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.
The bottom-line assessment for Q3 shows that 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 evaluating whether China’s economic system moved toward or away from market economy norms in this quarter, our analysis shows a mixed-to-negative trendline.
This issue of the China Pathfinder Quarterly Update highlights the Evergrande crisis, which has become a litmus test for how the Chinese government will balance financial stability against market discipline. China’s systemic debt problem has left only undesirable policy options, with implications for the Chinese consumer and economy at large.