Chinese Premier Li Keqiang’s recent warning to Communist Party cadres, that this quarter’s contribution to an annual 5.5% growth target was under threat, highlights the continued pressure on the Chinese economy, even as Shanghai and Beijing emerge from lockdowns. With exception of the onset of COVID-19, the global economy has not gone without Chinese growth in this century. Despite lockdowns being the main culprit once again, this time internal factors are also dragging heavily on growth and may not be as transitory as early 2020. Corporate and local government debt, the chilling effect of regulatory crackdowns and the property sector’s continuing woes had already prompted fiscal and monetary stimulus before the lockdowns.

Emerging markets and lower income economies are already suffering in an increasingly inflationary environment, and are most exposed to a slowing China. Reduced demand for commodities, tourism and other exports will hurt Asian economies unwinding strict COVID-19 protocols and crimp commodities windfalls for Latin American and African exporters, in turn piling stress on balance of payments and debt indicators. Wealthier exporters like Germany, Japan and South Korea may also suffer. With corporate earnings projections dimming and Federal Reserve rates rising, accelerating capital flight complicates the People’s Bank of China’s balancing act. A currency devaluation, especially a disorderly one echoing 2015, would exacerbate the global impact by reducing Chinese purchasing power and import demand and hurting emerging market currencies.

Beyond this quarter a recession in China remains unlikely, if only because the central government has headroom to throw fiscal stimulus into tried-and-tested infrastructure spending. While the party’s looming congress reduces its room for manoeuvre, we’ll be watching the extent of pragmatism shown regarding the enforcement of COVID-19 protocols and prioritisation of “high-quality growth”. Whatever China’s trajectory, its current struggles are adding to the other shockwaves currently reverberating through the global economy.

This article first appeared in the Axco Flashpoints newsletter, which provides monthly analysis on country risk and geopolitics from our Global Risk team. You can sign up at https://www.axcoinfo.com/axco-flashpoints-signup.aspx