization of the RMB under these conditions depends on other countries’ willingness to accept RMB-denominated loans from Beijing and currency swaps for trade financing. (This includes the PBOC’s digital currency as well.) Russia could certainly increase those forms of borrowing, but Beijing would not be able to keep this secret: Russia would have incentives to publicly declare they had access to these new financing channels, for them to do any good. This would risk secondary sanctions for Beijing.

Similarly, the China Interbank Payment System (CIPS) is not likely to be a significant tool for sanctions avoidance, as it involves only RMB-denominated transactions and features just 75 direct participants, all of which are overseas branches of Chinese banks. The idea of the CIPS system when it was created back in 2015 was to serve as a replacement for the previous arrangement of designated individual RMB clearing banks within a particular country or jurisdiction. CIPS is not a replacement for SWIFT, an interbank messaging service, and SWIFT can be used within CIPS transactions. But for China to add Russian financial institutions to CIPS would be a notable and obvious step, even if the intent was just to expand RMB-denominated trade settlement while complying with existing sanctions.

Difficult Choices Ahead

Given the breadth and depth of G7 sanctions against Russia, Beijing will have little cover if it chooses to extend financial and economic lifelines to Russia in the near term. China’s leadership must consider several factors, including:

  • How serious is the United States about pursuing secondary sanctions against major Chinese entities at a time when its primary focus is Russia? Will economic consequences of the sanctions, including cascading supply disruptions, alter Washington’s willingness to impose heavy punitive measures on China?
  • Would Chinese sanctions-busting at a time of Russian military aggression accelerate joint action by the US, European and Asian partners to restrict technology exports to China and move supply chains out of the country?
  • To what degree can China rely on other players such as India in circumventing sanctions? New Delhi is trying to balance trade ties with Russia against growing engagement with the West. It appears to be testing how far Biden will push for compliance at a time when the US wants Indian participation in regional blocs, like the Indo-Pacific Framework and the Quad, to counter China.
  • Should the political imperative to push back against what China perceives as an overuse of US-led sanctions take precedence over practical economic considerations? Or should Beijing wait to see how the war and the international backlash against Russia play out, keeping tools like the Anti-Foreign Sanctions Law in reserve?

Both Moscow and Washington are pressing Beijing to make choices, which will either compound the pressure on the Russian economy or provide a safety valve. We suspect that Beijing’s guidance to banks and SOEs will err on the side of compliance in this heated stage of the conflict, while China’s spokespeople publicly declare opposition to “unilateral” sanctions. Beijing appears to have been taken by surprise by how far Russia has escalated its military campaign in Ukraine and is probably trying to assess, along with other governments, what a return to economic crisis conditions like those of 1998 will imply for political stability in the Kremlin.

Figure 2

There are still ways for China to maintain some level of RMB-denominated trade and push back on sanctions in less sensitive areas, but Beijing will not want to accept collateral damage to its economy because of a Russian military misadventure. When the hot phase of the conflict ends, China could try to position itself as a mediator. From this position, it could look to undermine G7 solidarity and reinforce its narrative of an emerging multipolar order — one in which China is the dominant Eurasian power, maintains important economic ties to the West, and is not constrained by political choices made in Moscow.

[1] Mrugank Brusari and Maia Nikoladze, “Russia and China: Partners in Dedollarization,” Atlantic Council, February 18, 2022,

Justice40 Initiative: Mapping Race and Ethnicity

The Biden-Harris administration has vowed to make environmental justice and boosting economic development in disadvantaged communities a national priority. Last Friday, February 18th, the White House Council on Environmental Quality (CEQ) released a preliminary Climate and Economic Justice Screening Tool, identifying communities across the country which would be eligible for federal investment under President Biden’s flagship Justice40 (J40) initiative. Notably, this tool does not include race as a factor in determining eligibility for J40 funding, a decision which has been criticized by the environmental justice community and in the media.

Using 2019 census data, in this note we’ve quantified race and ethnicity demographics of the communities identified as disadvantaged in the Climate and Economic Justice Screening Tool. We find that 64% of the people in disadvantaged communities are either Hispanic/Latino, Black, or American Indian/Alaskan Native. In total, 50% of Hispanic/Latino, Black, and American Indian/Alaskan Natives in the country reside in census tracts considered disadvantaged and qualifying for J40 funding.

Mapping race and ethnicity

The Climate and Economic Justice Screening Tool (CEJST) identifies communities across the country which are marginalized, underserved, and overburdened by pollution. The purpose of this tool is to help federal agencies identify disadvantaged communities to ensure that at least 40% of the overall benefits of federal climate, clean energy, and other key programs reach these communities. However, the beta version of the tool released this month does not include data on race and ethnicity—a decision which has been criticized by many in the environmental justice community.

In order to quantify the racial and ethnic makeup of communities identified for J40 funding, we’ve combined the CEJST dataset with demographic data. CEJST identifies a census tract as “disadvantaged” if the tract is above the thresholds for certain environmental, climate, health or socioeconomic burdens. Using race and ethnicity breakdowns from the 2019 American Community Survey, we find that within the disadvantaged communities identified by CEJST, 34% of people self-identify as Hispanic/Latino, 22% as Black, and 1.5% as American Indian/Alaskan Native (Figure 1).

We also compared the racial makeup of communities eligible for J40 funding to the racial makeup of the US as a whole. As shown in Figure 1, people of color make up a much larger share of the population marked for J40 funding compared to their share of the overall US population, although race was not explicitly considered in the screening tool methodology.

Further, we calculated the number of individuals identifying with each racial demographic group and residing in a census tract eligible for J40 funding as a percentage of the total population of that group. Over 50% of Hispanic/Latino, Black, and American Indian/Alaskan Native individuals reside in census tracts considered disadvantaged and qualifying for J40 funding (Figure 2).

Assessing the Costs and Benefits of Clean Electricity Tax Credits

The U.S. House of Representatives passed the Build Back Better Act in November 2021. If enacted, the Act will make unprecedented investments in climate change mitigation, including substantial changes to clean electricity tax credits. Building on previous modeling conducted by Rhodium Group, we analyze the costs and benefits of tax provisions similar to those passed by the House. These provisions reduce cumulative power sector carbon dioxide (CO2) emissions by 13-22% from 2022-2050, compared to a scenario without these policies. This corresponds to a 64-73% reduction in 2031 electric power emissions below 2005 levels.

We find that the benefits of the clean electricity tax credits are roughly 3-4 times greater than the costs[1]. Cumulatively, the benefits from the policies range from $335 billion to $1.8 trillion, while the costs range from $130 billion to $309 billion[2]. On a per ton basis, the tax credits will reduce CO2 emissions at a cost of roughly $33-$50 per ton. These costs are less than estimates of the damages from the release of an additional ton of CO2, i.e. the social cost of carbon (SCC), and are substantially less expensive than most current policies to reduce CO2 emissions. These benefits only account for reductions in CO2 emissions and do not include any co-benefits from reductions in conventional air pollution emissions, which would likely further improve cost effectiveness.

Build Back Better’s Clean Electricity Tax Credits

On November 19, 2021, the U.S. House of Representatives passed the Build Back Better Act [3] (BBB), a broad, $2.2 trillion piece of legislation that includes major investments in climate change, as well as health care, education, and the social safety net. The bill is currently under consideration in the U.S. Senate.

Included among the bill’s $550 billion [4] in climate change funding are several provisions critical to accelerating clean energy deployment in the United States. The bill extends and expands production tax credits (PTC) and investment tax credits (ITC) for zero-emitting generators. The bill provides a credit of up to 2.5 cents per kilowatt-hour (kWh) or up to 30% of qualified investment costs for new clean electricity generating facilities that meet apprenticeship and prevailing wage requirements. It does so first as an extension of existing PTC and ITC statutes through 2026 and then under a new clean electricity PTC and ITC thereafter (until predetermined emission reduction thresholds are met). Under a new zero-emission nuclear power PTC, the bill separately provides up to 1.5 cents/kWh to help existing nuclear plants stay online, scaled by the revenue of those plants. If they meet certain domestic content requirements, developers can take these tax credits via a direct pay mechanism. Direct pay eliminates the need to partner with tax equity investors, removing financing bottlenecks that would otherwise slow clean energy deployment.

Rhodium Group released [5] “Pathways to Build Back Better: Maximizing Clean Energy Tax Credits” in June 2021, which models several changes to tax policy similar to those proposed under BBB. Specifically, the report modeled a 2.5 cents/kWh PTC and 30% ITC available to new zero-emitting generating resources available through 2031, as well as a provision to retain existing nuclear generators without an announced retirement date. Though the modeled policies do not precisely align with the House-passed language, they are a reasonable proxy for the emissions impacts and costs of the provisions within BBB. Notably, the modeled policies do not include the extension of the ITC to grid storage and transmission projects, deadline extensions for residential and commercial distributed solar ITCs, or changes to the carbon capture tax credits in section 45(Q), so these policies are outside the scope of this analysis. In “Pathways to Paris: A Policy Assessment of the 2030 US Climate Target,” Rhodium Group modeled the effects of this more expansive set of power sector tax credits, plus federal executive and state actions, and found still more opportunities for emission abatement, including beneficial interactions between tax policy and other decarbonization policies.


Cost-benefit analyses compare the sum of potential benefits for a given policy against the associated costs, allowing for an economic assessment of policies. In our cost-benefit analysis of the modeled clean energy tax credits, we measure the benefits from projected reductions in CO2 emissions. On the cost side, we account for projected increases in power system costs and the costs of raising government revenue to fund the tax credits. We then apply a discount rate to determine the present value of the policy’s costs and benefits. To measure the dollar value of the policy’s benefits, we apply estimates of the social cost of carbon (SCC), the monetized damages of an additional metric ton of CO2, to the projected emissions reductions calculated by Rhodium Group. Thus, we calculate the gross benefits of the tax incentives as the present value of the product of reduction in CO2 emissions and the SCC.

We run three scenarios with different values of the SCC. The Biden Administration set an interim value [6] of the SCC of $51 for 2020, which is a carryover from the Obama Administration. It is widely believed to be too low [7] , but we nevertheless monetize benefits at this value. The State of New York updated the Obama numbers based on changes in international capital markets to $121 per metric ton[8] of CO2 for 2020 and uses it for setting state policies. Therefore, we assess benefits at this value. Finally, we assess the benefits at $250[9] per ton of CO2, which is a ballpark estimate of the effects of updating the SCC to reflect recent research that finds that climate damages are larger than previously understood.

To measure the policy’s costs, we use Rhodium Group’s estimates of total electric power system costs, inclusive of private sector costs and increased fiscal cost to the federal government. There is an increase in overall system costs when including both private and public expenditures as the tax credits are not precisely calibrated to pay for the incremental difference between the clean technology they are incenting and the incumbent fossil technologies they are meant to displace in the dispatch stack. Though private costs to utilities and clean energy developers decrease, the overall system costs increase owing to this inefficiency.

The Rhodium Group cost estimates include two scenarios[10]: a low cost scenario and a central cost scenario. These pathways reflect a range of cost and performance estimates for electric generating technologies from the National Renewable Energy Laboratory’s Annual Technology Baseline as well as additional research conducted by Rhodium Group.[11]

Moreover, we account for the cost of taxes levied to finance the policy. A well-studied phenomenon in economics is that taxes can reduce total economic production by distorting incentives in the market. For example, increasing corporate profit taxes may cause businesses to relocate their production to other countries with lower tax rates. Using a standard value from the literature, we assume that the cost of such distortions is 40%[12] of the total revenue raised.

Though tax incentives phase out in 2031, the costs and benefits of the policies are spread out over the next 30 years. We calculate the present value of the costs and benefits at discount rates of 2%, 3%, and 5%. The 3%[13] figure has been used historically to represent the riskless real interest rate, however, the 2%[14] value better reflects changes in international capital markets over the last several decades. The 5% discount rate is also commonly used to conduct cost-benefit analyses. We treat the 2% discount rate as the base case.

The Benefits of Clean Energy Tax Incentives

Figure 1

The tax incentives lead to large reductions in CO2 emissions in both technology scenarios. Figure 1 plots cumulative emissions with and without the tax credits from 2022 through 2050. The cumulative reduction in CO2 emissions under the low and central clean energy technology cost pathways are 8.1 billion metric tons and 5.1 billion metric tons, respectively. This represents a 13-22% reduction in emissions, relative to a scenario without tax credits. At peak, the tax credits reduce CO2 emissions by 33-45% in the power sector in 2031, relative to a baseline without those investments. This corresponds to a 64-73% reduction in 2031 electric power emissions below 2005 levels.

The monetary benefits of these CO2 emissions reductions are substantial. Figure 2 reports the gross benefits for the two technology scenarios at the three SCC estimates. The benefits range from $335 billion to $1.2 trillion in the central cost pathway and from $554 billion to $1.8 trillion[15] in the low cost pathway.

Figure 2

It is noteworthy that the estimates of the gross benefits are likely to be conservative. Specifically, they understate the full benefits because they do not account for any co-benefits[16] from reductions in conventional air pollution emissions, like particulate matter and sulfur dioxide.

The Costs of Clean Energy Tax Incentives Are Less than the Benefits

The tax incentives have two costs: increased overall costs to the electric power system (including private and public expenditures) and a deadweight loss owing to reductions in economic efficiency due to taxes levied by the federal government to pay for the policies. Figure 3 plots the present value of these costs, which range from $309 billion in the low cost case to $130 billion in the central cost case.[17] More clean energy is deployed in the low cost pathway relative to the central cost pathway, thus the economic costs are higher in that case (as are the emission reductions). On an annual basis, these costs peak in 2031, the year that the modeled tax credits expire, as developers rush to take advantage of the credits. In the subsequent years, the costs reflect the continuing higher costs for operating the electric power system and tax expenditure costs for the remaining PTC payments. These costs decline as the increasing numbers of projects reach the end of the ten-year payment period of the PTC.

Figure 3

Figure 4 plots the present value of the benefits (as seen in Figure 2) along with the costs of the clean energy tax incentives under the two technology cost scenarios and for the three estimates of the SCC. Under the low technology cost scenario, the net benefits range from $245 billion to $1.5 trillion, while they range from $205 billion to $1 trillion with the central technology cost scenario.[18] The most striking feature of these results is that the benefits significantly outweigh the costs in all scenarios. With a $121 SCC[19], the ratio of the benefits to costs is 3:1 in the low technology case and 4:1 in the central technology case.[20]

Clean Energy Tax Incentives Deliver Inexpensive Reductions in CO2

Policymakers often compare the effectiveness of policy options to address climate change in terms of dollars per ton of CO2 abated. With the central discount rate of 2%, the clean energy tax incentives are projected to reduce CO2 emissions at a cost of $33-$50 per ton[21], with the range determined by the technology cost scenario. These values are on par with or lower than the values of the SCC used in this memo. In other words, the tax incentives reduce emissions at a lower cost than the estimated damages from the emissions per ton.

The clean energy tax incentives cost much less to reduce a ton of CO2 compared to many other climate policies. Figure 5 compares the tax incentives to a wide range of existing United States climate policies and is adapted from the “U.S. Energy & Climate Roadmap” by the Energy Policy Institute[22] at the University of Chicago (EPIC). The red range represents the tax incentives’ projected range of costs per ton of CO2 abated, while the other policies’ costs per ton are denoted with black ranges. The blue, green, and yellow vertical lines at $51, $121, and $250 denote the SCC values used in this report.

There are at least two critical points that come out of Figure 5. First, these tax incentives not only have benefits that exceed costs, but they are less expensive, substantially so in most cases, than almost all significant existing carbon policies. Second, most of the other policies represented cover relatively small parts of the economy, so they produce only modest reductions in CO2 emissions. In contrast, the clean energy tax incentives cover the entire electricity sector, which is the second largest source of emissions, and are projected to reduce that sector’s emissions by 33-45% in 2031 relative to a baseline scenario without these tax credits.


While the fate of Build Back Better is in the hands of the Senate, deliberations will in part focus on whether the extended and expanded clean energy tax credits merit inclusion in the final bill. Across a wide range of potential assumptions, we find that their projected benefits greatly exceed their projected costs. Additionally, on a cost per ton of CO2 abated basis, they tend to deliver greater carbon abatement bang for the buck than many other climate policies in place or under discussion in Congress and elsewhere. While tax credits are typically not considered a “first best policy,” such as pricing carbon emissions with a tax or targeting them with a cap-and-trade program, they have the potential to make substantial progress in decarbonizing the electric power sector while generating significant net-benefits to society.

[1] Under 2% discount rate and $121 social cost of carbon (see below). For 2% discount rate in general, multiples range from 2:1 ($51 SCC; low cost scenario) to 8.1:1 ($250 SCC; central cost scenario).
[2] Using 2% discount rate (see below). Numbers presented in 2020 USD.
[3] U.S. House of Representatives, “Build Back Better Act.” (H.R.5376).
[4] House Committee on the Budget, “The Build Back Better Act.”
[5] Larsen et al., “Pathway to Build Back Better: Maximizing Clean Energy Tax Credits”
[6] Interagency Working Group, “Technical Support Document.”
[7] Carleton and Greenstone, “Updating the United States Government’s Social Cost of Carbon.”
[8] New York State Department of Environmental Conservation. “Climate
Change Guidance Documents.”
[9] The SCC grows over time, consistent with empirical findings. For the $250 value, we use the SCC growth rates from the SCC estimation of $121 by NYDEC (2021). For the $51 value, we follow the United State Government’s time path, see Interagency Working Group (2021).
[10] Larsen, et al., “Taking Stock 2020: The COVID-19 Edition.”
[11] See the “Taking Stock 2020: Technical Appendix” for further detail. A short summary of the two pathways is summarized in the appendix.
[12] Finkelstein and Hendren “Welfare Analysis Meets Causal Inference.”
[13] OMB, “Circular A-4.”
[14] Greenstone and Stock, “The Right Discount Rate for Regulatory Costs and Benefits.”
[15] Gross benefits assuming 2% discount rate
[16] Lee and Greenstone, “Air Quality Life Index Annual Update.”
[17] Assuming 2% discount rate. Under 3% discount rate, these costs are $270 billion in the low cost case, and $116 billion in the central cost case. Similarly, under 5% discount rate, costs are $208 billion in the low cost case, and $94 billion in the central cost case.
[18] Net benefits assuming 2% discount rate. Net benefits under 3% and 5% discount rate, as well as central estimates for each discount rate, are presented in Table A1 in the appendix.
[19] Under $51 SCC, the ratio of the benefits to costs is 2:1 in low cost scenario and 3:1 in central cost scenario. Similarly, under $250 SCC, the ratio is 6:1 in low cost scenario and 9:1 in central cost scenario, assuming 2% discount rate.
[20] Using 2% discount rate. Under both 3% and 5% discount rates instead, the benefits to costs ratio is 1:1, 3:1 and 6:1 in low cost scenario under $51, $121, and $250 SCC, respectively, and 2:1, 4:1, and 9:1 in central cost scenario under $51, $121, and $250 SCC, respectively.
[21] Abatement costs per ton are calculated using discounted metric tons of CO2 to make estimations comparable. If undiscounted tons of CO2 are used instead, the abatement costs are lower than presented.
[22] EPIC, “U.S. Energy & Climate Roadmap.”

This note was written in collaboration with the Energy Policy Institute at the University of Chicago. 

China Pathfinder: Q4 2021 Update

China Pathfinder is a multiyear initiative from the Atlantic Council’s GeoEconomics Center and Rhodium Group to measure China’s system relative to advanced market economies in six areas: financial system development, market competition, modern innovation system, trade openness, direct investment openness, and portfolio investment openness. Below please find our update for the fourth quarter of 2021. To explore our inaugural data visualization and read our 2021 annual report, please visit the China Pathfinder website.

In the fourth quarter of 2021, China moved farther from market economy norms. The real estate sector continued to dominate the headlines as Evergrande, the country’s largest property developer, finally defaulted, along with peers Kaisa, Sinic Holdings, Fantasia, and Modern Land. Meanwhile, the government’s regulatory crackdown intensified, culminating in ride-hailing giant Didi’s forced delisting from the New York Stock Exchange. The move may herald a broader unwinding of foreign listings, particularly for data-heavy Chinese companies. While VC flows to China’s tech startups showed recovery from a low in 2020, the main targets for this investment were hardware technology sectors favored by Beijing. With expectations for a slowdown in 2022 mounting, China’s leaders dropped their fiscal restraint and promised new stimulus at their year-end Central Economic Work Conference (CEWC).

Quarterly Assessment and Outlook

The Bottom Line: In Q4 2021, Chinese authorities were active in four of the six economic clusters that make up the China Pathfinder analytical framework: financial system development, competition policy, innovation, and portfolio investment openness. There were fewer developments in the direct investment and trade clusters. In assessing whether China’s economic system moved toward or away from market economy norms in this quarter, our analysis shows a primarily negative shift.

Figure 1

Figure 1 reflects the direction of China’s policy activity in the domestic financial system, market competition, and innovation system, as well as policies that impact trade, direct investment, and portfolio investment openness. This heatmap is derived from in-house policy tracking that weighs and evaluates the impact of Chinese policies in Q4. Actions are evaluated based on their systemic importance to China’s development path toward or away from market economy norms. The assessment of a policy’s importance incorporates top-level political signaling with regard to the government’s priorities, the authority of the issuing and implementing bodies in the Chinese government hierarchy, and the impact of the policy on China’s economy.

A Look at Q4 Trendlines

State intervention to shape market outcomes was the defining feature of policymaking in Q4 2021, reflecting a systemic shift, rather than just a COVID emergency phenomenon. At the Sixth Plenum in November, the Chinese Communist Party (CCP) said the country had entered a “new era” under Xi Jinping, re-emphasizing the CCP’s leading role in steering long-term strategy. For the private sector, which spent 2021 adjusting to sudden shifts in policy priorities, toeing the Party line is becoming a necessity. This is particularly true for companies operating in the digital economy, as enforcement of “data security,” the government’s long-standing focus, kicked into high gear.

Financial System

The Chinese government rolled out few concrete policies related to the financial system, but de facto developments showed a Beijing poised to play a greater role in regulating financial markets in 2022 than in 2021. As the debt crisis in China’s property sector continued to metastasize from Evergrande to other developers in Q3, the Chinese government did not step in to stem the contagion, adding stress to the financial system. In Q4, it was Fitch, a US credit rating agency, that finally declared Evergrande and Kaisa in default, while the Chinese government continued to stay silent. The list of developers downgraded to default or near-default ballooned from three in Q3 to eight in Q4.

Without a new engine of growth, the slowdown in property sales and construction will be difficult to reverse. At a Politburo meeting in early December, messaging hinted at easing measures to “meet the reasonable housing needs of buyers.” At the CEWC, which took place days later, China’s government reaffirmed that it would support the property market. In 2020, the government introduced caps for debt ratios dubbed the “three red lines” to target property developers’ debt growth. While Beijing has not explicitly backtracked on the three red lines, it’s clear that China’s authorities are not prepared to let market forces alone shape a long-overdue shakeout in the property sector.

In Q4, China continued to intervene to limit currency fluctuations, reducing the scope for foreign exchange rate shifts to correct trade imbalances. When the People’s Bank of China (PBOC) intervenes to prevent an appreciation of the currency, it is effectively subsidizing exports and undermining market mechanisms. Throughout the past year, the central bank used a number of techniques to reduce its declared accumulation of foreign reserves on the PBOC’s balance sheet, including concealing reserves through Chinese commercial banks’ foreign currency holdings, or listing some of these holdings as “other foreign assets.” Beijing also attempted to limit currency appreciation by increasing banks’ foreign exchange required reserve ratio, rather than permitting more flexibility. All of these measures, captured via the proxy in Figure 2, are at odds with a market-driven approach to managing the exchange rate.

Figure 2

The CCP has also strengthened political oversight of China’s financial regulators and institutions. China’s Central Commission for Discipline Inspection (CCDI) announced a two-month inspection designed to “strengthen the Party’s overall leadership in financial work…and promote comprehensive and strict governance in the financial field.” These inspections suggest a lack of trust in the ability of technocrats charged with regulating China’s financial system to carry out the Party’s political objectives. The CCDI investigators’ scrutiny of ties between financial institutions and private companies may also prompt banks to reduce lending to smaller companies in favor of less efficient, but more politically relevant, state-owned enterprises (SOEs).

Market Competition

Developments in China’s market-competition environment also trended negative, driven by the government’s tightening grip on access to data and companies that operate in data-heavy sectors (Figure 3).

Figure 3

The government strengthened protections for consumer data from abuses by businesses, but not from itself. The draft Network Data Security Management Regulations, published in November 2021, classify data into three groupings accompanied by increasing safeguarding measures: general, important, and core. The definition of core data has not changed since the Data Security Law was passed last June, but the regulations further describe “important” data. This expansive category includes data on technologies and industries ranging from telecoms and financial services to artificial intelligence, as well as a catch-all class of data that may impact China’s political system, economy, and culture. While the regulations limit the access that private corporations have to consumer data, the classification system increases the state’s role in determining data rules and access. Absent clear delineation, most data held by China’s large companies could easily fall into one of the covered categories.

Under these data regulations, foreign companies operating in China face growing compliance risks. Because companies are prohibited from sharing data stored on the mainland with foreign government agencies such as law enforcement, abiding by both Chinese and foreign jurisdictions may become untenable. Meanwhile, the Shanghai Data Exchange opened for business about a week after the draft data security regulations were released—the latest in a series of moves by China’s government to boost its digital sector. Private companies previously showed hesitation in trading data on the other dozen-plus exchange platforms established across China over the past few years, with concerns that authorities may tack on regulations that transform businesses’ data into government property. The rise of local government-backed data exchange platforms and the government’s draft regulations to rein in companies’ possession of data notably do not limit the Chinese government’s own access to data.

China’s Anti-Monopoly Law could become a tool for the CCP to pursue industrial priorities. In October 2021, the draft amendment to the Anti-Monopoly Law (AML) was submitted to the National People’s Congress Standing Committee for review. The amendment specifically targets the digital economy, increases penalties on individuals and businesses that violate the AML, and provides the State Administration for Market Regulation (SAMR) with more authority in conducting merger reviews. Though the AML has the potential to curb problematic practices of Chinese Internet giants, it also provides the Chinese government with increasing leeway to selectively regulate sectors according to CCP-established goals and favored industries.

In the last quarter, Beijing ratcheted up its campaign to punish Lithuania for allowing Taiwan to open a representative office in the country. European and US companies have reported that their exports are not being allowed into China by customs officials because they contain Lithuanian inputs. There are also reports that companies are being pressured to drop Lithuanian inputs from their supply chains. Though Beijing has used punitive economic tools against European Union (EU) countries in the past, the steps taken against Lithuania represent a serious escalation in its use of economic coercion. If they persist, these measures risk doing further damage to increasingly tense EU-China relations. This marks the first instance in which China has blocked imports from companies that are not based in the country they are targeting. In this case, having operations in, or working with suppliers from, Lithuania appears sufficient cause to face retribution. For foreign companies, the dispute highlights the risks of a further politicization of market access in China, an issue that is already a long-standing sore point. This campaign’s timing was particularly awkward—just as China was celebrating the 20th anniversary of its accession to the World Trade Organization.

New mergers of SOE giants increased the concentration of market power and the risks that such power is abused in key sectors. In December 2021, China’s government approved a merger of three rare earths SOEs, paving the way for the creation of a “global rare earths giant.” This move reduces the competition between SOEs, enabling three firms to control 70 percent of China’s rare earths output and hold pricing power in the already-concentrated industry. It also runs counter to the Chinese government’s recent push to root out monopolistic practices and enforce fair competition for small- and medium-sized enterprises. China’s dominance in the global rare earths market means this merger would consolidate control over prices, with global implications for industries such as EV batteries and other clean technologies dependent on access to these minerals.

During the same month, China formally founded the state-owned China Logistics Group, merging five companies (most of which were state-owned) and expanding the new company’s logistics coverage to 30 Chinese provinces. China’s State-owned Assets Supervision and Administration Commission (SASAC) and SASAC-managed China Chengtong Holdings Group will own the majority of China Logistics Group’s shares. The new logistics giant will have exclusive control over 120 railway lines, property rights on 24.26 million square meters of land, and a transportation network operating three million licensed vehicles and logistics hubs in 30 Chinese provinces and on five continents—an unprecedented concentration of government power. The two megamergers in Q4 were not isolated incidents—last year saw an acceleration of mergers, many involving SOEs (Figure 4).

Figure 4

Innovation System

At the end of 2021, the Chinese government released a flurry of development plans outlining goals for the country’s innovation system. These covered big data, green development in industrial sectors, and intellectual property protection. The documents contain high-level statements on growth and improvement in these areas, but little detail on how targets will be met and what defines progress in these fields. While it is too early to evaluate the plans individually as pro- or anti-market reform, the continued use of five-year plans (FYPs) to shape industry development indicates the government continues to believe it should determine which industries should grow and how innovation should be defined. For instance, the big data industry previously appeared in government documents that broadly discussed innovation and was featured as a category within the “Internet Plus” initiative, which was incorporated into the 13th FYP.

Big data’s appearance in its own FYP signals that the government has designated it for special attention and intends to closely direct big data development. In the long run, this may have a chilling effect on innovation, as companies will need to adjust their practices to meet national innovation goals. China’s tech companies have become one of the most vibrant segments of its economy, attracting international renown. Despite the regulatory storm, venture capital (VC) funding reached more than $130 billion in 2021, with US VC funding into China up 23 percent from 2020 (Figure 5) and the number of foreign investors in Chinese VC exceeding the 2020 total (Figure 6). However, the main targets for this investment were hardware technology sectors favored by Beijing, such as biotech, semiconductors, and robotics, instead of traditionally popular Internet sectors. The overall increase in VC investment also tells a macroeconomic story: as many market economies retained low interest rates due to the pandemic, investors sought high-yield investment options such as stocks and VC.

Figure 5
Figure 6

Openness to Investment

While there have been some positive signs this quarter for portfolio investment openness, including reforms that promote the broader use of derivatives instruments and relatively strong inbound portfolio flows, the regulatory activity that triggered the delisting of ride-hailing giant Didi Chuxing from the New York Stock Exchange (NYSE) was a landmark event. On the regulatory side, the draft Network Data Security Management Regulations contain several provisions that could be used as a blunt instrument to discourage large, data-intensive domestic firms from listing abroad in the future. Clause 13 of the draft regulations would require firms seeking to list abroad to undergo security inspections if they handle data from more than one million users—which covers most of China’s prominent companies.

Figure 7

The China Securities Regulatory Commission (CSRC) has responded to the concerns of investors, stating that it has no intention of imposing restrictions on foreign listings and promising cooperation with US auditing officials to meet compliance requirements. While an outright ban is unlikely, the decision by CAC to push Didi to delist demonstrates that, even without such a ban, many firms are likely to face data-associated restrictions to listing abroad through variable interest entities (VIEs). For Chinese firms already listed on foreign exchanges, the latest developments in China’s regulatory space could spell trouble if the firms run afoul of the strict data security parameters.

Special Topic: Didi’s Forced Delisting

In December 2021, the ride-sharing leader Didi announced it would delist from the New York Stock Exchange, only about five months after its initial public offering (IPO). Didi simultaneously announced plans to list in Hong Kong, with the promise that existing investors’ shares could be converted. Didi’s delisting comes after months of scrutiny from China’s regulators. The Cyberspace Administration of China (CAC) expressed concerns about data security and suspicions of the company’s use of foreign services for data storage, advising Didi not to go forward with the firm’s US listing until the cybersecurity regulator completed an internal security review. However, with approval from the CSRC, the regulator formally in charge of the listing process, Didi charged forward. Within days of its IPO, seven government ministries together announced investigations into Didi’s actions.

Didi’s conduct scrutinized from multiple directions: In the months between its IPO and ultimate delisting, regulators forced Didi to pull its apps from app stores and increase driver pay. Didi is also facing an anti-monopoly investigation over the acquisition of Uber China in 2016, which is ongoing. The crackdown wiped 25 percent from Didi’s share price and the company reported a 1.7 percent decline in its third quarter revenue. Didi tried to address the CAC’s concerns, even proposing to use a People’s Liberation Army-approved cybersecurity and cloud storage provider, but the cybersecurity regulator was not deterred. Ultimately, the CAC’s pressure resulted in Didi becoming the first Chinese firm forced by Chinese regulators to delist from an overseas equity market.

Is Didi’s forced delisting an isolated case or the start of a trend? The CAC’s rapid emergence as a super-regulator for all things related to data security signals that its approach has backing from the top. This will likely motivate other regulators to harden their scrutiny of China’s tech sector. As regulatory headwinds grow, the allure of an NYSE listing may fade for Chinese firms. In fact, seven Chinese firms shelved their plans to IPO on US stock exchanges in 2021. Ultimately, companies may come to see a domestic listing as a way to curry favor with increasingly emboldened bureaucracies.

Innovation and steering clear of the CCP’s red lines: Didi’s story sends a warning to private companies in data-heavy industries that running afoul of regulators will result in severe penalties, regardless of the company’s size. Beijing’s intervention in the Didi listing resets risk assumptions. It is no longer theoretical that the state might sacrifice economic dynamism in pursuit of what it perceives to be greater national security. Now, the question is how often and how far down the value-added ladder authorities will use these tactics. This alters how firms raise capital and share information, but no one can be sure yet to what extent.

China’s government has ambitious plans for the development of the digital economy—aiming to raise the proportion of the added value of core digital economy industries in its GDP to 10 percent by 2025, up from 7.8 percent in 2020. But Beijing’s decision to make an example of Didi has cast a shadow over the innovation scene. In trying to stay out of the government’s way, companies are likely to overcompensate, only entering sectors where the political economy outlook appears predictable. High-technology frontiers may suffer as a result. Burdensome requirements for companies may undermine for-profit competition, which is essential to innovation.

A Year in Review

Distinguishing cyclical state responses to extraordinary pandemic conditions from structural drifts away from market mechanisms was challenging in 2021, as governments everywhere resorted to emergency measures. But by year end, it was difficult to ignore evidence that China’s policies were taking the country in a more authoritarian direction, not least in economic terms. Officials in Beijing claim that this policy course is warranted given the special conditions in the country—though they also deny that the tenor of “reform and opening” has, in fact, ever changed.

Forced overseas delistings, extraterritorial pressure to shun Lithuanian suppliers, sanctions on moderate foreign think tanks for raising human rights issues, political threats against multinationals operating in China if they abide by home country laws—all these and other moves reflect a growing state role in steering economic activity. Insisting otherwise makes constructive dialogue about bilateral or multilateral management of systemic differences difficult, if not impossible. Little, if any, progress on economic policy issues such as trade, investment, or subsidies was achieved between China and advanced market economies in 2021. If China can only offer market access under carefully managed conditions or if it is consistently falling short of the reform expectations it has cultivated, then the future will be worse, not better.

Some economists worry that the risks of an economic crisis in China are rising rapidly and that this will reduce the government’s appetite for reform in 2022. Unless they change, Beijing’s self-satisfied zero-COVID policies will only increase the vulnerabilities of an economy that is already suffering from weakness in domestic demand, and further fray international supply chains. Each citywide lockdown to prevent the spread of Omicron takes another bite out of growth.

With China’s real estate sector—a key engine of national growth—in meltdown, China’s domestic economy is already in financial distress. All of this will have trade implications. China will import less for construction, and its vast exports—almost $3.4 trillion in 2021, half the value of all industrial sector output—can only subside, as global demand shifts away from goods and towards services. Exchange rates will move to reflect new realities, as will interest rates as the investment landscape changes. How does this shape China’s outlook and options for 2022? The CCP’s calendar is bracketed with two milestones: the National People’s Congress in the spring and the Party Congress in the fall—meant to fête the Party’s achievements and anoint Xi Jinping for a third term. On current trajectory, those meetings may be more emergency planning councils than celebrations.

Preliminary US Greenhouse Gas Emissions Estimates for 2021

After the global pandemic spurred a year of economic upheaval in 2020, many looked to 2021 as a year for recovery. Despite the political and financial measures to support recovery in the US, 2021 was characterized by continued uncertainty as the country navigated a patchwork of COVID-19 prevention measures, access to vaccines, and the emergence of new variants. Consequently, the US economy—and production of greenhouse gas (GHG) emissions—remained below pre-pandemic levels. Based on preliminary data for 2021, Rhodium Group estimates that economy-wide GHG emissions increased 6.2% relative to 2020, though emissions remained 5% below 2019 levels. We don’t have final estimates of overall economic growth for 2021, but current estimates put year-on-year GDP growth at 5.7%. This indicates that GHG emissions rebounded slightly faster than the overall economy in 2021, largely due to a jump in coal-fired power generation, which increased 17% from 2020, and a rapid rebound in road transportation (primarily freight). As a result, progress in reducing US GHG emissions was reversed in 2021, moving from 22.2% below 2005 levels in 2020 to only 17.4% in 2021, putting the US even further off track from achieving its 2025 and 2030 climate targets.

COVID-19’s economic and emissions impact in 2021

As 2020 drew to a close, expectations for a rapid recovery in 2021 were high. Even as late as October 2021, the International Monetary Fund was forecasting a 6% rise in US GDP, more than recovering from the drop of 3.4% in 2020. But with the rise of the Omicron variant and its expected drag on growth, experts have since modified expectations. As of January 7, 2021, Goldman’s estimate of GDP growth in 2021 was 5.7%.

Although we will need to wait for final economic growth estimates, greenhouse gas emissions appear to have rebounded faster than GDP in 2021, bouncing back 6.2%. The transportation and electric power sectors experienced the steepest rise in emissions relative to 2020—10% and 6.6%, respectively—both claiming back about two-thirds of the drop from 2019 levels (Figure 2). Industry, which saw the most modest drop in emissions in 2020 at 6.2%, rebounded 3.6% in 2021—making up just over half the difference from 2019 levels. Buildings saw the smallest rise in GHG emissions in 2021, growing only 1.9% from 2020, returning only a quarter of the drop in emissions from 2020.

Figure 1
Figure 2

Modest rebound in transportation demand

The largest increase in emissions in 2021 came from the transportation sector, reflecting high demand for freight transportation of consumer products and a modest recovery of passenger travel. The transportation sector—which accounts for 31% of net US emissions—experienced the largest decline in GHG emissions in 2020, dropping over 15% (283 million metric tons of CO2e) below 2019 levels (Figure 2). In 2021, despite seasonal rebounds, overall transportation fuel demand never fully returned to 2019 levels. During the first two quarters of 2021, fuel demand increased as COVID-19 vaccines became available (Figure 3). However, the appearance of new variants and breakthrough cases in late summer led to staggered fuel demand for the remainder of the year.

Despite hopes that life would get back to normal in 2021, passenger travel never fully recovered to 2019 levels. After falling 13% in 2020, gasoline demand—indicative of demand for on-road passenger travel—rose steadily through 2021, ending the year 10% above 2020 levels. Despite air travel’s dramatic surge in 2021 (rising 26%), it remained down 24% below 2019 levels. Road freight was the only transport mode that rebounded beyond 2019 levels in 2021. Continued demand for consumer goods kept freight demand high, even surpassing 2019 levels for several months of the year. On a year-on-year basis, aggregate diesel demand rose 9% from 2020 levels, putting it at 0.4% above 2019 levels.

Figure 3

Coal’s comeback

The electric power sector, which accounts for 28% of net US emissions, saw the second largest increase in GHG emissions from 2020 levels. In 2021, emissions increased 6% (95 million metric tons CO2e) above 2020 levels (Figure 2). Despite the bounce back from 2020, emissions remained 4% lower than 2019 levels.

With only modest growth in overall electric power demand in 2021 (up 3% from 2020), the more robust growth in power sector GHG emissions was due to a sharp rise in coal generation, jumping 17% in 2021. This marks the first annual increase in coal generation since 2014, according to the US Energy Information Administration (Figure 4).

Figure 4

Coal’s rebound was driven largely by a run-up in natural gas prices, with Henry Hub spot prices averaging $4.93 per million Btu in 2021, or more than double their 2020 rate. Prices rose as oil and gas producers ramped down new production in 2021 in response to the COVID oil price collapse and ensuing slow growth in demand. High natural gas prices made gas-fired generation less economical in 2021, leading to a 3% decline in gas generation in 2021, dropping gas’s share of overall generation back down to 37% (Figure 5). Renewables continued their growth in 2021, with generation rising 4% (about half the rate of renewables growth in 2020), reaching 20% of US electricity generation for the first time.

Figure 5

The 2021 emissions rebound puts the US further off track to meeting its Paris Agreement target

The uptick in GHG emissions in 2021 moves the country even further from meeting its Paris Agreement climate target of reducing emissions 50-52% below 2005 levels by 2030. In 2020, due to the economic impacts of the COVID-19 pandemic, emissions fell to 22.2% below 2005 levels. In 2021, US emissions ticked up to 17.4% below 2005 levels (Figure 6). As we discuss in our recent report, Pathways to Paris: A Policy Assessment of the 2030 US Climate Target, joint accelerated action by Congress, the federal executive branch, and leading states can put the 2030 target within reach, but all must act quickly in order to put the US on track.

Figure 6

Preliminary 2020 Global Greenhouse Gas Emissions Estimates

Understanding annual trends in greenhouse gas (GHG) emissions is a critical input for decision-makers in their efforts to reach net-zero emissions, whether is at the national, state, city, or corporate levels. Tracking emissions of the 190+ Parties to the Paris Agreement is an essential part of ensuring the effectiveness of global efforts to keep temperature rise well below 2° Celsius. A recent Washington Post investigation found that countries underreport emissions to the UN, leaving a considerable gap between reported emissions and actual emissions. The Post investigation found that inconsistencies in measurement and the frequency of reporting contributed to a gap of 8-13 gigatons of CO2e, which accounts for as much as 23% of global emissions.

While the Paris Agreement calls for improvements in the consistency and frequency of reporting, decision-makers need reliable data about the status of countries’ emissions now. To fill that gap, Rhodium Group provides the most up-to-date global and country-level GHG emissions estimates each year. This year’s update features final emissions estimates from 1990-2019 and preliminary estimates for 2020. This data includes estimates for all six Kyoto gases from across all sectors of the economy consistent with UN reporting guidelines. In partnership with Breakthrough Energy, Rhodium makes this data available through the ClimateDeck.

Total global emissions drop 4.4% in 2020 based on preliminary estimates

Based on our preliminary estimates for 2020, global emissions—including emissions of all six Kyoto gases, inclusive of land-use and forests and international bunkers—dropped from 52.4 gigatons of CO2e in 2019 to 50.1 gigatons in 2020 (Figure 1). This marks a 4.4% decline from 2019 levels, by far the largest drop in recorded history. The reduction in emissions in 2020 due to the COVID-19 pandemic and global recession was 10 times greater than the impact on emissions from the 2008 global financial crisis.

As we noted in our preliminary estimates of China’s 2020 emissions from earlier this year, China was one of the only major economies that saw emissions rise in 2020, by 1.4%. Because all other major economies saw economic contraction and an overall reduction of emissions in 2020, China’s overall share of global emissions grew in 2020, reaching 30% (Figure 2). The US and EU-27 both saw double digit declines in 2020 (10% and 11% declines, respectively), dropping their share of global emissions slightly from 2019. GHG emissions in India—the world’s 4th largest emitter at 6% of global emissions—declined just under 7% between 2019 and 2020.

Based on our preliminary estimates for 2020, China’s GHG emissions exceeded those of all the developed world combined (here defined as all OECD member states and all EU member states) for the second year in a row. Based on our final 2019 estimates, we find that China’s emissions narrowly exceeded the combined OECD + EU total by about 0.8% (Figure 3). In 2020—based on our preliminary estimates—that gap grew to over 13% as China’s emissions continued to grow and OECD + EU emissions dropped by just over 10%.

Industry and electric power generate more than half of global emissions

In 2019—the latest year for which there is sufficient data to provide sectoral level detail—industry remained the largest emitting sector, generating 30% of global emissions (Figure 4). Emissions from electric power generation contributed 26% of global emissions, the vast majority of which came from combustion of coal. Combined emissions from land use, agriculture and waste made up 21%, followed by transportation (16%) and buildings (7%).

All the datasets provided here are available in the ClimateDeck, as well as additional data and details, including the ability to filter by country, gas, and sector, as well as socioeconomic indicators (e.g., emissions per capita and per GDP), and full inventory tables for each country.


To estimate global and country-level GHG emissions, we take a bottom-up approach, which combines national inventories (where fully provided) with derived inventories (where national inventories are not provided or complete). For all Annex I countries, Rhodium’s GHG estimates match those of official national inventory data from 1990-2019. For non-Annex I countries, we calculate derived inventories using a combination of national activity data (e.g. fuel combustion, industrial production) with sector- and fuel-specific emission factors. This method provides annual GHG emissions based on changes in socioeconomic activity at the country and sector level and is appropriate for tracking trends in emissions and emissions intensity over time.

In addition to our historical inventories, this year we also provide preliminary estimates for global emissions in 2020 for all countries. We estimate energy CO2 using BP’s 2021 Statistical Review of World Energy. For other gases, we estimate 2020 emissions based on relevant national activity and socioeconomic data.


To quantify country-level fuel combustion emissions, we source all Annex I countries’ emissions from their most recent national emission reports to the UNFCCC (1990-2019). For most Non-Annex I countries, we derive our own estimates of energy-related emissions from IEA energy consumption flows (1990-2019) and IPCC emission factors. For 2020 estimates for all countries, we use growth rates derived from BP’s 2021 Statistical Review of World Energy.

Not all Non-Annex I countries’ energy consumption is accounted for in IEA’s energy flows (i.e. there are 40-50 countries—mostly small-island nations and African countries—who consume a small amount of energy relative to the rest of the world, and whose aggregate annual emissions are less than 100 Mt CO2). For these countries, we source emissions data from national reporting to the UNFCCC for available years and interpolate for years with no available data.

For fugitive emissions from oil and gas and coal mining, for most non-Annex I countries, we use IEA’s database of world fugitive emissions (2021).

Industrial Processes

To quantify country-level industrial process emissions (non-combustion sources), we source all Annex I countries’ emissions from the most recent national emission reports to the UNFCCC. We source Non-Annex I countries’ non-CO2 emissions from EPA (2019), and we derive their non-combustion CO2 emissions based on fuel combustion emissions and production data by industry sub-sector.

Agriculture and Waste

To quantify country-level agriculture and waste emissions (non-combustion sources), we source Annex I emissions from UNFCCC inventories and non-Annex I countries’ emissions from the UN Food and Agriculture Organization (FAO) (2021).

Land-use and Forests

To quantify country-level land-use, land-use change and forestry (LULUCF) emissions and removals, we source Annex I countries’ emissions from UNFCCC national emissions reports. We source Non-Annex I countries’ emissions from FAO (2021).

China Pathfinder: Q3 2021 Update

In the third quarter of 2021, a Chinese economy already straining under COVID- 19 was rocked by energy shortages, while Evergrande, the country’s largest real estate developer, inched toward a full-blown debt crisis. At the same time, the government broadened the ongoing crackdown on technology giants, delivering another hit to investor sentiment. These disruptions are not the result of policies launched this quarter; rather, they reflect the consequences of the government’s failure to introduce much-needed market discipline, including in the real estate and energy sectors. Framing the outlook on China’s economic health is a broader uncertainty surrounding the future of the country’s development path under the slogan of “common prosperity” championed by Xi Jinping. Beijing’s moves in response to the challenges this quarter prioritized political objectives over market-oriented policy reform—not an encouraging signal.

China Pathfinder is a multiyear initiative from the Atlantic Council’s GeoEconomics Center and Rhodium Group to measure China’s system relative to advanced market economies in six areas: financial system development, market competition, modern innovation system, trade openness, direct investment openness, and portfolio investment openness. To explore our inaugural data visualization and read our 2021 annual report, please visit the China Pathfinder website.

Quarterly Assessment and Outlook

The Bottom Line: In Q3 2021, Chinese authorities were active in four of six economic clusters that make up the China Pathfinder analytical framework—financial system development, competition policy, innovation, and portfolio investment openness—with fewer developments in the trade and direct investment openness clusters. In assessing whether China’s economic system moved toward or away from market economy norms in this quarter, our analysis shows a mixed-to-negative trendline.

Figure 1 reflects the direction of China’s policy activity in the domestic financial system, market competition, and innovation system, as well as policies that impact trade, direct investment, and portfolio investment openness. This heatmap is derived from in-house policy tracking that weighs and evaluates the impact of Chinese policies in Q3. Actions are evaluated based on their systemic importance to China’s development path toward or away from market economy norms. The assessment of a policy’s importance incorporates top-level political signaling with regard to the government’s priorities, the authority of the issuing and implementing bodies in the Chinese government hierarchy, and the impact of the policy on China’s economy.

A Look at Q3 Trendlines

The defining feature of the Chinese government’s policymaking in the third quarter was the strengthening of state direction in the private sector. This was ostensibly motivated by concern about domestic demographic decline, and the need to alleviate household financial burdens to promote social confidence. The nascent “common prosperity” campaign emphasized reducing inequality and upholding social stability. Xi Jinping has described common prosperity as an essential requirement of socialism and a key feature of Chinese-style modernization, making it the watch- word for the government’s high-level messaging. The impact of the campaign remains to be seen, however, with no blueprints made public on how it is to be implemented.

Authorities unveiled minor policies related to the financial system, but the ongoing Evergrande debt crisis was the main event. The most significant policy signal was a non-signal: the absence of a clear decision on what concrete action to take to resolve Evergrande’s situation and stem contagion in the property sector. This nonintervention could be read generously as pro-market if the government clearly communicated its intent to inject self-discipline into markets and let Evergrande face the consequences. However, officials underestimated the severity of contagion and systemic concern, made confusing pledges to prevent a full reckoning, and ultimately claimed that the initial policy disciplines that precipitated the property stress had been misinterpreted. If the government intended to build confidence in the direction of financial reform, the outcome has been the exact opposite.

Developments in China’s market competition environment were mixed. Several new regulatory actions (Table 1) are meant to address legitimate market regulatory issues, while others are harder to distinguish from heavy-handed government interference. These include banning the private education sector from operating on a for-profit basis—something that was permitted, encouraged, and invested in for decades.

Beijing has explained its crackdown on leading Internet-based businesses as having several aims. Tech companies were labeled as engaging in monopolistic practices and abusing worker rights, generating the need for urgent regulatory enforcement. Other concerns centered on how companies collect, utilize, and share data—issues which reflect the state’s insistence on con- trolling data. Last year, the Central Committee of the Communist Party of China (CCCPC) and State Council designated data a “factor of production,” alongside land, labor, capital, and technology, underscoring its importance in their vision of economic development. The Cyberspace Administration of China (CAC)—an agency responsible for cyberspace security and Internet content regulation—emerged as the key enforcer of the government’s new activist posture in China’s tech sector. After launching a cybersecurity review of Didi two days after its initial public offering (IPO) in the United States, CAC issued a draft revision to the Cybersecurity Review Measures, which would mandate a cybersecurity review for most overseas IPOs.

In the tech crackdown, Beijing is pursuing political goals with seeming disregard for economic costs. This contrasts with a long-standing track record of Beijing hedging political aims to protect growth. The rollout of regulations on the private sector during Q3 triggered a sell-off that shaved $1.5 trillion or more from technology stocks. The primary targets of Beijing’s ire have been Internet service-sector businesses, while advanced manufacturing came in for praise. Strategic goals such as self-sufficiency in semi- conductors are understandable (if hard to realize), but state planning, interference in consumer choices, and micromanaging patriotism in the private sector are not likely to promote technological independence.

The government expanded its role in the innovation system with the rollout of three key policies: the “Outline for Establishing China as an Intellectual Property Rights Superpower (2021-2035),” issued by the State Council; draft regulations on algorithms released by CAC; and the Personal Information Protection Law passed by the National People’s Congress (NPC). These policies paint a mixed picture. On the one hand, Chinese consumers’ personal data would be better protected, and there are new pledges to improve the intellectual property regime for domestic and foreign firms. On the other hand, state actions to restrict how companies use data (especially cross-border flows) cast a pall on the data-driven knowledge economy.

Government’s intrusion into market activity is weighing on the outlook for portfolio investment. The Cybersecurity Review Measures would make it harder for Chinese companies to go public on foreign exchanges. The China Securities Regulatory Commission’s proposed checks on Chinese companies that use the popular variable interest entity (VIE) legal structure to list over- seas have chilled capital raising. (VIEs are extensively used by tech companies such as Alibaba to go abroad.) Officials announced the establishment of a new Beijing Stock Exchange, China’s third major exchange after the Shanghai and Shenzhen exchanges, with the aim of serving smaller private companies. This signals intent to support this hard-pressed segment of the economy, but it will take considerable time to see whether it makes a dent in small business financing challenges.

Special Topic: Evergrande

In a quarter where the Chinese government was active on many fronts, this China Pathfinder update focuses on the Evergrande crisis, which has major implications for the development of China’s financial system, while also highlighting broader systemic risks in China’s economy.

Evergrande crisis and the structural problems in China’s system: The economic turmoil surrounding Evergrande has become a litmus test for how the Chinese government will balance financial stability against market discipline. Evergrande has accumulated over $300 billion in liabilities—compounding years of risky financial practice and a massive expansion of leverage in China’s economy, particularly in the property sector. Historically, China’s real estate sector has expanded unchecked as the government prioritized economic growth and households sought property as a secure store of value. Meanwhile, local governments, which are responsible for upward of 85 percent of expenditure but receive only about 60 percent of tax revenue, filled the subsequent short- fall by selling land. As a result, debt ballooned even as linkages between property developers and local governments created a persistent moral hazard, with investors assuming the government would step in to bail out any troubled companies. Last year, how- ever, the Chinese government introduced caps for debt ratios dubbed the “three red lines” to target property developers’ debt growth and to dramatically reduce land purchases from local governments. Thus far, the government has not intervened to resolve the Evergrande debt crisis, even as other property developers began to default on onshore and offshore bonds.

China’s systemic debt problem has left only undesirable policy options: A Chinese government intervention to bail out Evergrande would signal a major watering down of the “three red lines,” with negative consequences for China’s market discipline. The failure to act, however, could result in a long-term chilling effect on China’s economic growth as property sales and construction activity continue to weaken, even though the Chinese government has claimed that the risks from Evergrande are “controllable.” Beijing has few good options, underscoring its failure to foster a robust, well-regulated financial system that can manage the repercussions of even large firms exiting the market. As we noted in our 2020 China Pathfinder annual scorecard, China still lags far behind market economies in terms of allocating credit to the financial system in an efficient way, and lending is controlled heavily by the government. We point to extreme corporate indebtedness over the past decade as primary evidence of these issues.

China’s policy decisions will have a tangible impact on the Chinese consumer and economy at large: As China’s real estate market contributes to roughly 20 percent to 25 percent of the country’s gross domestic product, Beijing’s approach to Evergrande and other large property developers has major implications for the entire economy’s future growth trajectory. Evergrande alone owes money to hundreds of contractors, suppliers, and local governments across China, which means its failure would affect broad swaths of China’s economy.

The outcome of the Evergrande crisis directly impacts home buyers: Those who have already purchased apartments and are paying mortgages risk being stranded as construction stalls, while prospective home buyers could be deterred from investing in real estate due to falling prices and fears that developers will fail to complete construction. Figure 2 illustrates the latter phenomenon, with a severe drop in weekly property sales across thirty Chinese cities since July 2021. As contagion spreads throughout the property sector and property values fall, real estate owners will see a major hit to their household wealth, which in turn would weigh on their spending. In the absence of other investment alternatives, real estate comprises around two-thirds of Chinese households’ assets. In other words, the Evergrande fallout could further scupper the Chinese government’s ambition to transition the economy to a consumer-dependent growth model. In the long run, this would impact regional and global markets as Chinese demand for foreign goods wanes.

Looking Forward

Relative to our annual China Pathfinder benchmarking report published this October, Beijing policy outcomes this past quarter did not promote convergence with open-market norms. Our heatmap of quarterly developments shows negative or at best mixed signals of convergence. An emphasis on state intervention and deemphasis of marketization persist. In the acute phase of COVID-19, one could argue that heightened state intervention was called for by the pandemic, but this argument becomes less credible with time. Today’s positive signals—such as Vice Premier Liu He saying that “China will persist in opening up the economy”—are damage control on equally recent missteps, not compelling signs. The most convincing move would simply be acknowledgment that the current model is flawed, not that “China’s path is the right and correct one,” as President Xi declared.

Quarter-over-quarter annualized growth was barely above 2 percent this period—unheard of for China outside rare times of crisis. The growth rate will likely rise thanks to laxer property constraints, but that solution just circles back to the debt problem that property tightening was meant to fix. The shortcomings evident in the present policy mix are changing the China conversation, with risks to future growth potential the focal point. This is unfortunate because major decisions about strategy toward China, including in terms of whether economic “decoupling” is called for, are underway. Better signals of market reform from the Chinese government would have been especially helpful right now to damp down the most hawkish recommendations. China’s economic downturn will not stay inside its borders, and it is unclear how much Beijing will revert to “reform and opening” to get back on a potential growth track. Everyone from developing country commodities exporters to developed country portfolio managers has a stake in whether China manages to do so.

The inaugural edition of the China Pathfinder Quarterly Policy Tracker tests various approaches to the challenge of gauging policy directions. Based on this experience, we will augment and refine our approach in the quarters to come.

An OECD For a New Era

September 30th, 2021, marks the 60th anniversary of the creation of the OECD—the Organisation for Economic Cooperation and Development. The organization was the post-WWII flagbearer for market economics, offering a positive vision of the benefits of cooperation among market democracies. By emphasizing analytical expertise to find pathways to policy alignment, the OECD achieved success and helped define the character of post-war liberal political systems in competition with authoritarian statism. Today, market economies are struggling to agree on a competition model with non-market statecraft again. Rather than invent a new institution, they should take a fresh look at this existing one.

A Market Economy Family Reunion

After a period of unilateralism, the US is again promoting international cooperation to address shared concerns. This will not always be the case, as the contretemps over submarine sales to Australia made painfully clear. But the return to market economy teamwork is real, and it comes at a crucial moment: advanced economies are dealing with questions that require active coordination. How to deal with non-market or authoritarian business partners? How to craft data policy, competition policy, investment screening, and other policy areas at the intersection of economic and national security?

Most importantly, what forum should market nations use to cooperate on these issues? The big-tent multinational organizations such as the World Bank, WTO, UNCTAD, and IMF each have important roles. But their inclusiveness has drawbacks too, particularly when members have fundamentally different views over the merits of market mechanisms versus state planning and economic authoritarianism. A few business associations – notably Germany’s admirable BDI – have moved out front to get their members thinking proactively, but most trade groups are keeping their heads down, waiting for national leaders to set the tune.

Market economies have begun caucusing in several venues to discuss novel concerns in an era of systemic competition, such as the G7 leaders meeting in Cornwall and the US-EU summit in Brussels this summer. The first ministerial-level meeting of a new US-EU Trade and Technology Council will convene in Pittsburgh on September 29, with an ambitious agenda to improve alignment in ten economic areas (see Sept 21, “Transatlantic Stress Test”). Like any new effort, that process will take time to gel, but already it has demonstrated seriousness in defining the agenda. These and other ongoing conversations like the US-EU-Japan trilateral dialogue on subsidies are an important step toward alignment. But each of these conversations involves just a subset of like-minded market economies.

Does a new forum need to be created? Before attempting that difficult chore, there is a good case to be made that the well-established, Paris-based Organisation for Economic Co-operation and Development (OECD) is well-suited to manage the market economy conversation—and response— to today’s emerging concerns.

Why the OECD?

In 1948, the United States and Canada worked with eighteen European economies to form the Organisation for European Economic Coordination (OEEC). Just as NATO was a vehicle for shared security cooperation, the OEEC was the center for economic prosperity partnership in the democratic world.[1] With Europe facing the monumental challenge of rebuilding after the Second World War, the OEEC was tasked with administering Marshall Plan assistance. By the end of the 1950s, with European rebuilding on track, member countries redirected the OEEC to “promote the highest sustainable growth of their economies and improve the economic and social well-being of their peoples.” Rebranded as the Organisation for Economic Co-operation and Development in 1960, it expanded its membership and focused on growing global trade and investment. It took on new work on energy, governance, and global development. In the ensuing decades, the OECD built an impressive track record grappling with thorny economic topics among the industrial democracies (Table 1).

Figure 1

Today, the OECD has 38 member economies: upper-middle and high-income democracies generating over 60 percent of global output. The organization works with policymakers, businesses, labor representatives, academia, and other stakeholders to provide independent research and policy recommendations, facilitate information sharing, and establish international standards. In addition to its core membership, the OECD maintains partnerships with five non-member economies—China, India, Indonesia, South Africa, and Brazil—providing opportunities for regular dialogue. Thanks to its reputation for objective analysis, it has been tasked with developing reports, recommendations, best practices, and agreements on a wide range of issues.

The OECD has the features required of a forum to address the challenges posed by non-market economies. Its smaller roster makes it a more flexible organization than larger multilateral bodies. China, although not a voting member, is nonetheless a partner, creating opportunities for exchange without sacrificing principles. The OECD’s reputation for quality research and record on security, climate, and technology—all central to current debates—make it a compelling platform. Finally, its attachment to evidence-based work on economic, social, and environmental variables makes it a mostly apolitical shop.

Secretary-General Angel Gurría (2006-2021) focused his long tenure on making the OECD more inclusive. Some observers feared this could dilute credibility. Proponents of hard-hitting new research agendas sometimes had a hard time getting support from leadership. Gurria’s successor Mathias Cormann, a Belgian-born former Australian finance minister with a pro-reform reputation, has raised expectations since taking over in June 2021.

An Expanded Agenda

As the OECD secretariat enters a new era, the organization can play a greater role in bolstering shared norms and crafting a response to the challenges posed by non-market economies. Certainly not everything can or should be on the OECD’s agenda. Some issues—non-proliferation and arms control, for instance—are best left to other organizations. But there are many areas where the OECD is suitable to play a leading role. Many of these lines of work are not new to the OECD, but they would merit being strengthened further:

  1. Subsidies and other distortive economic practices: The OECD has successfully documented the negative spillovers into the global semiconductors and aluminum markets due to subsidies from China and other countries. Building on the EU’s lead in grappling with these problems using an anti-foreign subsidies instrument (FSI), the OECD can be a forum to share experiences in drafting and implementing anti-subsidies regulations, developing best practices on how these rules should be implemented, and documenting distortions in other sectors too.
  2. Industrial policy: Mounting competitive pressures from China and heightened concerns of an overreliance on Chinese supply chains have inclined OECD economies to deploy domestic programs to support home champions in critical technologies and sectors. In this context, there is a risk that these policies will raise trade and investment barriers, trigger wasteful public spending, or even cancel each other out. While other organizations such as the IMF have published research on the pros and cons of industrial policies, the OECD is the right forum to establish a series of best practices to prevent industrial policy from teetering into protectionism.
  3. Transparent and sustainable overseas infrastructure development: Developed countries need to articulate programs for overseas infrastructure development that adhere to certain standards of quality and transparency. The EU’s newly announced Global Gateway and the US Build Back Better World (B3W) initiative, for example, present similar yet uncoordinated visions for global infrastructure support. The OECD’s research capacity, its commitment to transparency and high-quality growth, and its broader membership beyond the G7 make it a good candidate as a hub to formulate standards for global infrastructure development.
  4. Common ground on climate policy: All countries accept the need for climate change mitigation strategies, but approaches vary widely, creating a need for coordination and policy interoperability. The OECD can be a platform to align economic instruments, from the EU’s carbon border adjustment mechanism to American electric vehicles procurement programs.
  5. Best practices for secure supply chains: Many countries are rethinking the risks of over-relying on one country—particularly adversarial ones—for critical supply chains. There is a need for countries with shared values to align tools to assess and mitigate supply chain concerns.
  6. Combating forced labor: The OECD has produced guidelines in the past meant to help firms and countries conduct adequate due diligence on forced labor in their supply chains. As the EU and the US work on regulatory instruments to combat these practices, the OECD can be a forum for aligning these policies in ways that address these issues while avoiding an excessive compliance burden on businesses.
  7. Economic coercion: Many countries, including Sweden, Canada, and Australia, have experienced economic coercion from China as a result of political tensions. Though the WTO has formal mechanisms to address certain acts of coercion, these processes are often too slow and not necessarily effective. The OECD could function as a group to compare responses, issue common statements of solidarity, and push back collectively.


The challenges posed by non-market economies require an organization like the OECD to step forward. This does not mean other groups don’t also have crucial roles to play or that more inclusive organizations are irrelevant. But for aligning approaches on advanced market economy concerns, the OECD is an excellent solution for gathering information, sharing best practices, and moving toward common guidelines.

Fashioning a shared market economy agenda will not be easy. There will be criticism that some issues (addressing subsidies, for instance) should be managed at bigger organizations like the WTO, and that moving the conversation will undermine existing multilateral institutions. Preserving multilateral governance is an important objective. But if the members of these organizations disagree over fundamental issues around the centrality of liberal economic governance, then these organizations’ limits must be acknowledged, too, and the discussion advanced within the next-most-inclusive body.

Boldness on certain issues has sometimes been quietly discouraged—at the OECD, as elsewhere—for fear of undermining relations with China. But a more serious advanced economy caucus is not bad news for China. If market economy debates remain fragmented, market countries are likely to lack the confidence to keep the doors open to even pedestrian commercial interaction with authoritarian nations. A more confident market cohort is more likely to be open to engagement. Beijing convenes the Shanghai Cooperation Organization and south-south summits to share perspectives and make plans germane to the developing world needs; market economies need to meet to discuss their issues as well.

Despite the challenges, there are no other international organizations with the research capabilities, track record of policy formulation, and right membership size to do the job. It will be far easier and more productive to resolve these issues under an existing organization like the OECD rather than to start from scratch. The timing for the OECD is good as well. Sixty years ago this September, the convention that transformed the Marshall Plan-era OEEC into the OECD of today came into force. On that date, market economies adopted an organization built for the needs of the immediate post-war recovery into a body to address the contemporary needs of economic growth. New challenges and new leadership could make 2021 another such turning point.

[1] A review by Ron Gass in the OECD Observer (No. 236, 2003) noted, “NATO and the OEEC were the two arms of a Western strategy to provide security and prosperity in the post-war period.”