China’s faltering growth engine
Ten reasons why the Chinese economy is heading for lower growth

Atradius Economic Research – January 2023
Summary

Summary•

China has developed itself into the world’s factory, with an economy that has grown fast for decades and liftedmany millions out of poverty. Since 2010, however, economic growth is slowing down, raising the question ofwhether the economy could fall into the so-called ‘middle-income trap’.

•

It is too early to draw conclusions on this, as it is not yet clear what the results of earlier policy measures will be,
and these policies may change in the coming years. Nevertheless, multiple developments in the Chinese economy
point to a further growth slowdown. We have listed ten of them.

•

Currently the consequences of the zero-Covid policy and the real estate sector crisis are putting a brake on GDP
growth, while high debt at local governments and state-owned enterprises is a risk for financial stability. The longterm growth outlook is negatively affected by the ageing of China’s population, a human capital mismatch and low
productivity growth, aggravated by policy measures related to controlling private business and a focus on selfreliance.

•

In addition to these domestic factors, China's economic growth is affected by the country’s relationship with the restof the world. Many countries where Chinese exports are destined want to reduce their dependence on imports.
Making supply chains more secure will lead to only a partial and gradual decoupling of economies, but increasing
geopolitical rivalry - of which the trade war is just a part - is nonetheless an uncertain factor that can only turn out
negative.

•

The 14th Five-Year Plan of the Chinese Communist Party (CCP) stated that China will become a ‘moderately
developed’ economy by 2035. Crucial to achieving this goal will be that China manages to sufficiently adjust its
current, faltering growth model. It is therefore worrying that the policy choices made as a result of geopolitical
rivalry now appear to be counterproductive in terms of increasing productivity growth.

Factory of the world
The Chinese economy has been an important growthengine for the global economy for decades. Heavy
investment in infrastructure, high productivity growth,and an expanding workforce have made China thefactory of the world. Since China started opening up its

economy and embarking on reforms in the late 1970s,
GDP growth has averaged 9%. From being the world's
tenth largest economy in 1980, China has grown tobecome the second largest. In about ten years, China willprobably overtake the US as the world's largest economy,
measured in US dollars and at nominal market exchange
rates. This is not to say that China would then be more

prosperous than the US: the population of China, at 1.4
billion, is more than four times that of the US. Thismeans that China's GDP per capita needs to reach only aquarter of America's for its total GDP to become thebiggest in the world.
China’s high economic growth has clearly led to a strong
increase in prosperity. No fewer than 800 million people
have been lifted out of poverty and in 2001 China
became a lower-middle-income economy according toWorld Bank criteria, only to achieve the status of an
upper-middle-income economy nine years later.
However, it is from then on, in 2010, that economic
growth started to weaken. In 2011-2015 GDP growth
averaged 7.9% per year, before slowing to 5.7% in thefollowing five-year period. For 2021-2025, average GDP
growth appears to be around 5%. And the growth
slowdown is expected to continue: for 2026-2030,
consultancy firm Oxford Economics foresees average
GDP growth of 4.4%, while the Economist Intelligence
Unit (EIU) forecasts growth of just under 4%. The
Economist's think tank even assumes an average growthof only 2.0% for 2031-2050. Oxford Economics expects
an average of about 2.5% for that period, with GDP
growth at the end only 1.5%.
Figure 1 Growth slowdown has not ended yet
Real GDP growth, % change Y/Y
16
14
12
10
8
Forecast
6
4

economy in 2001. From this point of view, time isrunning out for China.

Multiple factors pointing to lower growth
For now, it is difficult to determine whether China will
fall into the middle-income trap or not. The
consequences of earlier policy measures are not yet
clear, and these policies may change in the coming years.
However, listing the key developments currently playing
a negative role will help to better understand the growthprospects for the Chinese economy. We therefore explainten, often interrelated reasons that point to a further
growth slowdown. These concern both temporary andstructural developments, some of which result fromdiscretionary policy choices.

#1 Zero-Covid policy
One factor that has put downward pressure on growthover the past two years obviously is the Covid-19
pandemic. The strict zero-Covid policy that the Chinese
authorities have followed until recently - to nip
infections in the bud wherever they occurred - wasinitially successful. The number of infections and deaths
has remained very low compared to almost all othercountries. However, while Covid-19 currently is nolonger an issue elsewhere, China’s economy is still
feeling its impact. Illustrative of this is that in 2022
economic growth in China was lagging behind that of therest of the region for the first time this century. Countries
in East and Southeast Asia generally feel the impact ofother factors - higher food and energy prices, monetary
tightening, weak demand from the US and Europe – asmuch as China, but domestic demand (which is mostsensitive to Covid restrictions) is stronger in most ofthese countries.

202000 2005 20102015 2020 2025 2030 2035 2040 2045 2050
Source: Oxford Economics, Atradius

Middle-income trap
Economists now wonder whether China might be caught
in the so-called ‘middle-income trap’.1 In order tomaintain the upward momentum in economic
development, countries need to adjust their development
model as they move into the next phase. This also applies
to China, if it wants to develop from a middle-income to ahigh-income economy. The trap consists of wages in acountry rising to a level where the growth potential inexport-driven, low-skill manufacturing decreases, while
the growth in innovative capability needed to boost
productivity and compete with developed countries inhigher value-chain industries still lags behind. The
period in which middle-income countries go through thistransition usually lasts about 25 years. South Korea,
Taiwan and Singapore were middle-income economies
for 23, 27 and 29 years respectively before moving up to
high-income level. China became a middle-income1

For example: Chen Y, Liu Y, Fang X (2021) The new evidence ofChina’s economic downturn: From structural bonus to structural
imbalance. PLoS ONE 16(9): e0257456.; and Rozelle S, Hell N

Atradius Economic Research 2

The Chinese authorities have largely lifted therestrictions in December 2022, but their negative effectwill continue for a while. The previous strict policies and the use of domestic, less effective vaccines – haveleft the Chinese people with little immunity. Meanwhile,the sudden policy change coincides with a medical
system lacking readiness. China therefore will needmore time to stabilise the caseload than the two or threemonths that other countries needed after they moved
away from stringent Covid restrictions. The number of
infections in China will probably rise sharply in thewinter period, with short-term negative consequences
for consumer confidence and spending. The economic
outlook for the second half of 2023 will be better, withprivate consumption picking up, and the likelihood thatthe zero-Covid policy will cause economic scars andreduce the economy's potential growth having
diminished. However, this improved outlook will also
depend on the extent to which the authorities succeed inincreasing vaccination coverage and restoring consumer
confidence.

(2020) Invisible China – How the Urban–Rural Divide Threatens
China′s Rise. The University Of Chicago Press.

#2 Real estate crisis
Simultaneously with the Covid pandemic, problems in
the real estate sector escalated. The first signs of a
possible crisis appeared earlier, but the impending
default of the Evergrande Group in August 2021 was thetrigger for trouble that spread widely. Real estatedevelopment was 7.4% lower in the first eight months of2022 than in the same period one year earlier, while
housing sales fell about 30%.
The Chinese government has taken steps to stabilise theproperty market, cutting interest rates on mortgages,
reducing down payments and relaxing purchaserequirements. These measures will probably stabilise thehousing market in the coming months, but further
defaults by property developers remain a major risk to
the property sector as well as the financial sector. Banks
are heavily exposed to real estate, since the property
sector makes up 25% of total bank loans, and personalmortgage loans account for more than 70% of real estateloans. With a weakening asset quality, non-performing
loans will increase and profit margins will face further
downward pressure. The government will do enough toavert collapse of the sector, but anything more than alengthy L-shaped recovery of the sector is not in sight.
The real estate sector will probably continue to put
pressure on economic growth for the coming five years
at least.
Figure 2 No sign of recovery for house prices
House prices 70 medium & large cities, % change Y/Y
14
12
10
8
6
4
2
0
-2
2016

2017

2018

2019

2020

2021

#3 High debt at local governments and state-owned
enterprises
The government has relied much on fiscal policy
measures to counteract the headwinds coming from theCovid pandemic and the real estate crisis. Besides theimpact of a weaker economy, stimulus measures like tax
cuts, refunds for enterprises and rising public
expenditure have widened the budget deficit, whilecentral government debt has risen. Central government
finances are strong and the higher budget deficit gives
no cause for worries about debt sustainability, but
implicit liabilities associated with local governments
have risen. Local governments have funded
infrastructure projects not only in recent years, but have- in an effort to reach economic growth targets - provided
countercyclical investments already since the mid-

IMF (2021) People’s Republic of China, Selected Issues.

Atradius Economic Research 3

The implicit liabilities among local governments and
LGFVs, including their poor visibility, are reasons for thecentral government to try to contain the growth in LGFVdebt and the associated risks of adverse macro-financial
feedback loops. This relates also to the non-financial
corporate sector, with state-owned enterprises (SOEs)
and private firms investing in LGFVs, as well as LGFVs
investing in SOEs. This interconnectedness is seen as
adding to the risk associated with China’s high nonfinancial corporate debt. Because this debt, which rose
rapidly in the 2010s and reached a level of 152% of GDP
in 2021, is largely domestically financed and stateowned, the risk of a financial crisis remains low.
However, still nearly 60% of companies in China belong
to the category with the highest credit risk, which issignificantly higher than the global average of 38%.
Because firms with investment linkages to LGFVs tend tohave lower capital productivity, this is pointing toresource misallocation.
So far, the elevated debt levels at local governments and
SOEs have not led to an unsustainable situation. Still,with the property crisis continuing to unfold, they
represent a threat to China’s financial stability that is noteasy to address.

#4 Ageing

2022

Source: China National Bureau of Statistics, Atradius

2

nineties. Using so-called Local Government Financing
Vehicles (LGFVs) to raise capital market funding, theycreated a large pile of debt, estimated at about 40% of
GDP. 2 Besides funding public infrastructure, LGFV
activities also included forms of financial support for
local governments, firms and the property market, muchof which is not captured in earnings statements.
Meanwhile, not even half of this LGFV borrowing is used
for capital expenditure in public investment likeinfrastructure, which can generate productivity gains.
Instead, the bulk of expenditure went to interest
payments, accumulation of land and real estate,
employee payrolls and investments in unprofitablefinancial assets.

The aforementioned factors have been at play for quite
some time, and for longer than many expected.
Nevertheless, in principle they are temporary and theirimpact on economic growth likely will decrease in themedium term. This, however, certainly does not apply tothe ageing of the Chinese population, which will last for
decades and will have a profound impact on theeconomy. After all, besides productivity growth (which
we look at in the next section) and growth of the capitalstock (plant, equipment and other assets that help
production), it is the long-term growth rate of the labour
force that determines the potential growth rate of an
economy.
For China, the picture is far from favourable. In 2021,
China’s birth rate declined to 0.75%, a record low acrossits 72-year data, after a steady decline for more than five
decades. An important reason for the decline has been
the one-child policy, which was abolished in 2016,leading to a temporary rise in the birth rate, but is stillaffecting the choice of many families. Simultaneously,
China’s death rate is gradually climbing due to its ageing
population. As a result, the natural population growthrate (births minus deaths) dropped to 0.034%, the slowest
pace since 1960, when the country was plagued bywidespread famine, caused by the policies of theinfamous Great Leap Forward. Meanwhile, China’s
fertility rate (the average number of children per woman
aged 15-49) also declined rapidly. At just 1.3 it is among
the lowest in the world and much lower than the natural
replacement rate of 2.1.
Figure 3 Labour force declining faster than total population

According to various estimates, the Chinese population
will gradually decline to between 800 million and 1.1
billion people by 2100, from 1.41 billion now.3 The
working age population (age 15-64), which is relevant foreconomic growth, already peaked about ten years ago.
Moreover, China’s working age population is ageing
faster and at an earlier development stage than mostother G20 countries. In the year when the per capita
gross national income of China's G20 peers was
equivalent to China's in 2019, most of them still had a
growing labour force relative to the total population,
while China’s already was declining for ten years. 4

Meanwhile, part of the workforce is overeducated. In
recent years China has made important strides in higher
education in science, technology, engineering andmathematics, while the number of young people
pursuing higher education has risen apace. In 1998, only
1 million students gained admission to Chinese colleges,
while nearly 11 million graduated in 2021. However, here
too, there is a mismatch, with only 0.71 white-collar jobs
available for each college graduate. Joblessness among
youth is now a serious problem, at 18% in mid-2022, thehighest rate since before the pandemic and far abovethat of the US or Europe. As far as production isconcerned, technological innovation, in particular
automation, will be helpful to solve theover/undereducated issue. But it will take a lot of timeand investment to make China’s workforce equipped to
become a high-income economy.
A prosperous workforce is also essential for anotherchange to take place successfully. To avoid the middleincome trap, the manufacturing-heavy economy has tochange into a services-led one, with private consumption
becoming the main driver of growth, at the expense ofinvestments and exports. The Chinese government has
been committed to this transition for a long time, but so
far little progress has been made. Twenty years ago,
when the government announced its intention to moveto a more consumer-led economy, the ratio of private
consumption to GDP had fallen to 45%, which is tens ofpercentage points lower than in the US and Europe. Aftera further decline this ratio has risen, but it still lags
behind. Apart from the fact that investments and exports
are still important drivers of growth, high private
savings related to an inadequate social protection system
play an important role in relatively low private
consumption. Social insurance and assistance protection
spending doubled during the 2010s, but with apopulation ageing rapidly and traditional
multigenerational family support weakened because ofurbanisation, China has some way to go.

#5 Human capital mismatch

Figure 4 Relatively low share of private consumption to GDP

Until recently, China enjoyed a ‘demographic dividend’because a large pool of rural migrants helped the urban
workforce to grow. The unskilled workers contributed
much to China’s growth, but since their wages are rising,an increasing number of companies are shifting
manufacturing production to countries with lower wages
like Vietnam, Malaysia and India. Upgrading its industry
is the logical response for China, but while thegovernment has invested much in physicalinfrastructure, it did not invest adequately in humancapital. Surveys show that, on average, China’s labour
force has one of the lowest levels of education comparedto peer countries.5 Only 30% of all workers havecompleted just one day of high school, let alone obtained
a high school diploma. This means that a large majorityof low-skilled workers are not suitable for the jobs where
they are needed - in advanced manufacturing.

Private consumption, % share of GDP

3

The high estimate from United Nations World Population
Prospects, the lower one from YuWa Population Research Institute.
4
IMF (2021) People’s Republic of China, Selected Issues.

Atradius Economic Research 4

55

50
Forecast
45

40

35

30
1980

1985

1990

1995 2000 2005 20102015 2020 2025 2030

Source: China National Bureau of Statistics, Atradius#6 Productivity growth decline
From the above it may be clear that higher productivity
has to compensate for worsening demographics.
5
Rozelle S, Hell N (2020) Invisible China – How the Urban–Rural
Divide Threatens China′s Rise. The University Of Chicago Press.

However, after impressive growth in the 2000s, China’s
productivity has more recently stagnated.6 Reforms
twenty years ago spurred China’s productivity growth,
including entry into the WTO and reductions in external
trade barriers, reductions in internal trade and migration
barriers, and reform of SOEs. The entry and rapid growthof young private firms were also important drivers of
aggregate productivity growth. But since the financial
crisis twelve years ago, there has been a decline inChina’s business dynamism, with a falling share ofyoung firms in the economy and younger and smallerfirms performing weaker than their older and larger
counterparts. Moreover, the economy’s ability to allocate
capital has worsened over time, while there were large
and persistent productivity gaps between SOEs andprivate firms, with the latter performing consistently
better. The productivity stagnation took place in a period
when the share of SOEs in the economy remained flat,
after falling in the first decade of the century. Looking atdifferent provinces, it appears that where SOEs accountfor a larger share of assets, business dynamism tends tobe weaker.
The findings underscore the need for China to undertakepro-market reforms to boost productivity growth.
However, if the government decides to put more effort
into expanding the private sector at the expense of SOEs,
even then productivity may not increase enough tocompensate for the negative impact of the ageing
population. China’s investments in high-tech will help,
but given their relative weight in Chinese GDP, thesetechnologies are a long way off from being the drivers ofgrowth.

corporate leaders were called to order because of
meddling in government policy. One reason for thecrackdown on the sector was that its growth had led tomuch power and wealth being concentrated in a few
hands. Since the government’s ‘common prosperity’campaign had become a defining theme in many
policies, the government wanted to put a brake on the
expansion of the sector.
More recently there have been signs that the crackdown
might have started to ease, but the stricter regulations
and enforcements are likely to remain. There certainly
was a logic to clamping down on monopolies and abusesof market power. And there is also a rationale in greater
control on the technology sector if the government isaiming to bolster more strategically useful sectors suchas high tech manufacturing at the expense of parts of thetech industry that it sees as dispensable, such as online
gaming, social media and the wider platform economy.
One probable consequence of the measures, however, isthat they will dampen innovation and will therefore
have a negative impact on productivity gains that could
fuel economic growth. After all, too much government
intervention could undermine the entrepreneurialenergy the sector needs.
While opinions may differ in this respect, the regulators’
tough approach has led to the exit of companies invarious sectors. Declining confidence has also had anegative impact on investor confidence, at a time when
China has to compete with other Asian countries inattracting investment from abroad.
Figure 6 Interest for Chinese equities and bonds fell in 2022
Net non-resident purchases of EM stocks and bonds in USD billion

Figure 5 Productivity growth gradually slowing further

140
120
100
80
60
40
20
0
-20
-40
-60

Labour productivity, % change Y/Y25
20
15
Forecast
1050

Sep 2020 Jan 2021 May 2021 Sep 2021 Jan 2022 May 2022 Sep 2022
-5
-10
2000

2005

2010

2015

2020

2025

China Equity Flows

China Debt Flows

EM ex-China Equity Flows

EM ex-China DebtFlows

2030

Source: IIF, Atradius

Source: Oxford Economics, Atradius#7 State control on the technology sector#8 Self-reliance by Dual Circulation

As indicated, it is now important for China to take theright steps in adjusting its growth model. Some factorsthat currently complicate this adjustment can be said tohave happened to China accidentally or at least
unintentionally. However, a number of discretionary
policy choices may also have had an adverse impact on
China’s growth outlook. One of these choices is toincrease state control on the high-tech sector, describedby many as a crackdown. In 2021, regulators took aseries of actions concerning anti-trust, finance and data
security. IPOs and takeovers were frustrated andA second policy choice that could have negative
consequences for the economy is the government’s Dual
Circulation Strategy (DCS). With this strategy, launchedin 2020 and incorporated in the CCP’s 14th Five-Year
Plan, China places greater emphasis on the domestic
market, or internal circulation, without abandoning its
export-oriented development strategy, the external
circulation. Expanding domestic demand essentiallymeans boosting private consumption, which is in linewith the desired shift to consumer-led growth that China
has been pursuing since 2008. An important difference,
however, is that the push for a consumption-based

6

IMF Working Paper.

Cerdeiro D, Ruane C (2022) China’s Declining Business Dynamism.

Atradius Economic Research 5

model at that time represented a call for more, rather
than fewer, imports, as is the case for the DCS.7 In thefirst years after 2008, imports of commodities andintermediate goods rose sharply as a consequence offiscal stimulus in infrastructure. The underlying reason
for dual circulation, however, is that China wants to
reduce its exposure to other countries, especially the US
and other nations with which it is at odds. Under the DCS,
China therefore aims to substitute imports for domestic
production as soon as it is able to produce the relevant
goods domestically.
In a period of rising geopolitical tensions such a strategy
of import substitution may be understandable. Westerncountries are likewise aiming to reduce their externalreliance on a number of strategic sectors while, related to
the Covid pandemic, awareness of the vulnerability of
global supply chains has grown. The flip side of thisincreased emphasis on self-reliance, however, is that itcomes at the expense of economic efficiency. Economic
science and history, including China's, have proven thatinternational trade and removing the barriers thathinder it are positive for the economy. Dual circulation
will require additional investment for China to compete
in new areas, and the question is whether it will be
successful in doing so. Especially if an increasing
number of countries see China as a systemic rival, it will
be difficult to achieve a competitive edge in the markets
that support economic growth and can propel thecountry to the status of a high-income economy.
Therefore, it will be difficult to make external circulation
successful as well. China is undertaking efforts toincrease its access to foreign markets by entering trade
agreements like the Regional Comprehensive Economic
Partnership and, if allowed, the Comprehensive andProgressive Trans-Pacific Partnership. Yet trade deals
alone will not make China a leader in exporting highvalue-added goods.

#9 Securing global supply chains
The aim to be less reliant on other countries does not
apply only to China. The awareness that supply chainsare vulnerable has grown globally in recent years, and is
not only related to the US-China trade war (which we
look at in the next section). The Covid-19 pandemic has
especially played a role in this. At the height of thepandemic, lockdowns in China and other countries
disrupted international shipping, created shortages of
essential goods and led to elevated commodity prices.
Currently, the war in Ukraine and Western sanctions
against Russia also show how dangerous it is to dependon only one or a few countries of origin for essential
goods. Governments and internationally operatingcompanies therefore want to make their supply chains
less vulnerable. Especially when it comes to food, energy,
technology and medical equipment, governments are
7

Herrero A (2021) What is Behind China’s Dual Circulation
Strategy? China Leadership Monitor.
8
Smid T (2022) Pandemic and security shocks shake global value
chains. Atradius Economic Research.
9
Every M, Harn E-J van (2022) Friendshoring: Who will benefit?

Atradius Economic Research 6

considering promoting a return of production to theirown country, or to countries seen as more reliable.
This reshoring, or - in the case of shifting production tobefriended countries - ‘friendshoring’, has to be weighedagainst the downsides and costs that come along with it.
Some strategic reorientation in critical sectors probably
will happen, but a major step back on the globalisation
ladder is unlikely, as the key economic rationale behind
global value chains – the opportunity to exploit
differences in labour costs – still holds.8 However, related
to specifically China, the situation is different. With the
US leading the way, several Western countries havedeveloped initiatives to encourage companies to movetheir production and investments from China to othercountries. For the time being, it is unclear to what extent
these initiatives will result in major shifts, but if
friendshoring continues in the coming years, this will
have major consequences for the Chinese economy.
Estimates say that up to 28 million jobs could disappear
from China. This concerns both low and medium techjobs that would move mainly towards India and otheremerging economies, as well as, to a lesser extent, hightech jobs from which the advanced economies inparticular would benefit. The implied dollar value ofexports that would be lost via friend-shoring potentiallycould be the equivalent of China's trade surplus of 3% of
GDP turning into a deficit of -0.6%.9
Taiwanese companies have a special place in the
migration from China. According to a recent survey10,
most of them are not advocates of outright decouplingfrom China and onshoring, but they are collectively
diversifying and seeking other ways to manage theirrisks and create new opportunities in a complex andchanging world. More than three quarters of Taiwanesecompanies think Taiwan needs to reduce its economic
dependence on Mainland China. Over a quarter of thesurveyed Taiwanese firms with business in China havealready moved some of their production or sourcing out
of China, while another third are considering doing so.
China's zero-Covid policy has played a role in this, but
the increasing cross-strait tensions are the main reason
to leave.
For the time being, decoupling of China from othereconomies will probably take place to a limited extent
only. Several governments do not want to go further thansecuring the most critical supply chains. Unlike the US,
they see no end in itself in deliberate hobbling of theChinese economy. Second, companies that do not see any
problems in their own dependence on China will be
reluctant to participate in reshoring their activities
because of the higher costs. The business relationships,
investments and supply chains cannot be easily
unwound, and for many companies the Chinese market
is still very attractive. Nevertheless, the process of global

Rabobank Research.
10
Kennedy S (2022) It’s Moving Time – Taiwanese BusinessResponds to Growing U.S.-China Tensions. Center for Strategic &International Studies. The survey was conducted in July 2022, prior
to the visit of Nancy Pelosi, speaker of the U.S. House ofRepresentatives, to the island.

fragmentation of technological development will affectChina’s growth potential negatively. The extent to which
this will happen will depend on the further developmentof the geopolitical rivalry between China and the West.

increased further in the past year. Although neither ofthe superpowers wants to escalate the situation, a lasting
solution that will satisfy all parties, including Taiwan
itself, is not in sight at all.

#10 Geopolitical rivalry

The geopolitical rivalry between China and the US, andincreasingly also frictions between China and other
Western countries, are at the expense of the benefits ofinternational cooperation, including free trade andexchange of knowledge. If heightened tensions lead totechnological decoupling, this will be more detrimental
for China than for Western countries, causing China’s
GDP growth to slow by almost 0.3%-pt. over the medium
term, whereas the US and the EU would see growthfalling by less than 0.1%-pt. 11 An important reason forthis difference is the impact of weaker knowledgetransfers. An assessment of the impact of knowledge
spillovers on productivity across 35 countries shows thatboth domestic and foreign Research and Development(R&D) have a major impact on productivity growth.
Furthermore, while domestic R&D is hugely important,foreign knowledge spillovers contribute almost a third of
the total knowledge contribution to productivity.
Looking at the patterns of knowledge spillovers, it turns
out that US R&D, and to a lesser extent that of the EU, arecritical to driving global productivity growth in the restof the world. China's influence on the US, Europe, andadvanced Asia, however, is limited. Although China is an
important innovation centre, it will feel the impact oftechnological decoupling more than the US and the EU.

Closely intertwined with the pursuit of self-reliance andmaking global supply chains safer is the US-China trade
war that has been going on for more than four years
now. In July 2018, the Trump administration begansetting tariffs and other trade barriers on China in
response to alleged unfair trade practices and intellectual
property theft. The Biden administration, with bipartisan
support in US Congress, has thus far kept these measuresin place. The trade war has significantly reduced theshare of Chinese exports to the US. While China’s exports
to the rest of the world have increased by almost 80%
since the start of 2017, exports to the US are at about thesame level as they were then. China’s share of total US
goods imports has fallen to 18%, down from 22% at theonset of the trade war.
Figure 7 Chinese exports to US lagging those to rest of world
China exports to US and Rest of World, rebased 2017=100
200
180
160
140
120

2017

2018

2019

2020

Exports to US

2021

100

Counterproductive policy choices

80

The 14th Five-Year Plan of the Chinese Communist Party(CCP) stated that China will become a ‘moderately
developed’ economy by 2035. Crucial to achieving thisgoal will be that China manages to sufficiently adjust its
current, faltering growth model. Looking at the multiple
developments that are putting a brake on economic
growth now and in the future, the only conclusion can bethat achieving the target is uncertain. Some of the
problems, such as the crisis in the real estate sector andhigh debt of local governments and state-owned
enterprises, appear to be reasonably under control.
Others, such as the ageing population, low productivity
growth and the mismatch in the labour market, arechallenging. It is therefore worrying that the Chinese
government is currently embroiled in a trade war with
the US amid other geopolitical rivalries. The policy
choices made as a result of this now appear to be
counterproductive in terms of increasing productivity
growth. It is precisely this that is crucial for avoiding the
middle-income trap and making the step towards thestatus of a high-income economy.

2022

Exports to ROW
Source: Macrobond, Atradius

Recently the trade war entered a new, more intense
phase. The US has unveiled regulations that will restrict
the export to China of goods containing US-madetechnology related to semiconductors manufacturing andartificial intelligence. The regulations will make it
difficult for China to develop advanced chips and otherhigh-tech industries and will be, if implemented
effectively, a major setback for the Chinese tech sector.
The export controls probably will encourage China evenmore to achieve supply-chain self-sufficiency, but - as
explained above - this will take many years, especially if,
as expected, further restrictions follow to prevent thetransfer of US technological knowledge to China. In
addition, the curbs will also apply to non-US companies
that use US technologies, like global chipmakers and chipequipment suppliers in other Western countries. Alsothese actions will encourage multinational corporations
to reassess the risks of doing business in China.
In fact, the trade war is broader than its name suggests. It
can be seen as a collision between systems, market
capitalism versus state capitalism, and – as put by someWestern leaders - autocracy versus liberal democracy.
What does not help is that tensions around Taiwan have

11

McFee I (2022), Technological decoupling is the real
deglobalisation threat. Oxford Economics Research Briefing.

Atradius Economic Research 7

Bert Burger, Principal Economist
bert.burger@atradius.com+31 20 553 2872

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