Introduction

After 30 years of extraordinary growth, China’s economy – the world’s second largest – appears to be entering a new phase of slower expansion. The real estate sector – which accounts for around one-third of Chinese GDP and has been one of the main drivers of the country’s economy – is in crisis. Exports and foreign investment have stalled, youth unemployment is at record levels, and the post-pandemic recovery has been anaemic. Meanwhile, there are long-term structural problems: the population is aging, with the cohort of working-age people falling, and the economy remains unbalanced, in part due to consumers opting to save, resulting in weaker demand for products and services. Future levels of foreign investment are also in question: in July-September 2023 China recorded its first deficit in foreign investment, possibly an indication that Western governments’ “de-risking” is starting to have an impact.

The expected prolonged period of slower growth ahead comes at a time when the country’s political, economic, and social fabric has already been tested by almost three years of intermittent Covid-19 lockdowns, which forced many citizens to close, or severely curtail the activities of, their businesses.

From the realities of the slowdown and geopolitical challenges, a new government agenda has emerged – one that appears to prioritize state control, economic stability, national security, and self-sufficiency. So far, there is little indication that Beijing will make the economic changes to rebalance the economy, including shifting towards a more consumption-driven model. Nonetheless, China retains enormous potential to grow and has significant bright spots in its economy, such as the world’s busiest patent office and its electric vehicle (EV) industry.

Supporting Statistics

Global Risks For Business

1. Pressure on Western investors coming both from China and from their countries of origin
   
   Western countries and China are attempting to insulate and protect their economies, through regulation and trade restrictions, and to reduce strategic vulnerabilities. The US and some of its allies have imposed tariffs, export bans, and other restrictions on partnerships with an investment in Chinese companies, especially those involved in developing sensitive strategic technologies, such as advanced microchips, quantum computing, and artificial intelligence. China has retaliated with trade restrictions of its own. That said, there have been some limited attempts to increase cooperation, including visits by three US cabinet secretaries in 2023 and the San Francisco summit between Chinese President Xi Jinping and President Biden, which yielded some diplomatic progress and warmer rhetoric. However, various restrictions on business and free trade, imposed by both sides, will remain in place, or even expand, as long as intractable political issues – such as the status of Taiwan – remain unresolved.
2. China’s demand for raw materials is uncertain
   
   China’s slower economic expansion threatens projected growing demand for some raw materials, particularly those used in its booming construction sector. This is globally significant because China currently consumes enormous amounts, including: nearly one-fifth of the world’s oil; half of its refined copper, nickel, and zinc; and more than three-fifths of its iron ore. That said, the shift is relative – China will continue to need more raw materials, albeit at a slower pace – and Xi’s future political decisions will significantly impact demand. He may, for example, support property developers to finish projects already underway, in the interest of maintaining social order, or prioritize accelerating the country’s green energy transition, both of which would increase demand for some raw materials.
3. More legal cases as companies face pressures
   
   The combination of rising geopolitical tensions and increasing pressures on Chinese companies amid economic slowdown, may lead to more legal cases involving international firms. These could include cases concerning breach of contract, insolvencies, pandemic-related difficulties, regulatory and sanctions issues. International companies doing business in China through joint ventures or otherwise should take special precautions to protect themselves and their intellectual property.

Global Opportunities For Business

1. An opening in Africa’s critical metals and mining sector
   
   China has been the leading global investor in Africa, with Chinese financing peaking in 2016 as a result of its Belt and Road Initiative, which aims to strengthen Beijing’s global influence through strategic infrastructure development around the globe. However, a Chinese economic slowdown could cause China to change its foreign investment strategy, with certain sectors and countries becoming less of a priority. Although critical minerals are unlikely to be deprioritized, this still could open up opportunities for countries such as the US, UK, and EU nations trying to increase their influence in Africa, and to secure the commodities needed for their decarbonisation drives. For example, the US, together with the Democratic Republic of the Congo (DRC) and Zambia, recently agreed to jointly develop the supply chain for EV batteries. Separately, a recent deal will see Namibia export rare earth minerals and green hydrogen to the EU.
2. India and Latin America may offer more investment opportunities amid China’s slowdown
   
   Businesses in India will benefit from the reallocation of some investment from China, as it continues to grow in both population and economic strength. The World Bank forecasts India’s GDP to grow at 6.3% in fiscal year 2023 / 2024.

Opportunities will open up in other economies, too. China has long been South America’s top trading partner, and the second largest for the entire Latin America region; the Belt and Road Initiative poured money into some twenty Latin American countries, primarily in the energy and infrastructure sectors. A less rapidly growing Chinese economy, coupled with US incentives to ‘onshore’ supply chains in ‘friendly’ countries, will help Western companies be more competitive in these markets.

3. Strategic sectors will continue to receive government support

Strategically important sectors like batteries, EVs, and renewable energy are likely to continue to receive state support. Moreover, in practice, China’s strong position across the EV supply chain may prove much more resilient to Western attempts at “de-coupling” than some senior Western officials’ tough rhetoric suggests.

4. A more resilient Chinese economy than expected

China retains very significant potential for future economic growth because of its large population, including many new university graduates. Strong state control over the economy also gives Beijing the tools to mitigate and tackle many of the structural problems in China’s economy. Overcoming the current economic impasse, painful though it may be, could eventually result in a more resilient, balanced economy in which growth is driven more by domestic consumption and less by credit-fuelled investment. Policy shifts in this direction could provide companies selling to China’s large domestic market with significant opportunities.

(v) China will seek to maintain its position within the global construction industry

The Chinese government’s plan to increase spending on infrastructure projects should help its construction sector. This comes despite a continuing downturn in the property market, which will adversely affect growth in residential and non-residential building, according to the US International Trade Administration. At the same time, China dominates the global construction market. The country’s influence can be seen in companies such as the China State Construction Engineering Corp., the China Railway Construction Corp., and the China Communications Construction Group. According to the Engineering News-Record in 2023, these three firms are listed among the top international contractors in the building and transportation sectors.