China’s struggle to regain footing has global economic repercussions

By Andreas Charalambous and Omiros Pissarides

In recent decades, the Chinese economy has been expanding at a fast pace and has proved to be a strong driving force behind the growth of the global economy. Relying on the bold reforms of the 1980s, a wave of technological leaps, its export prowess and a rapidly exploring domestic demand, fuelled by a massive shift of its population from the lower to the middle economic group, China overtook Japan as the world’s second largest economy in 2010.

Since then, China continued to experience satisfactory growth until the pandemic period, when it pursued the so-called ‘zero Covid’ policy against the coronavirus. Following the global shutdown of the economy and the re-opening of the Chinese market, contrary to expectations, the Chinese economy failed to recover to pre-pandemic levels. Especially in the second quarter of 2023, China displayed a lower-than-expected growth rate. Although the World Bank expects growth to accelerate in the coming months, economic activity remains sluggish by China’s standards.

In this context, the following conclusions may be drawn.

First, the reduction in import consumer demand in key export markets, including Europe, is a substantial inhibiting factor. Negative geopolitical developments and intensifying trade protectionism add to the challenges for China, which relies heavily on exports.

Second, certain structural weaknesses in the Chinese economy are increasingly becoming apparent. In particular, we note the increased debt of households and the weaknesses of the real estate sector, after a period of spectacular growth, with unfavourable implications for the banking sector.

Third, a prolonged period of slowdown in the Chinese economy has serious implications for the global economy. The IMF has calculated that 1 per cent growth in China equals to a 0.3 per cent boost to the global economy. The slowdown of the Chinese economy is expected to particularly affect countries in its immediate region. Already, the central banks of South Korea and Thailand have revised their forecasts downwards for the recovery of the domestic economies.

Fourth, China is particularly vulnerable to the effects of climate change, mainly due to its dependence on traditional forms of energy.

Fifth, China is faced with a serious demographic problem due to the adoption of the ‘one child’ policy, which lasted many decades. It resulted in an ageing population and the parallel reduction of its work force, with negative impacts for the country’s production capacity and the social insurance and pension schemes.

Although economic data alone would allow China to pursue an expansionary macroeconomic policy, the country’s authorities remain committed to a cautious stance, aimed at strengthening the position of its national currency in international markets.

Despite the moderate economic growth, China still displays surpluses in its external transactions, which it uses for investments, primarily in developing countries, thus strengthening its geopolitical influence.

Over the coming decades, geopolitical rivalry, especially with the US, is expected to intensify. Dominance in the core technology sector is expected to play a huge role.

Andreas Charalambous and Omiros Pissarides are economists