The China Dashboard uses a selection of objective data, overwhelmingly Chinese, to evaluate China’s progress toward its self-defined reform imperatives. This is an exciting quarter in which to assess China’s reform landscape. Having reported 6.9% GDP growth for full year 2017, considerably above a planned target of “around 6.5%,” Beijing must once again explain how it will realize meaningful reforms on a broad spectrum of fundamental economic policies without incurring a temporary growth slowdown. High growth achieved by deferring reform today means mounting risks of a sharp fall in activity in the future. We do not believe reforms such as deleveraging, fiscal reform, and environmental control are costless to GDP in the short term, though they are better for growth in the longer term.
By our Dashboard indicators through the end of 3Q2017, it would appear that short-term activity remains strong because reforms are not yet in high gear. Outcome indicators for eight of our ten reform clusters are showing standstill or negative movement toward the self-stated objectives Beijing previously defined for policy adjustment. Innovation continues to show positive movement, but by using industrial policies favoring domestic players that are fomenting strong push back from Western policymaking. Environmental policy implementation, while mixed, is decisive enough to merit recognition for real positive movement – so much so that we expect this success to cause problems for local fiscal policy. Policy emphasized stability, in preparation for the (fourth-quarter) 19th Communist Party Congress. Much debate centered on whether policymaking would take on greater urgency after that once-in-five-years affair: instead, the theme most emphasized was continuity.
Expectations for reform are being steered down, and foreign governments are revising their responses in turn. Indeed, the limited evidence of fundamental reform, combined with Chinese signals trying to manage downward Western expectations about China’s intent to converge toward market norms, played a leading role in U.S. decisions to suspend economic dialogues and embrace more confrontational strategies at the end of 2017. This is critical and worrisome. But if China does manage to “surprise the world” with an early implementation of economic reforms, as presumptive Vice-Premier Liu He said at Davos in January 2018, then this will be evident in our Dashboard indicators and be the basis of a positive discussion.