China's economy is being weighed by a crisis in the crucial propert sector, which accounts for a large part of the country's gross domestic product
The precipitous slowdown in the world's second-largest economy could weigh on the Asia-Pacific region and the rest of the world. AFP

China's economic recovery from the COVID-19 pandemic is slowing down, confirming a trend that could spell trouble for the Asian-Pacific region and the world.

According to data from the National Bureau of Statistics released on Friday, manufacturing PMI came at 49 in June, below the benchmark of 50 for a third month, suggesting that manufacturing is contracting. Non-manufacturing PMI came at 53.2, down from 54.5 a month earlier.

China's economy grew by leaps and bounds for almost four decades, pulling up the Asia-Pacific and the world economy.

That's thanks to smoothening relations with the rest of the world, including the U.S., a cheap labor force, and a property bubble that fed into a virtuous growth cycle.

Since the Great Recession, China's annual GDP growth has slowed, from around 14% in 2007 to about 4.5% recently, below the official targets.

Experts expect this trend to continue, with Michael Pettis of Carnegie Endowment for Peace questioning whether China's long-term growth can exceed 2-3%.

China's economic slowdown is partly a numbers game. High growth numbers are harder to sustain as economies grow in size.

Then there are the middle-income trap and the Lewis point, which undermine China's role as a factory of the world.

Adam Coons, Certified Financial Analyst (CFA) and Portfolio Manager at Winthrop Management, sees a larger risk coming from the potential secular trend, where an aging population due to meager fertility rates leads to continued slowing growth.

The precipitous slowdown in the world's second-largest economy could weigh on the Asia-Pacific region and the rest of the world.

"Much of the developed world has leveraged their bets on long-term growth on the assumption that the Chinese economy would grow and become enriched enough to shift towards a more consumer-based economy like the U.S.," he told International Business Times. "If China decelerates towards GDP growth similar to Japan, Europe, and the U.S., it will be difficult for the global economy to maintain growth rates above 0%."

"We're already starting to see the tension that this evolving cold war between China and the U.S. is placing upon global supply chains and international investment," Cathryn Chen, the Chairman at MarketX Ventures, told IBT. "The Chinese diaspora is seeking refuge in places never before considered, like Riyadh and Dubai, and is changing global dynamics almost overnight. But I, unfortunately, believe the most impact will be born by APAC."

Chen believes that China's economy has already slowed because of national policy shifts on technology companies from both the CCP and the U.S. and adverse demographics, which have led to a declining working population. "If this economic degradation continues, it's increasingly likely the party will turn to nationalistic policies to maintain the support of the people, exacerbating an already tense atmosphere for Taiwan and China's neighbors."

Matt Shoemaker, Former Intelligence Officer at Defense Intelligence Agency, sees a grimmer scenario. "If the Chinese government becomes concerned that the health of its economy is in jeopardy, it could potentially take extreme measures such as moves to control its supply lines through the South China Sea, barring adversarial countries from transiting through it, for example," he told IBT. "It could even accelerate China's plans to reclaim Taiwan if Secretary Xi believes China's technology sector will falter without the microchip processing facilities in Taiwan."

The geopolitical analyst Irina Tsukerman won't go that far. But she sees the impact of China's economic slowdown most severe for countries that rely on Chinese investments for their growth.

"Malaysia, for instance, that has been on the receiving end of a record amount of Chinese investment in recent years, is in for a rude awakening when the loans or interest come due or when Beijing is simply no longer able to either carry out the current commitments or to provide new investments," she told IBT.

Tsukerman has a warning: "Unless countries doing increasing business with China or heavily dependent on China for a financial lifeline diversify their sources of revenue, they could face significant recessionary periods if the not outright crash of some aspects of their economies."