Once the driving force behind global growth, China’s economic engine is now sputtering, leaving policymakers in unfamiliar territory. With a multitude of problems unlikely to go away and a range of new challenges on the horizon, China’s economic slowdown will reshape domestic and international dynamics.
Three key takeaways:
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Facing many challenges, China’s economy has begun to slow down and is projected to continue to do so in the foreseeable future.
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The deceleration of China’s economy carries political, economic, social, and environmental implications both domestically and internationally.
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The impact of China’s economic slowdown will vary across different regions and sectors.
China has undergone a remarkable transformation, evolving from an agrarian society in the 1970s to an industrialized power with the world’s second-largest economy. Since 1989, China’s economic growth rate has averaged an impressive 9% annually. However, domestic challenges, from youth unemployment to a collapsing property market and an aging population, are causing significant concerns for policymakers in Beijing. International disputes—territorial conflicts in the South China Sea, tensions over Taiwan, and the trade war with the United States—further undermine confidence in the Chinese economy. These factors have contributed to a deceleration of economic growth in recent years, with projections from the Lowy Institute suggesting it could slow even further to around 3% by 2030 and 2% by 2040. Understanding the implications of China’s slowing economy will be crucial for adapting to the shifting landscape.
Domestically, the worst may be yet to come
Domestically, China’s slowing economy could increase political pressure on the ruling Chinese Communist Party (CCP). Regimes, such as the CCP, often frame their repressive governance as necessary for maintaining stability, economic growth, and national security. The Chinese population has tolerated the CCP’s authoritarianism because the regime has, until now, largely delivered on its promises and improved living standards. However, if the government fails to meet these expectations, civil disobedience may arise, not least because Chinese citizens lack the means to express their discontent at the ballot box. Aware of this threat, the CCP has been tightening its grip on the population through mass surveillance, online activity monitoring, and media control. The scale and sophistication of these measures have significantly increased since the early 2010s due to technological advancements. While these strategies may strengthen the CCP’s control, whether they will effectively curb future disobedience remains to be seen. Research has already linked the slowdown in China’s exports to a “rise in incidents of labor unrest”. In recent years, political protests in China have taken the form of social movements such as tang ping (“lie flat”) and bai lan (“let it rot”), reflecting the widespread disillusionment among China’s youth, who reject the pursuit of success through hard work due to a sense of hopelessness. A slowing economy increases the risk of socio-political unrest and the likelihood that the government will resort to a harsh crackdown to reassert its authority.
Domestic economic factors, such as falling foreign direct investment (FDI) and a sharp decline in consumer spending, have played an important role in China’s economic slowdown. As it becomes clearer that China’s slowdown is part of a broader trend rather than a temporary downturn, confidence in the economy will likely decrease further. Foreign investors withdrew $14.8 billion from China between April-June 2024. Although China does not depend on FDI to finance its development, the withdrawal of foreign capital can exacerbate underlying issues and signal growing uncertainty. Problems with the property market are also likely to worsen as demand continues to fall. As China’s economy continues to slow and policymakers grapple with numerous dilemmas, the CCP will find itself in an increasingly difficult position. The Regional Comprehensive Economic Partnership (RCEP), a free trade agreement between 15 countries in the Asia-Pacific region, may alleviate some of China’s difficulties, but Beijing will have to confront the reality that it is no longer equipped to maintain the rapid economic growth of previous decades.
The international stage: far-reaching shockwaves or a false alarm?
In today’s interconnected world, where supply chains span continents and the global economy links nations closely, events in one country often have knock-on impacts elsewhere. With China’s economic slowdown increasing the probability of domestic political instability, the question arises: what will the consequences be on the international stage? China’s economic slowdown may prompt the CCP to strengthen international relations and become less confrontational. However, given the country’s aggressive foreign policy track record, it is difficult to envision Beijing abandoning its geopolitical objectives. The “peaking power trap” suggests that a declining power may react aggressively. In China’s case, this might manifest in an invasion of Taiwan or escalating hostilities in the South China Sea. As a weakened China could be more dangerous, the international community must proceed with caution.
Economic developments in China have a ripple effect globally. Research by the International Monetary Fund shows that when China’s growth rate rises by one percentage point, global expansion is boosted by approximately 0.3 percentage points. The extent of the negative impact of China’s slowing economy on the international community is a topic of intense debate. Some analysts reckon there is an “extremely high” risk that a failing Chinese economy triggers an “international contagion”. Others dismiss such projections as “exaggerated”, downplaying China’s influence on global prosperity. Still, the impacts will be unevenly distributed, as countries have varying levels of economic dependence on China. For instance, exporters of raw materials for construction, such as Australia and Brazil, are already being hit as Chinese demand decreases. Oil-exporting countries, such as Angola and Nigeria, are also set to be disproportionately affected as China’s oil consumption drops. Conversely, some countries may stand to gain from an economically struggling China. If Beijing continues to reduce its lending to African nations, US companies could seize the opportunity to capitalize on opportunities in the critical mineral mining sector.
As countries experience differing economic impacts from China’s slowdown, the resulting social consequences will likely vary between nations. If China scales back the Belt and Road Initiative (BRI), a global development strategy focused on major infrastructure projects, participating countries could face significant socio-economic challenges. This threat is particularly concerning as the BRI primarily targets developing nations with vulnerable populations. Sri Lanka and Zambia, for example, have defaulted on their debts (much of which was owed to Beijing), subsequently suffering from inflation, currency depreciation, and rising poverty. In Sri Lanka’s case, the port of Hambantota and 6,000 hectares of land were handed over to China in December 2017 on a 99-year lease in exchange for financial relief. Violent protests ensued between government supporters and villagers in Sri Lanka, offering a glimpse of the social unrest that could unfold in other countries if Beijing tightens its approach to BRI countries.
China’s rapid industrialization and extensive heavy industry have come at a significant environmental cost. As the economy slows, concerns are growing about the impact on Beijing’s policies and the potential environmental ramifications both domestically and internationally. Although the CCP has pledged to cut emissions and invest in renewable energy under the Paris Agreement, economic growth remains the top priority. Despite the CCP’s increasing investment in green energy, China accounted for 95% of the world’s new coal power construction in 2023. However, there are signs that this trend may be changing as approvals for new coal-fired power plants dropped sharply in the first half of 2024. Furthermore, recent guidelines issued by the CCP in August 2024 have set green targets to be achieved by 2030. These include increasing the scale of the energy conservation and environmental protection industry as well as expanding the proportion of non-fossil fuel energy. It remains to be seen whether Beijing will adhere to these objectives as the economy slows down, increasing the likelihood that environmental concerns may become a lower priority.
Conclusion: A rocky road ahead
The implications of China’s economic slowdown are likely to be varied and global in scale. Although uncertainty persists regarding how effectively the CCP will handle the situation, recent events provide little cause for Chinese citizens to be optimistic. Policymakers and stakeholders around the globe should assess their vulnerabilities, closely monitor developments, and proactively implement strategies to mitigate risks where necessary. Such measures will be crucial for navigating the likely impacts of China’s economic downturn, domestically and internationally.
