China’s Economy Faces Growing Threats Amidst Lack of Reforms, Warns New Report

A new report by the Washington-based think tank Atlantic Council Geoeconomics Center and research organization Rhodium Group highlights the serious economic challenges facing China. Titled “Running out of road: China Pathfinder 2023 annual scorecard,” the report identifies core problems within the world’s second-largest economy, warning that “structural threats to economic stability have never been greater.”

The report underscores that the economic difficulties in China are not merely cyclical, as seen with the COVID-19 pandemic, but are rooted in a failure to reform the nation’s economic system. It argues that the Chinese Communist Party’s prioritization of ideology over economic dynamism has contributed to the current economic malaise.

China’s economic performance is assessed across over 25 economic indicators and compared to market economies using a quantitative framework based on six components: financial system development, market competition, modern innovation system, trade openness, direct investment openness, and portfolio investment openness.

Key challenges facing China’s economy include a troubled property market, an aging population, deteriorating domestic business sentiment, and declining foreign direct investment. The property sector’s troubles have led to temporary measures from authorities, which, while stabilizing the market, haven’t addressed the root issues.

Foreign investor confidence has also waned, with foreign investment declining, as businesses from the US, EU, and Japan seek alternative investment destinations. The report predicts China’s growth to be below 4 percent in 2023, much lower than Beijing’s official target of around 5 percent.

The root problem identified in the report is China’s “persistent structural reform gap,” which has left the country trailing top OECD economies in most market dimensions. It is expected that, without significant reform, China’s economic growth will continue to slow, impacting its ambitions for high-tech development and affecting other countries that rely on China’s markets.

The report calls for robust reforms, including ending the practice of setting GDP growth rate targets, privatizing some state assets, and reforming the pension system. However, it suggests that even with reforms, China’s future growth will be lower compared to the US and other OECD economies.

Uninvestable and Decoupling Trends

As China’s economic struggles persist, foreign investors increasingly find its investment environment challenging and, at times, hostile. US companies, in particular, are finding China “uninvestable” due to rising challenges and risks associated with doing business in the country.

Challenges include unclear fines, uncertainties surrounding new anti-espionage laws, intellectual property theft, and competition with Chinese companies that receive government subsidies. A poll from the American Chamber of Commerce in Shanghai revealed that US firms have the bleakest outlook on China in decades.

The report suggests that these challenges are pushing foreign companies to consider decoupling from China, leading to a shift in global investment patterns and potentially reshaping expectations for great power competition.

In conclusion, the economic difficulties China currently faces, compounded by a lack of structural reform, pose threats to its growth prospects and global position. Addressing these challenges will require significant reforms, and even with reform, China’s future growth is expected to be lower than that of its OECD counterparts. These economic issues are contributing to a trend of foreign companies finding China increasingly “uninvestable” and considering alternatives, which could result in significant changes to global investment dynamics.