China and growth have been synonymous for so long it’s hard to imagine a world in which they part ways. Due to a rare confluence of events, China’s nearly two decades of rapid expansion appear to be coming to an end. The covid pandemic, effects of climate change and a range of internal economic difficulties — from high local government debt to a cratering real estate sector — have buffeted the country. The damage has been well documented. But there’s a huge and less well-understood ripple effect spreading around the globe. Countries large and small are not prepared for the fallout.
For the most export-dependent nations — primarily South and Southeast Asia, and Africa — the effects of an already-slowing global economy will be amplified by a shrinking China market. For others, new markets may open up as trading patterns shift to rapidly growing India and other countries, but such shifts will take years to fully materialize. World leaders will need to rethink their own economic plans in a world that can no longer count on China growth to fuel their own prosperity.
A China under economic strain is a relatively new phenomenon for the rest of the world. Developed and developing countries alike have grown used to Beijing’s seemingly insatiable appetite for their products. The poorest have also become dangerously dependent on China’s trillion-dollar Belt and Road Initiative and the lending spree that came with it — which was meant to rival the World Bank and International Monetary Fund (IMF) as a source of capital and infrastructure.
All these China-related opportunities are now being thrown into question. Even Beijing’s flexibility when it comes to economic policy — once a hallmark of its enduring success — can no longer be taken for granted. Meanwhile, Chinese President Xi Jinping’s singular grip over decision-making is turning the country into a one-man show with potentially disastrous results for many countries.
The troubles inside China
The great driver of economic trouble in China has been Xi’s zero-covid policy, which has sent hundreds of millions of people into mandatory lockdowns that have led to food and medicine shortages, and a stifling of economic activity. Many factory workers were stuck at home during the worst of the lockdowns — apart from the minority who lived at their facilities. Perpetually shifting closures, from even a single nearby case, continue to cause production slowdowns. Meanwhile, this summer’s crippling heat wave, exacerbated by climate change, has dried up massive riverbeds and diminished hydropower generation — so much so that China’s southeastern industrial and exporting hubs had to shut down as well. If that weren’t enough, low birthrates — despite the lifting of the decades-old one-child policy — and a rapidly aging population are poised to slow growth even further.
As much as centralized planning has traditionally helped China avoid the worst of major global recessions, this time the scale of the problems far outpaces the policies that might fix them. Massive infrastructure investment and real estate development, China’s preferred boosts for much of the last decade, look ill-equipped to deal with the current slowdown.
And it’s worth defining what the 2022 “slowdown” looks like. Growth estimates are falling monthly, with major banks including Goldman Sachs and Nomura now predicting barely 3 percent or lower GDP growth for 2022 and the World Bank forecasting a figure of 2.8 percent. That might be a satisfactory number for many countries; it’s an anemic figure for China, down from a jaw-dropping 8.1 percent last year, and — perhaps more important — nowhere near the government’s own forecast of 5.5 percent for 2022. Add to this a significant drop in imports and exports, and the subsequent pressure on the yuan, and the much-touted “China century” is hitting its first major speed bump. It may very well knock off a tire or two as well.
Xi, up for a third term at this month’s party congress, has distinguished himself with a neo-Maoist leadership style that would compel his people to “eat bitterness” through difficult years. That’s a stark departure from former Chinese leader Deng Xiaoping’s reforms of the 1990s that opened the state-dominated economy to private firms and foreign companies. Those policies ignited decades of explosive growth. Now, foreign access is becoming more and more limited, fast-growth tech firms are under fire, and state-owned enterprises are on the rise again.
That means fewer market opportunities for other countries, as Beijing pushes for more made-in-China alternatives to imported goods.
Who will feel the pain? The U.S., for one
The impact of a prolonged China slowdown — and there’s little reason to believe this is just a temporary setback — will vary from country to country.
Those that have grown dependent on the commodity trade with China are likely to feel the most pain. With much of the world teetering on the cusp of recession, there are still no other major markets for China’s high-volume/low-margin exports — agricultural products, for example. China is the third-largest export market for the U.S. behind Canada and Mexico, with $151 billion in goods sold to China last year. Nearly 18 percent of that figure included fruit, grains, seed, cereals and meat.
The China slowdown is already hitting this year’s trade numbers. After years of rapid growth, U.S. exports to China were relatively flat for the first six months of 2022 compared to the same period last year. Popular foreign consumer brands including Adidas and Estée Lauder are already revising down their revenue projections. Apple has also seen signs of lowered demand along with Hilton Worldwide Holdings and Moncler. Nike’s fiscal 2022 China revenue, which ended in May of this year, saw its first drop after nearly a decade of steady growth.
If there’s any silver lining, it’s that the effect on the overall U.S. economy will be blunted by the fact that sales to China represent only 0.65 percent of the roughly $23 trillion U.S. gross domestic product. American consumers continue to drive the economy, and so far they continue to spend. This is one of the principal advantages of a household-driven economy; it helps maintain a buffer against upheavals in other parts of the world.
The rest of the world
For other major economies, the effects are likely to be more dramatic. Germany’s 2021 exports to China made up more than 3 percent of the country’s GDP, and the German mix is overwhelmingly weighted with higher-end manufactured goods, including vehicles and machinery, which would be hard-hit by an industrial slowdown. Here, too, the pain is already evident; while early 2022 got off to a good start, German exports to China in the latter part of this year are noticeably lower than the same period a year ago.
Japan, Hong Kong, South Korea and Taiwan have been hit even harder — all suffering negative export growth to China in the last few months. China is Japan’s top export market, and while sales have remained fairly flat through the first of half of 2022, they are running below the same period a year ago.
Poorer nations may suffer most. It’s hard to overstate the degree to which many developing countries have grown dependent on exports in general, and on exports to China specifically, to fuel their growth. Here too, the 2022 trade numbers tell the slowdown story. China has long been the top export destination for Indonesia, Malaysia and Singapore, and the No. 2 export destination for Thailand, the Philippines and Vietnam. Nearly all were exporting less to China as of July than a year ago.
Malaysia in particular is highly export-dependent on China, with sales accounting for more than 12 percent of its 2021 GDP. While exports continue to grow, China as a percentage of Malaysian overall exports is slowing considerably, outpaced by the Association of Southeast Asian Nations, the U.S. and Singapore. Thailand’s exports to China accounted for nearly 6 percent of its last year’s GDP, but growth has turned negative this summer after peaking at 50 percent growth year-over-year back in early 2021. The trend is similar for Indonesia, with exports to China representing 5 percent of its GDP, but on a dramatically downward trend, dropping to 25 percent growth in mid-2022 from roughly 75 percent at the same point a year ago.
Most vulnerable: those in debt to China
Perhaps no nations will feel the pain of the Chinese slowdown more than those that have grown dependent on the more than $1 trillion in development lending flowing through China’s mammoth Belt and Road Initiative. These countries are going to have to wean themselves off what has been an almost free-flowing spigot of cash. So many countries are at risk of defaulting on these debts that Beijing is now forgiving interest-free loans and turning to the very same international lending institution that they originally sought to displace — the IMF — to direct $10 billion to debt-laden African countries.
Standard loans are being renegotiated or augmented with additional funding to stave off even larger-scale defaults. Pakistan, despite securing $23 billion in China-backed loans, had to seek subsequent IMF help and still remains at serious risk of default — and Sri Lanka, Chad, Ethiopia, Angola, Mozambique and Zambia have all run into serious trouble. Large China loans have also begun to dry up. Estimated total deal value according to Janes IntelTrak is down 35 percent in the first nine months of this year — from $108 billion during the same period last year to $69.6 billion in 2022.
How to thrive in an era of slower China growth
None of this is to suggest that the sky is falling in China, or that some sort of cataclysmic economic collapse is imminent or even likely. But the slowdown is real, and it is going to have longer-lasting effects than downturns of the past. Many countries have no adequate plans in place to make up for the disproportionate influence exports have on their economy, let alone the reliance on China for much of that growth.
Many countries will need to recalibrate and retool their domestic markets and economic strategies to adapt to slower growth. One alternative is to move away from exports and toward domestic consumption. That may not be an easy or a quick fix. In many parts of the world, making significant policy changes can be a bridge too far, as endemic corruption, income inequality and bureaucratic inertia stymie the aspirations of small businesses and entrepreneurs that have historically driven rapid growth. However, the benefits of reforms are already evident for those who have successfully made the change.
Countries that find the right mix of regulation, innovation, intellectual property rights protection and investment will not only build a more resilient domestic market, they will also thrive going forward. These are the ingredients entrepreneurs and businesses need to succeed.
Instead of relying on exports of key pharmaceutical ingredients that are manufactured into drugs in China, for example, a resource-rich country could harness domestic entrepreneurs, scientists and industrialists to develop their own manufacturing capabilities, much like India has done. But these types of initiatives won’t thrive and create good-paying jobs if businesses can’t be easily formed, contracts can’t be enforced or their inventions aren’t protected.
Once a robust middle class forms, households can drive growth despite a decline in exports, as they have in the U.S. where spending is propping up the economy even with record inflation. Vietnam, which relied heavily on primary goods exports to China during most of Southeast Asia’s boom times, has also adapted. Before the worst of the pandemic had hit, household consumption reached an impressive 68 percent of GDP in 2020, on par with other consumption-oriented countries. While still export-oriented, Hanoi has also created a more business-friendly manufacturing environment that was poised to attract foreign firms when covid-induced supply chain disruptions hit China. Factory capacity quickly filled up and domestic incomes rose along with an influx of foreign investment.
Indonesia is another bright spot — a nation where consumers are becoming a much stronger part of the economy. The same is true in the Philippines, India and Nigeria — where younger demographics favor a large consumer base and robust growth.
For exporters, however, these growth countries won’t necessarily replace the same demand that is being lost. India’s rapidly developing consumer class will attract different types of products and services as the market there is significantly different than China. For one thing, India produces most of its own food and won’t need the same level of agricultural imports. The country also has well-developed sectors in textiles, pharmaceuticals, chemicals, steel, auto manufacturing and IT that have helped sustain growth despite the global downturn.
Cultural differences, including a largely vegetarian diet for most of the country, also make for a vastly different market. U.S. exports of soybeans for animal feed, and pork and beef products, for example, will not find the ready market they did in China.
The bottom line for all these countries with economic ties to China?
China’s longer-term demographic, economic and environmental pressures are increasing — and there is little Beijing can do to stimulate economic activity to rival the boom years of the past. The political climate also points to tougher market conditions going forward, with less liberalization and more centralized control.
Countries suffering the ripple effects of the China slowdown need to seriously consider the alternatives. Their ability to adapt when negative events hit will determine whether they can weather the storm when the China shock waves reach their shores. And those shock waves are coming sooner rather than later.
Thanks to Alicia Benjamin for copy editing this article.