Warning signs are emerging for China’s economy, where the export sector has played a pivotal role in driving growth during the first half of the year. These concerns have been exacerbated by fears of an impending U.S. recession, which triggered a massive global stock market sell-off earlier this week.
The sell-off was driven by a convergence of global macroeconomic factors: disappointing U.S. job data, escalating geopolitical tensions in the Middle East, unsustainable valuations in AI-driven tech stocks, and unexpected policy tightening by the Bank of Japan. These elements collectively erased over $6 trillion in global market capitalization on Monday, with leading U.S. equity benchmarks experiencing their worst performance in two years.
While some of the hardest-hit markets saw a recovery on Tuesday—most notably Japan’s key index, which rebounded over 10 percent—analysts warn that it is premature to assume the worst is over. The market volatility could be an early signal of deeper structural challenges, such as the potential for a synchronized global downturn.
“For now, this appears to be a market fluctuation,” said Ding Shuang, chief economist for Greater China at Standard Chartered Bank. “However, if this is indeed a harbinger of a U.S. recession, the global economy could face significant headwinds, with a subsequent slowdown in China’s external demand.”
China’s economy, heavily reliant on exports, could face a dual challenge: weakening global demand coupled with domestic pressures such as a struggling real estate sector and cautious consumer spending. In such a scenario, the Chinese government may need to pivot towards more aggressive fiscal and monetary policies to sustain growth, though this would come with its own set of risks, including rising debt levels and financial instability.
On Sunday, economists at Goldman Sachs raised the probability of a U.S. recession in 2025 from 15 percent to 25 percent, reflecting growing concerns over the resilience of the U.S. economy amidst tightening monetary conditions and persistent inflationary pressures. Should a U.S. recession materialize, it could exacerbate global supply chain disruptions, further strain trade relations, and put additional pressure on emerging markets, including China.
It’s likely that Chinese export shipments will slow over the coming months Nick Marro, Economist Intelligence Unit
As China's domestic demand shows little sign of a robust rebound, Beijing is likely to implement additional stimulus measures, particularly in the real estate sector or through increased fiscal spending, to sustain growth should the export sector experience a downturn, according to Ding Shuang. This reflects a broader strategy to cushion the economy against external shocks by bolstering internal drivers of growth.
China is poised to release its July export figures on Wednesday, with expectations of a 9.5 percent year-on-year increase in shipments, following 8.6 percent growth in June, according to forecasts by Wind, a Chinese financial data provider. However, these figures may not fully capture underlying vulnerabilities.
Nick Marro, principal economist for Asia at the Economist Intelligence Unit, notes that while the U.S. economy remains relatively resilient—despite signs of weakening job growth and consumer spending—China’s export outlook for the year is still relatively stable. However, Marro underscores that recent growth in Chinese trade has been driven more by inventory restocking than by sustainable demand, suggesting a disconnect between headline growth figures and the actual health of trade dynamics.
“Much of the recent upswing in Chinese trade growth has been tied to inventory restocking, rather than reflecting genuine economic expansion,” Marro explains, adding that the traditional relationship between U.S. economic performance and Asian trade has become less predictable since the pandemic. This suggests that while export figures may show growth, the underlying demand dynamics are more complex and potentially fragile.
In the coming months, Marro anticipates a slowdown in Chinese export shipments. However, this deceleration will likely be linked to the winding down of export front-loading activities related to both shipping disruptions in the Red Sea and impending U.S. tariffs scheduled for mid-August, rather than indicating a fundamental collapse in U.S. demand.
The July Caixin/S&P Global manufacturing purchasing managers’ index (PMI) for China, which provides insight into the health of smaller exporters, dropped to 49.8 from 51.8 in June, signaling cooling external demand. This decline in the PMI, which often precedes broader economic slowdowns, points to a challenging environment for China's smaller exporters who are more exposed to fluctuations in global demand.
Looking ahead, Marro identifies significant policy-related risks on the horizon, particularly in 2025, given the potential return of Donald Trump as U.S. president. Trump has threatened to revoke China’s permanent normal trade relations (PNTR) with the U.S. and impose blanket tariffs on all U.S. imports from China, a move that could profoundly disrupt bilateral trade and exacerbate existing tensions.
Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis, offers a slightly different perspective. She argues that the risk of a U.S. recession remains low, given the Federal Reserve's capacity to cut interest rates, potentially even earlier than expected in September. However, Garcia-Herrero also highlights a critical shift in China’s trade landscape: the U.S. is no longer China’s largest export market, having been overtaken by Europe due to years of U.S. protectionism.
“The direct impact of a potential U.S. recession on China’s trade might not be as significant as it once was,” Garcia-Herrero explains. “Europe has now become a larger market for Chinese exports, driven in part by the protectionist policies the U.S. has adopted in recent years.”
In this context, China's economic strategy is likely to evolve, focusing on diversifying its export markets and stimulating domestic demand to reduce vulnerability to external shocks. As global economic uncertainties persist, China's policymakers will need to balance short-term stimulus with long-term structural reforms to sustain growth and stability in an increasingly volatile global environment.
