Author: Tiziana Barghini

For China the Going Gets Tough. Will the Tough Get Going? A New Study Says So.

As China’s top political leaders gathered this week in Beijing for their annual conclave amid expectations for a new reform push, a joint study by two U.S. think tanks said that the world’s second-largest economy is undergoing a massive overhaul of its obsolete growth model.

Carried out by Rhodium Group, a New York-based advisory firm, and the Asia Society Policy Institute in partnership with Rhodium Group, an organization dedicated to educating Americans about the Far East, the study said that, despite evidence still “partial, anecdotal and contestable,” reforms announced in November 2013 for the years up to 2020 are “game changers” that could provide a new boost to the country’s economic growth and affect the rest of the world, to which China contributes more than 15% of global GDP.

Despite the fanfare of last November’s announced economic reforms by the Communist Party, American corporations have so far perceived little or no changes in the liberalization of the Chinese economy. Earlier this month, a quarterly poll by the US-China Business Council found that the needle on the reform scorecard had not moved from “limited.”

However, the study, authored by Daniel Rosen, partner and founder at Rhodium, said, “China’s current reforms will shock the world’s economy.” Titled “Avoiding the Blind Alley: China’s Economic Overhaul and Its Global Implications,” it estimates that productivity gains from the announced reforms will add a hefty 3% annual growth to China in the years to come. The study presents three scenarios. In the first, and the likely one if reforms are implemented, GDP will grow at an annual rate of 6%. In the second, reforms stall, resulting in halved economic growth of 3%. And in the third, there are no reforms, resulting in a hard landing with mere 1% annual growth.

“Those differential growth rates add up, and the stakes are high. China’s economy in 2020 will be more up to $2 trillion larger with reform than without–a difference the size of the entire Russian economy today.” 

For China, economic liberalism is dictated by the need for growth at a time when the labor force is poised to shrink, investments have declining returns and productivity gains are fading. 

“China has not exhausted its growth potential. On the contrary, decades of more high-quality growth are possible provided that reforms are made,” said the study, which highlights opportunities in “higher quality products with greater intangible value,” modernization of the agricultural sector and environmental cleanup.

The sweeping overhaul of the economy announced a year ago by president Xi Jinping, with a pledge to treat domestic and foreign investors equally, is still far from being implemented. According to the study, the Party will soon have to decide which “sacred cows” the state wants to defend in the ongoing liberalization. The sooner this takes place, the better.

“The most promising early sign of reform would be the release of a negative list explaining which industries are meant to be protected from competition. This would help show that Beijing is serious about ensuring that the markets become the dominant, overriding factor governing economic activity,” the study said.

But at the same time, the study said, the Communist Party is tightening the reins on civil society to suppress resistance to economic reforms to increase the chances of success. This could be a problem, once the reforms are implemented. “There are no guarantees that the Party will reverse course and reestablish a modicum of civil liberties once adjustments are passed.”