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Can China’s high growth continue? Considering global value chain reconstruction

Ran Wang, Jinjun Xue and Yang Zhou

The history of China’s economic development

Over the past four decades, China’s economic development has undergone a remarkable evolution—from an agrarian and planned economy to socialist market economy and then to the world’s second-largest economic powerhouse. Yet, beneath this headline success lies a more complex trajectory marked by multiple structural transitions. This chapter examines two key inflection points: the transition from high-speed growth to high-quality but medium-to-low-speed growth, and the gradual shift from an export-oriented growth model to an economic structure oriented more to the domestic market.

The end of China’s high growth

For more than three decades, China sustained extraordinary economic growth, averaging double-digit annual increases in GDP. This period of rapid expansion was fuelled by industrialisation, urbanisation, export-led development and investment-driven stimulus. However, after 2010, a structural deceleration began to emerge.

According to IMF data, China’s annual GDP growth has declined from a peak of more than 14 per cent in the early 1990s to below 5 per cent in recent years (see Figure 13.1). The sharp drop in 2020 due to the Covid-19 pandemic was followed by a short-lived rebound, but growth has since moderated. IMF projections suggest this trend will continue, with China entering a phase of medium to low growth in the coming years. This slowdown reflects multiple headwinds: demographic ageing, diminishing marginal returns on infrastructure investment, rising labour costs, environmental constraints and geopolitical pressures—most notably, the US–China trade war, which has accelerated the restructuring of global value chains (GVCs) and reduced external demand for Chinese exports.

Figure 13.1: Annual GDP growth in China, 1980–2027 (%)

Source: IMF data (data.imf.org/en).

This structural deceleration is underpinned by several factors. First, China’s demographic dividend is fading, with a shrinking working-age population and rising dependency ratios. Second, the marginal returns on capital investment have diminished, especially in infrastructure and real estate. Third, the external environment has become more volatile and uncertain, with rising trade frictions, supply chain restructuring and geopolitical tensions. As a result, China’s economy is transitioning from being driven by quantity and scale to being led by quality and efficiency.

Despite the slowdown, this shift does not necessarily imply weakness. Rather, it reflects a maturing economy moving towards sustainable development. The government has increasingly emphasised innovation, green technology and domestic consumption as new growth engines.

Transition from export-led growth to a domestic demand–led economy

One of the most significant hallmarks of China’s earlier growth phase was its export-led strategy. From the 1990s to the mid-2000s, international trade was the primary engine propelling economic expansion. China’s accession to the World Trade Organization in 2001 catalysed its integration into global value chains, leading to a sharp increase in trade activity. As shown in Figure 13.2, the trade-to-GDP ratio surged and peaked around 64 per cent in 2006—an indicator of China’s deep dependence on external demand.

Figure 13.2: Trade as a share of GDP, 1970–2024 (%)

Source: World Bank data (data.worldbank.org/).

Figure 13.3: Decomposition of GDP growth contribution rate, 1978–2024 (%)

Source: National Bureau of Statistics of China (data.stats.gov.cn/english/).

However, after the 2008 GFC, the limits of the export-led model became increasingly apparent. External demand volatility combined with rising global protectionism exposed the risks of overreliance on foreign markets. Since then, the trade-to-GDP ratio has steadily declined, reaching approximately 37 per cent in 2024. This marked shift reflects both structural constraints and deliberate policy adjustments aimed at rebalancing China’s growth model.

The pivot from export to domestic orientation is also reflected in the changing composition of GDP growth. According to Figure 13.3, the contribution of net exports has been declining and has become increasingly volatile over time. In contrast, final consumption has become a more stable and consistent contributor, while gross capital formation continues to play a significant—though more fluctuating—role.

This structural transformation is further supported by policy initiatives such as the ‘dual circulation’ strategy, which emphasises domestic demand as the primary growth driver, while maintaining openness to global trade and investment. Rather than a retreat from globalisation, the strategy represents a recalibration of economic priorities: leveraging the scale of China’s domestic market to build resilience in the face of global uncertainty.

The remarkable rise of China’s role in global production networks

China’s economic transition is also reflected in its changing position within global production networks. From the late 1970s to the early 2000s, China served primarily as a low-cost manufacturing hub—the so-called world’s factory—providing labour-intensive assembly services for multinational firms. Visual network analysis for 1995 and 2000 shows China as a peripheral node in the global production network (see Figure 13.4).

After its accession to the WTO in 2001, China rapidly climbed the value chain. With a more complete industrial base, coordinated development between SOEs and private firms and increased foreign direct investment (FDI), China became an integral part of global supply chains. By 2011, its network centrality had significantly increased, reflecting deeper integration (Figure 13.5).

Since 2012, China has evolved into a regional manufacturing centre, surpassing Japan in Asia’s production network. It now maintains strong linkages not only with advanced economies such as the United States and Germany, but also with emerging markets (see Figure 13.6). This shift from quantity to quality is a key backdrop for understanding China’s current focus on domestic upgrading and resilience.

These shifts in the pace and structure of growth reflect the broader changes discussed above: rising costs, weaker external demand and policy adjustments. Together, they mark a turning point in China’s development path. The evolution of China’s role in global production networks—from assembler to regional hub—further illustrates this transition, highlighting the deep link between domestic economic changes and GVC reconstruction.

Figure 13.4: Global production network, 1995 and 2000 (all goods and services)

Source: Calculated based on OECD Input–Output Tables (www.oecd.org/en/data/datasets/input-output-tables.html).

Figure 13.5: Global production network, 2011 (all goods and services)

Source: Calculated based on OECD Input–Output Tables (www.oecd.org/en/data/datasets/input-output-tables.html).

Figure 13.6: Global production network, 2017 (all goods and services)

Source: Calculated based on OECD Input–Output Tables (www.oecd.org/en/data/datasets/input-output-tables.html).

The impacts of GVC restructuring on China

Over the past four decades, China has rapidly industrialised to become a global manufacturing hub and the ‘world’s factory’, greatly enhancing the efficiency of global production. However, with rising geopolitical tensions and escalating trade frictions, major economies such as the United States and Japan are promoting ‘de-Sinicisation’ and diversification of supply chains, resulting in reduced reliance on Chinese intermediate goods and a decline in foreign investment inflows to China. Against this backdrop, China is facing numerous challenges brought about by the restructuring of GVCs.

China, the world’s factory, becomes the target of decoupling and de-risking

After more than 40 years of rapid economic growth, China has established the world’s most comprehensive and integrated supply chain system, spanning virtually all industries and sectors and earning its reputation as the ‘world’s factory’. This unparalleled industrial ecosystem has brought significant benefits to the global economy by lowering costs and improving efficiency for countries around the world. However, it has also resulted in a high degree of dependence on Chinese intermediate goods among major manufacturing nations.

Figure 13.7: Percentage-point difference between the reliance of one country’s manufacturing sector on another country’s inputs, 2009–15

Note: The figure shows the percentage-point difference between the reliance of a country’s manufacturing sector (in the horizontal row) on the inputs from another country (vertical columns).

Source: Freeman and Baldwin (2020).

As highlighted in Figure 13.7, from 2009 to 2015, every major manufacturing country increased its reliance on Chinese inputs, with positive and often substantial percentage-point gains seen in China’s column. This trend, while economically advantageous, has heightened concerns among some countries about supply chain security and strategic autonomy, especially amid rising geopolitical tensions. As a result, there is growing support for ‘de-Sinicisation’ and ‘de-risking’ policies, encapsulated in the ‘China plus N’ strategy, in which countries and multinational firms seek to diversify their supply chains by incorporating additional sourcing destinations outside China.

New dynamic trends in global trade and investment

The United States and Japan have begun to decouple from China (Figure 13.8). China’s share of US intermediate goods imports fell from 18.5 per cent in 2018 to 14.1 per cent in 2022, and further declined, to 11.4 per cent, in early 2023, with the most significant decrease occurring during the 2018–19 period when the Trump administration imposed additional tariffs. During the same period, China’s share of Japanese intermediate goods imports also declined, from 26.5 per cent to 24 per cent, reflecting Japan’s ‘de-risking’ strategy—such as the implementation of technology export controls and targeted investments in the semiconductor industry after the G7 summit in Hiroshima in 2023.

Figure 13.8: China’s share in total intermediate goods imports of major economies (%)

Source: Nguyen-Quoc (2023).

In contrast to the United States and Japan, China’s importance as a supplier of production inputs has increased markedly in other major economies, including Germany, Brazil, Australia and the United Kingdom, driving up these countries’ shares of intermediate goods imports from China. This growth has been primarily driven by expanded trade in inputs related to electronics, machinery and chemical products. At the same time, China has been actively adjusting its export destinations for intermediate goods, with Vietnam and Malaysia seeing the most notable increases in their shares. This shift can be attributed both to rising labour costs in China and the relocation of downstream manufacturing activities in response to US–China trade barriers, as well as multinational enterprises investing in additional production capacity in other countries.

The US–China trade war and subsequent policy adjustments have led to significant shifts in the composition of US import sources. Between 2017 and 2022, China’s share of the US import market declined substantially across all goods and strategic industries, with a drop of nearly 6 percentage points—far exceeding that of any other country (see Figure 13.9). In contrast, countries such as Vietnam, Taiwan, Mexico, South Korea and India saw notable increases in their US market shares, with Vietnam and Taiwan standing out as the primary beneficiaries of the supply chain reallocation. This pattern suggests that trade tensions have accelerated the regional restructuring of global production networks, driving supply chain diversification and reinforcing trends towards ‘nearshoring’ and ‘friend-shoring’. The effect is particularly pronounced in strategic industries, reflecting the United States’ deliberate efforts to reduce reliance on China in critical sectors and strengthen its sourcing from emerging Asian economies.

Figure 13.9: US import share in top 10 countries and regions, 2017 and 2022 (%)

Source: Freund et al. (2024).

Since the end of the GFC, rising labour costs in China, restrictions on foreign ownership (such as joint-venture requirements) and concerns about intellectual property protection have contributed to a sustained decline in greenfield FDI inflows into China’s manufacturing sector (Figure 13.10). This downward trend accelerated markedly after the onset of the US–China trade war in 2018. Investment from the United States, one of China’s major FDI sources, dropped sharply from 2018 and fell to nearly zero after 2020, underscoring the direct impact of geopolitical tensions on bilateral investment flows. Meanwhile, FDI from other key economies such as Japan, South Korea and Taiwan has also contracted significantly. This pattern suggests that the US–China trade conflict has not only affected bilateral investment but also, through supply chain restructuring and policy spillover effects, dampened the willingness of other advanced economies to invest in China. Overall, the escalation of the US–China trade war and ongoing geopolitical tensions have accelerated the diversification of China’s FDI sources. However, in the short term, emerging economies have not yet been able to compensate for the decline in investment from developed countries.

Figure 13.10: Evolution of China’s inward greenfield FDI projects in the manufacturing sector, 2005–22

Source: Alfaro and Chor (2023).

Expected pathways for China to sustain economic growth

China’s economy has undergone remarkable transformations over the past few decades, evolving from a low-cost manufacturing hub to a global leader in technology and innovation. However, in recent years, China has faced multiple challenges, including trade tensions with the United States, demographic shifts and slowing domestic demand. To sustain economic growth, China must explore new pathways that leverage its strengths in global trade, outward foreign direct investment (OFDI) and emerging high-tech industries.

China’s new strategy of trade and investment via ‘third countries’

China has increasingly relied on third countries to maintain its export volumes in recent years, particularly in response to US tariffs imposed during the first Trump administration and continued under Joe Biden. According to UN Comtrade data (comtradeplus.un.org/), China’s direct exports to the United States declined from 19 per cent of total exports in 2018 to 16 per cent in 2023, while exports to the United States through South-East Asia and Mexico surged. For instance, in 2017, China’s domestic value-added exports to the United States through Mexico and Vietnam were worth about US$500 million and US$9 billion, respectively, while in 2022, these values were about US$11 billion and US$18 billion, respectively (see Figure 13.11). Vietnam and Mexico have emerged as key intermediaries, absorbing Chinese components for final assembly before re-export to the United States. This strategy allows Chinese firms to avoid direct tariffs while maintaining access to the American market.

Beyond simply rerouting exports through third countries, China has actively increased FDI in key intermediary markets—such as Vietnam and Mexico—to establish production bases that can directly export to the United States while avoiding tariffs. This strategy helps Chinese firms not only circumvent trade barriers but also strengthen their integration into global supply chains. As illustrated in Figure 13.12, China’s FDI flows into Vietnam surged from US$500 million in 2017 to nearly US$1.6 billion in 2020, reflecting a deliberate shift in manufacturing relocation. Since Vietnam’s geographic and logistical advantages allow Chinese firms to maintain just-in-time production while reducing costs and its participation in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the European Union–Vietnam free-trade agreement provides tariff-free access to Western markets.

Figure 13.11: China’s domestic value added through third countries to the United States, 2011–22

Source: Authors’ calculations.

Figure 13.12: Foreign direct investment in Vietnam from China and the United States, 2017–24 (US$ billion)

Sources: Vietnam Ministry of Commerce (vntr.moit.gov.vn/news/post/Statistics); LiveMint (www.livemint.com/); South China Morning Post (www.scmp.com/); USI Global (www.usiglobal.com/en); Capco (www.capco.com/); Sohu (www.sohu.com/); Vietnam Investment Review (vir.com.vn/).

Promoting reverse technological spillovers and industrial upgrading through OFDI

While China is no longer the world’s top destination for foreign investment, it has strategically shifted towards OFDI—particularly in developed economies (such as the United States, Germany and the United Kingdom; Figure 13.13)—to acquire advanced technologies and accelerate domestic industrial upgrading. Empirical studies demonstrate that Chinese firms gain reverse technology spillovers through overseas mergers and acquisitions, joint ventures and research and development collaborations, which in turn enhance productivity and innovation back home (Li and Fabus 2019; Zhang et al. 2022). For instance, after acquiring Volvo in 2010, Chinese carmaker Geely gained access to patents for safety systems, hybrid engines, and so on, which were later integrated into its own brands. This not only promotes Geely’s technological upgrading but also drives it towards internationalisation. Despite these benefits, China’s OFDI faces obstacles. The first is Western scrutiny; the United States and the European Union have tightened FDI screening—through, for example, the Committee on Foreign Investment in the United States and the European Union’s FDI regulation—to block sensitive technology transfers. The second are intellectual property protection concerns; some acquired firms resist full technology sharing due to fears of forced transfers. The third obstacle is geopolitical tension, with US export controls (such as semiconductor bans) limiting China’s access to cutting-edge technology.

Figure 13.13: Destination countries for China’s outward FDI, 2017–22 (US$ million)

Source: National Bureau of Statistics of China (data.stats.gov.cn/english/).

The ‘new three’ bring new momentum

China’s economy is undergoing a structural shift, with the ‘new three’ industries—electric vehicles (EVs), lithium-ion batteries and photovoltaic (PV) products (or solar cells)—emerging as the country’s most dynamic export drivers. Meanwhile, the contribution to exports of the ‘old three’ industries—clothing, home appliances and furniture—continues to weaken (Figure 13.14). In the first 10 months of 2024, the export growth of the new three contributed 18 per cent to total export growth (Figure 13.15). These industries not only reinforce China’s dominance in global green technology but also provide a crucial counterbalance to slowing growth in traditional industries such as real estate and low-end manufacturing.

China’s rapid expansion in the ‘new three’ industries has not only reshaped its own economic landscape but also catalysed growth in developing economies along the global supply chain. By integrating upstream resource extraction, midstream manufacturing and downstream applications, China’s industrial strategy has enabled developing countries to participate in high-value segments of global production networks, fostering technological spillovers and economic diversification. For example, China’s demand for raw materials such as lithium, cobalt and polysilicon has driven investments in resource-rich developing nations. Chinese companies such as Ganfeng Lithium and Tianqi Lithium have established mining operations in Africa and South America, creating jobs and infrastructure while transferring sustainable extraction technologies. This vertical integration ensures stable supply chains for battery production and solar panel manufacturing, while also helping countries such as Chile and Democratic Republic of Congo to shift from raw material exports to intermediate processing in the future.

Figure 13.14: Shares of the ‘new three’ and ‘old three’ industries in total Chinese exports

Source: Citi Global Insights (2024).

Figure 13.15: Chinese exports of the ‘new three’ industries

Source: China Customs Statistics database (english.customs.gov.cn/Statistics/Statistics?ColumnId=1).

At the same time, the development of China’s ‘new three’ also faces various challenges from both domestic and international sources. On the one hand, due to excessive competition, the new-energy industry has experienced frequent price wars, leading to the risk of profit compression and overcapacity. On the other hand, geopolitical risks and trade barriers continue to rise, and some European and North and South American countries restrict the entry of Chinese products under the pretext of ‘national security’, which hinders the development of national markets. In addition, some key mineral resources (such as lithium) and non-core technologies (such as high-purity electrolytes and high-end separators) have a high degree of external dependence and face the risk of supply disruption.

Conclusion and discussion

Global value chains are undergoing significant restructuring, characterised by trends such as ‘de-Sinicisation’, ‘friend-shoring’ and ‘nearshoring’. At the same time, the dependence of the United States and Japan on Chinese intermediate goods imports has declined notably, and the scale of FDI inflows into China has decreased. Nevertheless, China’s export share in so-called friendly markets—including Vietnam, Mexico and the European Union—has been rising. For example, since 2018, China’s exports to Vietnam and Mexico have increased by 72 per cent and 155 per cent, respectively, and, from 2017 to 2023, China’s share of EU imports grew faster than that of any other country.

In response to the evolving GVC landscape, China can pursue multiple strategies to sustain its economic growth, including maintaining exports through third-country trade and overseas production, expanding OFDI to promote industrial upgrading and technology spillovers and vigorously developing the ‘new three’ export industries: EVs, lithium-ion batteries and PV products. However, China currently faces numerous challenges, such as US trade restrictions on the ‘new three’, the European Union’s anti-dumping investigation into Chinese EVs, as well as external dependence on key resources and advanced technologies. In summary, China may be able to maintain a certain degree of growth, but achieving long-term sustainable growth will require effectively addressing the risks and uncertainties posed by GVC restructuring, economic decoupling and related external barriers.

References

Alfaro, Laura, and Davin Chor. 2023. Global Supply Chains: The Looming ‘Great Reallocation’. NBER Working Paper No. 31661. Cambridge: National Bureau of Economic Research. doi.org/10.3386/w31661.

Citi Global Insights. 2024. ‘China Economics: Out with the Old Three and In with the New Three.’ Citi Global Insights, 8 January. New York: Citi Institute.

Freeman, Rebecca, and Richard Baldwin. 2020. ‘Trade Conflict in the Age of Covid-19.’ VoxEU, 22 May. London: Centre for Economic Policy Research. cepr.org/voxeu/columns/trade-conflict-age-covid-19.

Freund, Caroline, Aaditya Mattoo, Alen Mulabdic, and Michele Ruta. 2024. ‘Is US Trade Policy Reshaping Global Supply Chains?’ Journal of International Economics 152: 104011. doi.org/10.1016/j.jinteco.2024.104011.

Li, Shuyan, and Michal Fabus. 2019. ‘The Impact of OFDI Reverse Technology Spillover on China’s Technological Progress: Analysis of Provincial Panel Data.’ Journal of International Studies 12, no. 4: 325–36. doi.org/10.14254/2071-8330.2019/12-4/21.

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