China’s Economic Slowdown and the Risks It Presents to Businesses

Following three decades of exceptional growth, China’s economy, the world’s second largest, is slowing down. Despite expectations that China would witness a great economic revival following the COVID-19 pandemic, 2023 proved to be the year that its debt-fueled growth model hit a wall. The property sector, a main growth driver of the socialist market economy, is in shatters while youth unemployment reaches record high levels. Consumer demand has collapsed, whereas inbound foreign direct investment is hitting new lows. Moreover, China faces a looming demographic disaster as birth rates fall and the population ages at a rapid pace, presenting intensified problems down the line. Such challenges dampen expectations that China will overtake the U.S. economy in the next four years, as analysts had previously predicted.

China’s slowdown comes as tensions with the U.S. and other advanced economies rise over geopolitical competition, trade disputes, and growing cyber-espionage incidents. Western governments increasingly seek to “de-risk” their economic relationship with China, with many restricting market access to critical industries such as advanced technology and energy. Chinese leadership appears largely unconcerned, offering a narrative of self-sufficiency, social stability, and the prioritization of national security, while doubling down on state control of the economy. Meanwhile, stressors over Taiwan and hegemony in the Asia-Pacific remain prone to escalation, casting the high-stake potential of a conflict with the U.S. or its regional allies as a backdrop to China’s economic performance.

Understanding the Slowdown

Since reforms took off in the 1980s, China’s economy has relied on massive infrastructure investment and manufacturing capabilities, aided by a large, efficient, and cheap labor force. This proved to be a recipe for a growth miracle, with real per capita GDP rising from just $312 in 1980 to $12,720 in 2022, making China an upper-middle-income country per World Bank national income criteria. Yet, as President Xi Jinping aims to transition China to a high-income, service-based economy, policy shifts in recent years, compounded by external shocks, have contributed to a mismatch between the state’s high ambitions and a crisis of confidence. Consumers are opting to save rather than spend, reflecting pessimism towards the country’s growth trajectory.

The collapse of the country’s real estate sector, which holds 70% of Chinese household wealth, drove this trend. Beijing had been using household construction to stimulate economic growth for years but initiated a liquidity squeeze to curb excessive borrowing and property speculation by developers. The halt in once-generous lending and Xi’s decision not to bail out developers who exceeded their debts caused the real estate bubble to burst, impacting assets for millions of Chinese households. COVID-19 brought a simultaneous shock, as disruptions caused by intermittent lockdowns and a lack of government stimulus for consumers weakened spending. Beijing’s sudden policy reversal at the end of 2022 further depressed confidence, as authorities declared the economy up and running while a wave of infections spread across the country.

Foreign investment has also declined markedly, recently hitting its lowest level since 1993. Along with falling demand for Chinese exports as the cost of living rises for many of its trading partners, the country’s traditional sources for growth are running dry. Growth in the Chinese stock market is struggling from fears of supply chain vulnerabilities and state seizure of intellectual property, prompting foreign investors to shift their assets to other regional markets, such as India and Japan. Meanwhile, continued low consumer confidence weakens the potential for domestic investments to make up the difference.

However, the Chinese government’s turn towards more centralized decision-making amid growing tensions with the U.S. appears out of step with domestic economic priorities. Beijing is actively investing in advanced information technologies, AI, biopharmaceuticals, and clean energy technologies, which while helping China achieve self-reliance in the future, typically have longer cycles and non-guaranteed returns, as well as risk creating oversupply. The lack of stimulus support for businesses who have already lost profits from reduced exports has reduced job creation, causing an ongoing youth unemployment crisis. Chinese university graduates are finding it more difficult than ever to get a job, with the sentiment reflected in popular neologisms tang ping (“lie flat”) and bai lan (“let it rot”) that exemplify the cynicism Chinese youth feel towards Beijing’s grand strategy.

Adding to the pessimism are China’s demographic woes. The country’s population is expected to reach an average age of over 50 years old by 2030, according to United Nations data, the effects of which are already being felt. The aging of China’s population further impedes confidence in the economy’s future growth as less people will be working and spending. In the meantime, the economy is in deflation, with depressed demand, both domestic and external, driving down prices. Despite Chinese leadership’s hope of a great economic revitalization post-COVID-19, the prospects are shaky and point to continued struggles down the line.

Business Implications

For U.S. businesses, it is important to understand that China’s current economic slowdown is not a temporary development. Risks will remain ever-present given the sheer magnitude of U.S.-China bilateral trade. Economists from EY estimate that a 1 percentage point decrease in China’s GDP growth would lead to a fall of 0.3 for the U.S., while recent research from Wells Fargo shows that a substantial slowdown in China’s growth would only have a moderate impact on U.S. GDP growth, though the effect would be slightly larger for Japan and the Eurozone. However, broader impacts in the global economy could be more severe, as countries dependent on China for trade, investment, and tourism would be hit hard. Persistent slowdown in Chinese consumption for critical minerals could lead to price shocks, injecting additional uncertainty in the global renewable energy transition. Given the extent to which China is integrated with both the U.S. and global economies, the consequences are high and far-reaching.

The chance of a geopolitical conflict turning hot is also a risk that could emerge from China’s economic slowdown, as continued stagnation could lead to Chinese leadership taking more assertive stances on political tensions, such as the status of Taiwan and the U.S. military presence in Asia. According to a February 2024 National Association of Business Economics survey, 63% of U.S. business economists anticipate a conflict between China and Taiwan to be a moderate probability and believe it poses a greater risk to a downturn in the U.S. economy compared to domestic factors. In a worse-case scenario, economic struggles would prompt forceful action by Beijing, including potential military action in Taiwan and elsewhere in Asia, bringing the U.S. and China into a direct confrontation.

Despite the risks outlined, room for opportunity remains. China’s economic slowdown could offer a chance for U.S. companies to take greater advantage of the critical mineral and mining sectors in Africa, which have been a leading destination of Chinese global investment. The U.S. recently reached a deal with the Democratic Republic of Congo and Zambia to develop an integrated value chain for electric vehicle (EV) batteries, and further initiatives would help U.S. industries secure the supply of minerals needed to meet decarbonization goals. There is also opportunity for companies to benefit from the exceptional growth occurring in emerging Asian markets such as India and Vietnam, as well as Latin American countries like Mexico, aided by U.S. incentives to friend-shore or near-shore supply chains (meaning to shift supply chains to friendly or nearby countries). Variables of uncertainty include China’s ability to maintain dominance in the global renewable energy supply chain and continue advancing its capabilities in AI and other advanced technology, in spite of restrictions from the U.S. and other advanced economies. Regardless, China’s economic slowdown will impact the global economy, including U.S. businesses, in one way or another, and decisionmakers will need to thoroughly understand the risks in order to better navigate the changing economic environment.