China and the world: a slow goodbye?

Just over a decade later, the 2022 Beijing Winter Olympics projected a rather different image. The stadiums were virtually empty and athletes lived and competed in a sealed-off bubble, as a result of China’s strict Covid-19 controls. Borders remain closed to foreign tourists—even as most other countries are opening up. Several nations, including the U.S., boycotted the Games over alleged human rights abuses by China.

This growing international isolation has many other facets, ranging from the fall in expat numbers and Chinese consumers’ growing preference for local brands, to the scaling-back of the flagship Belt and Road overseas development initiative (BRI) and the government’s desire for self-sufficiency in key technological domains. And while the path has not pointed entirely towards one direction—the authorities have opened up the economy in some areas and boosted China’s participation in regional trade agreements, for instance—a continuation of such trends could raise serious questions for the future of China’s economy and its place in the world


  • East or west, home is best

Twenty-three months have now passed since China closed its borders in a bid to shut out Covid-19, with any visitors forced to undergo an arduous hotel quarantine process. The economic impact has been profound. On the one hand, Chinese citizens, unable to take trips abroad, are now traveling locally, providing some support to domestic demand. So-called Red Tourism, which is linked to sites with historical or cultural significance to the Communist Party, has been a key growth sector. Perhaps partly due to a more limited exposure to the outside world, young consumers in particular are increasingly patriotic, showing a penchant for locally-made products over foreign ones in a phenomenon known as Guochao.

At the same time, the foreign tourism industry has been snuffed out. Passenger arrivals to Hong Kong, which has largely followed mainland China’s border restrictions, were a mere 150,000 in December last year compared to close to six million before the pandemic. The number of international students in China—which swelled to around half a million before the pandemic, mainly from developing Asia—has been hard hit, with many forced to study remotely from their home countries. This is a body blow to China’s soft power and attractiveness as a research and educational hub, which is crucial for the development of the knowledge-based economy that Beijing so craves.

The border measures are hurting foreign talent in other ways too. Expat numbers have likely taken a knock, accelerating a trend which predated the pandemic. For instance, the number of foreigners working in Shanghai, China’s most international city, has reportedly fallen by over 20% in the last decade. In Beijing, the figure is an even more stark 40%. Together with technology export bans by the U.S., and restrictions on Chinese investment into many advanced economies, this bodes poorly for the knowledge transfer from West to East which has been crucial to the East Asian nation’s meteoric rise in recent decades.

As well as the labor market, the country’s economic structure is also growing more inward looking, with the government engaged in a nationwide effort to wean itself off of its dependency on key foreign technology. Semiconductors are a prime example: Crucial for everything from cars to computers, they have emerged as a pressure point in the ongoing trade and technological conflict with the United States. With China importing nearly USD 380 billion of chips in 2020, Beijing is anxious to reduce this bill.

Some progress has been made on this front. China’s share of the global chip market has soared recently, to 9% in 2020. In that year alone, nearly 15,000 Chinese semiconductor firms were registered, spurred on by the promise of generous government support. Yet, the nation is still far from the cutting edge: While the Taiwanese market-leader TSMC is about to roll out three-nanometer chips later this year, Chinese firms still mainly focus on legacy chips of 28 nanometers or more.

China’s rapidly growing aviation market, which is set to become the world’s largest over the next 20 years, is another example of where Beijing aims to develop an indigenous alternative to foreign competitors. After years of delays, the country’s C919 plane—produced by state-owned firm COMAC—is set to begin deliveries this year, with a view to taking market share from Boeing and Airbus, which currently dominate global aircraft sales.

The drive for domestic production is also present in low-tech domains. China is aiming to boost soybean output by 40% by 2025, for instance, to meet growing demand from consumers and the livestock industry. Elevated self-sufficiency targets have been set for staples such as pork, beef, dairy, eggs and poultry. Xi Jinping recently reiterated the importance of the country “holding its rice bowl in its own hands”.

While shifting towards a domestic economy less reliant on the outside world, the expansion of capital abroad has also been reined in. In 2021, total financial engagements in BRI countries were around USD 60 billion, roughly half the level of a few years earlier. The flashy infrastructure projects of the past are increasingly giving way to lower-key investments as part of a greater focus by Chinese firms on value for money. There is good reason for this: The commercial viability of past projects has often been questionable, with several emerging markets heavily exposed to Chinese funding now in debt distress.

The decline in investment into non-BRI countries has been even more stark, tumbling from a peak of nearly USD 150 billion in 2017 to a mere USD 36 billion in 2021. There are two key drivers at play here. First, many countries—particularly in the West—have grown warier of Chinese funds, and even imposed outright bans on Chinese involvement in certain economic sectors. At the same time, Beijing has clamped down on capital outflows in a bid to contain the financial risks associated with often-speculative overseas investments.

Keeping sensitive data within the country’s borders has been another of the government’s objectives. Beijing recently announced new rules restricting overseas stock market listings in certain sectors, for example, aiming to encourage more firms to go public on local bourses—such as Hong Kong’s exchange, or the STAR market set up by the government in 2019 as a rival to the Nasdaq. In the process, Beijing hopes to temper Chinese firms’ tendency to list in New York, which has been the default option for aspiring tech companies, but also gives U.S. authorities greater leverage and access to those firms’ inner workings.

  • Not so black and white

That said, there are certainly caveats to the idea that China is turning inwards. While BRI funding may have fallen in the last few years, it is still sizable compared to the cash committed by advanced nations towards developing countries’ infrastructure. The country remains responsible for over a quarter of the world’s manufacturing output and sits at the heart of global value chains. This state of affairs is unlikely to shift dramatically in the next few years—even if Covid-19 continues to cause some near-term disruption to domestic firms, and rival Asian hubs such as Vietnam eat away at some of China’s market share in lower value-added goods. Furthermore, inward FDI hit a record high of USD 173 billion last year, which is hardly the sign of a country battening down the hatches to the outside world.

In some areas, the government has actually become more open in recent years. Recent reforms have reduced the number of sectors off-limits to foreign investors. Access to the country’s capital markets has also been liberalized, and Western banks are now allowed greater participation: In late 2021, U.S. financial juggernaut Goldman Sachs announced that it had been granted permission to take full control of its mainland Chinese subsidiary, for example. The government has pushed to deepen regional trade ties, signing the Regional Comprehensive Economic Partnership (RCEP) trade deal in 2020 and requesting to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) last year.

The takeaway is that China is more than happy to open up in areas that suit its interests. Harnessing the expertise of foreign banks should improve the allocation of capital, allowing the best firms to thrive and weeding out underperformers. Strengthening trade ties with neighbors not only improves market access for Chinese goods, but acts as a counterweight to American influence in the region. Welcoming foreign investment facilitates the transfer of technology. This is of particular interest to the government when that technology is cutting edge; look at Tesla, the world leader in electric vehicles, which was allowed to open the first wholly foreign-owned car factory in Shanghai in 2019.

However, the drive for self-sufficiency is set to continue in other domains. Beijing is likely to achieve at least some of its goals: Recent stock market listings have already shifted more towards domestic markets, while indigenous semiconductor capacity should continue to rise at a brisk pace in the coming years, reducing China’s reliance on chip imports. The economy is thus likely to become less vulnerable to external supply shocks.

That said, the push to produce more key goods locally could lead to waste, weighing on total factor productivity growth—which has already slumped sharply in recent years as pro-market reforms stalled. Restrictions on exports of advanced technology by industrialized nations and falling expat numbers could also further hinder China’s productivity convergence with the rich world. If the investments in Beijing’s favored sectors fail to pay off, public debt could become an issue, with local governments already reeling from a decline in land sales amid the ongoing property downturn.

China still holds immense economic potential. Relative to the U.S., China’s urbanization rate is still around 20 percentage points lower, while GDP per capita at market exchange rates is less than a fifth. Over our forecast horizon to 2026, the Consensus among analysts is for growth to average close to 5%—slower than the recent past, but still respectable compared to many other emerging markets. Yet, an increasingly inward-looking focus in key policy domains is still an important risk to longer-term economic performance. One thing is for certain: The China on display that 2008 summer’s night in Beijing is not coming back.


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