How vulnerable is China to external shocks?

China is undergoing a period of economic distress and structural transformation that has increased its vulnerability to external disruption. The outlook for domestic demand remains muted given the government’s intent to continue pursuing ‘dynamic zero-COVID.’ A rapid slowdown in global growth constrains China’s ability to leverage the international market to offset the impact of its domestic headwinds, but if a global recession were indeed to materialize in 2023—not our base forecast—the Chinese economy could be driven into a severe slowdown.

The room for Chinese authorities to stimulate the economy through policy—in response to a potentially big external shock in 2023—is limited. This would go against the global backdrop of rising rates and hence depreciate the value of the RMB. Furthermore, with weakening consumer and investor confidence and rising uncertainty about the outlook, it’s questionable whether such stimulus would be efficiently distributed to support economic growth.

Even with the risk of slowing global economic activity, we expect that China’s GDP will grow 5.3 percent in 2023, assuming a relaxation of the government’s ‘dynamic zero-COVID’ strategy. But gray swans can happen. The Chinese economy could suffer a steeper slowdown next year if the recession in the US and Europe is more severe than currently forecast or the anticipated downturn in China’s housing investment deepens. These factors could have a bigger impact on the economy than the pandemic had in the first quarter of 2020, given that stimulus measures might not be as effective.

Read Assessing the Vulnerability of China's Economy to External Disruption