China’s economy could face a long period of lower growth, a prospect that could have global ramifications after 45 years of rapid expansion and globalization.

The The Chinese government is implementing a number of measures aimed at reviving the economy, with leaders on Monday’s promise to “modify and optimize policies in time” for its beleaguered real estate sector while pushing steady employment toward a strategic goal. The Politburo also announced pledges to boost domestic consumption and address local debt risks.

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China’s gross domestic product rose 6.3% year-on-year in the second quarter, Beijing reported on Monday, below market expectations for a 7.3% expansion after the world’s second-largest economy emerged from strict Covid-19 measures.

Economic output rose 0.8% quarter-on-quarter, slower than the 2.2% quarterly increase seen in the first three months of the year. Meanwhile, youth unemployment reached a record 21.3% in June. On a slightly more positive note, the pace of industrial production growth accelerated from 3.5% year-on-year in May to 4.4% in June, comfortably beating expectations.

China’s ruling Communist Party has set a growth target of 5% for 2023, lower than usual and significantly modest for a country that has averaged 9% annual GDP growth since opening its economy in 1978.

Over the past few weeks, the authorities have announced a number of pledges targeting specific sectors or designed to reassure private and foreign investors that a more favorable investment environment is on the horizon.

But these were largely broad measures that lacked some crucial details, and the latest reading of the Politburo’s quarterly meeting on economic affairs struck a dovish tone but fell short of major new announcements.

Julian Evans-Pritchard, head of the China economy at Capital Economics, said in a statement on Monday that the country’s leadership was “clearly concerned” byeadout calls economic trajectory ‘brutal’ and highlighting the “numerous challenges facing the economy”.

These include domestic demand, financial difficulties in key sectors such as real estate and a bleak external environment. Evans-Pritchard noted that the latest figure cited “risks” seven times, up from three in the April figure, and that management’s priority appeared to be expanding domestic demand.

“The Politburo meeting had a dovish tone and made it clear that the leadership feels more work needs to be done to get the recovery on track. This suggests that some additional policy support will be put in place in the coming months,” Evans-Pritchard said.

“But the absence of any major announcements or concrete policies suggests a lack of urgency or that policymakers are struggling to come up with appropriate measures to support growth. Either way, it’s not particularly reassuring for the short-term outlook.”

Triple shock

China’s economy is still suffering from the “triple shock”. Covid-19 and extended lockdown measuresits ailing real estate sector aa a series of regulatory shifts according to Rory Green, head of China and Asia research at TS Lombard, it is linked to President Xi Jinping’s vision of “shared prosperity”.

With China still within a year of reopening following Covid measures, much of the current weakness can still be attributed to this cycle, Green suggested, but added that they could become entrenched without an adequate policy response.

“There’s a chance that if Beijing doesn’t step in, the cyclical damage part of the Covid cycle could coincide with some of the structural headwinds that China has — particularly around the size of the real estate sector, the disconnect from the global economy, demographics — and push China to a much, much slower growth rate,” he told CNBC on Friday.

TS Lombard’s base case is that the Chinese economy stabilizes in late 2023, but that the economy is entering a longer-term structural slowdown, though not yet in a Japan-style “stagflation” scenario, and is likely to average closer to 4% annual GDP growth due to these structural headwinds.

While the need for exposure to China will still be critical for international companies as it remains the world’s largest consumer market, Green said a slowdown could make it “a little less attractive” and accelerate the “decoupling” with the West in terms of investment flows and manufacturing.

For the global economy, however, the most immediate impact of China’s slowdown is likely to come in commodities and the industrial cycle, as China reconfigures its economy to reduce reliance on the real estate sector, which “absorbs and drives commodity prices.”

“Those days are gone. China will still invest a lot, but it will be a little bit more advanced manufacturing, technical hardware like electric vehicles, solar panels, robotics, semiconductors, those types of areas,” Green said.

“The value of real estate – and with it the supply of iron ore from Brazil and/or Australia and machinery from Germany or equipment from around the world – has disappeared, and China will be a much less important factor in the global industrial cycle.”

Second order effects

The recalibration of the economy away from property and towards more advanced manufacturing is evident in China’s massive push into electric vehicles, which has led to it overtook Japan this year as the world’s largest exporter of cars.

“This shift from a complementary economy, where Beijing and Berlin benefit from each other, to being current competitors is another big consequence of the structural slowdown,” Green said.

He noted that in addition to the immediate loss of demand for commodities, China’s response to its shifting economic sands will also have “second-order impacts” on the global economy.

“China is still making a lot of stuff and they can’t consume it all at home. A lot of the stuff they’re making now is much higher quality and that’s going to continue, especially with less money going into real estate and trillions of renminbi going into these advanced technology sectors,” Green said.

“And so the second-order impact, it’s not just less demand for iron ore, it’s also much higher global competition across a range of advanced manufactured goods.”

While it is not yet clear how Chinese households, the private sector and state-owned enterprises will handle the transition from a model based on real estate and investment to one driven by advanced manufacturing, Green said the country is currently at a “pivotal point”.

“The political economy is changing, partly by design, but also partly because the real estate sector is effectively dead or not dying, so it has to change and a new development model is emerging,” he said.

“It’s not just going to be a slower version of the China we had before Covid. It’s going to be a new version of the Chinese economy that’s also going to be slower, but it’s going to be a version with new drivers and new kinds of idiosyncrasies.”