A downturn in China will reduce growth in Denmark significantly

“Let China sleep. For when she wakes, she will shake the world.” This is a quote often attributed to Napoleon. China has long since woken up, and its importance to the global economy has grown significantly over the past decades. Today, the Chinese economy accounts for 18 per cent of the global GDP, relative to just under 2 per cent merely 30 years ago, see table 1. This makes China the second largest economy in the world in terms of GDP in dollar. The strong growth is mainly due to the opening of the Chinese economy to the world and the expansion of global value chains. Over the years, China has established itself as an important production centre in the world, and 31 per cent of the global production of goods came from China in 2021. This is nearly twice as much as the United States, see table 1. 

Chinese demand is more important to the Danish economy than shown by gross exports

China’s importance to the Danish economy has also increased significantly, both as an importer of Danish goods and services and as a supplier of finished goods to Danish consumers and production inputs to Danish businesses. While China is an important trading partner for Denmark, it still plays a minor role in other economic areas such as direct investments and financial assets, see box 1. Therefore, this analysis focuses primarily on the trade channel.

Exports from Denmark to China totalled kr. 126 billion in 2022 – corresponding to 6.3 per cent of total Danish gross exports.¹  This is more than a doubling since 2005 and makes China the fourth largest receiver of Danish gross exports, even though it still trails behind Denmark’s largest export markets: the United States and Germany.² The increase in exports to China reflects a number of factors, including increased Chinese demand for inputs for production of export goods and a large and growing middle class as an increasingly important driving force behind greater domestic demand in China.³ GDP per capita has increased 30 times in China over the past 30 years, see table 1. 

Gross exports measure exports directly from Denmark to China. Since parts of Danish exports consist of inputs produced abroad, and parts of Danish production outputs end up in China via exports from other countries, gross exports do not give the full picture of how Danish businesses are connected with Chinese consumers, see chart 1 . International input-output databases can be used to calculate how much of the Danish value added depends on the final demand in individual countries.⁴ Value added is the value of goods produced in Denmark less the costs of foreign intermediate goods. In 2020, China accounted for 7 per cent of the final demand for Danish value added linked to exports, see chart 2. This is significantly more than in 1995, when Chinese demand accounted for only 1.5 per cent of the foreign use of Danish value added. 

As a small and open economy, Denmark is more dependent than USA on Chinese demand 

Generally, the Danish economy is increasingly dependent on Chinese demand – also more than many other countries, see chart 3. In 2020, 2.2 per cent of the value added in Denmark was absorbed by final demand in China. By comparison, Chinese final demand accounted for 2 per cent and 0.9 per cent of value added in the euro area and the United States, respectively. Thus, Chinese demand plays a greater role for the Danish economy than for particularly the US economy. One reason for the difference may be that Denmark, as a small, open economy, is more dependent on foreign demand. At the same time, the US economy has become less dependent on foreign demand in recent years. This applies particularly to demand from China, reflecting, among other factors, deteriorating trade relations between the two countries. 

Exports to China create jobs in Denmark

The increased exposure to China is also reflected in the Danish labour market, where there were approximately 60,000 jobs linked to the final demand in China in 2018. This is twice as many as 10 years ago and is equal to just over 3 per cent of Danish employment in the private sector and 7 per cent of export-related employment.

China is an important supplier of finished goods for Danish consumption and production inputs for Danish production

It is not only as a market that Chinese influence has grown. China has also become an important supplier of intermediate goods for Danish exports and finished goods for Danish consumption, although China still plays a minor role relative to our closest neighbouring countries. In 2022, 7.1 per cent of Denmark’s imports of goods and services came from China, including Hong Kong. Gross imports, like gross exports, do not capture indirect trades between Denmark and China. Denmark imports goods from other countries which are wholly or partly produced in China earlier in the value chain. Calculated by foreign value added, China was the fifth largest supplier of inputs to Danish exports in 2020.

The international organisations expect decent growth in the Chinese economy in the coming years. For example, the OECD expects in its latest forecast from June 2023 that the Chinese economy will grow by 5.4 per in 2023 and 5.1 per cent in 2024. Nevertheless, the risk of a sharp and abrupt downturn in China is present. For example, several indicators of economic and geopolitical uncertainty regarding China have tripled since 2016.⁵ The increasing uncertainty largely reflects unusual global events such as the coronavirus pandemic and Russia’s invasion of Ukraine, but also several challenges facing the Chinese economy. These challenges may trigger a significant downturn in China, which could have a major impact on both the global and the Danish economy.

Two of the most current challenges faced by China are geopolitical tensions with the United States and high indebtedness in the Chinese real property sector. In addition, there are underlying factors that may lead to significantly lower growth in China than expected in the longer term. These factors include a declining population and challenges in shifting domestic demand from investment to consumption and diminishing productivity growth, as a result of many years of excessive investments and dominance of state-owned corporations.⁶  

Persistent tensions between the United States and China may weaken Chinese growth outlook

Relations between the United States and China have deteriorated significantly in recent years. Among other things, this has increased protectionism and focus on self-sufficiency for security reasons. Population surveys show that the American and Chinese populations’ views of each other have become predominantly negative in recent years. In 2023, 83 per cent of US respondents had a negative view of China, which is a significant increase since 2018, see chart 4. In turn, 75 per cent of Chinese respondents had a critical attitude towards the United States, according to a survey from 2021.⁷

The political decision-makers in the United States are also viewing China with increasing scepticism, and the number of China-related bills introduced in Congress has increased considerably since 2018, also as a share of all bills introduced in Congress. During the current congressional term, running from January 2023 to January 2025, 300 China-related bills have been introduced. This corresponds to nearly 5 per cent of all bills introduced in Congress and a threefold increase relative to the 2017-2018 congressional term, see chart 4. The bills introduced cover e.g., control of export of high-tech goods and screening of investments. The number of export restrictions from China has also increased significantly.⁸ Ongoing geopolitical tensions between the United States and China could result in more trade and investment restrictions, especially in high-tech sectors. This could weaken China’s growth outlook through lower production and exports. It could also lead to renewed difficulties in international supply chains and increase inflationary pressures.

China’s debt-ridden real property sector poses major economic risks

The Chinese real property sector is characterised by massive indebtedness and therefore poses a significant risk to China’s economic stability. The most serious economic crises often occur in the wake of credit-driven house price bubbles.⁹ Total debt in the Chinese real property sector, which covers both housing loans and debt among property developers, constituted 44 per cent of GDP at the end of 2022, see chart 5. This is a threefold increase since 2005. In particular, the high level of indebtedness among some property developers could pose a risk to the real property sector and the economy as a whole, according to the IMF.¹⁰ In addition, the Chinese housing market is characterised by large shifts between supply and demand, where supply significantly outstrips demand, especially in smaller cities. This increases the risk of an abrupt adjustment of house prices. A sharp fall in house prices will reduce investment and activity in the construction sector, which has otherwise been a driver of Chinese growth. It will also spill over into private consumption, as more than half of the households’ wealth is tied up in their homes, according to the European Central Bank.¹¹

A downturn in China has major implications for the global economy

The impact of a Chinese downturn for the Danish economy is calculated in two steps. Firstly, the Global Projection Model (GPM) is used to quantify the effects on the global economy. See box 2 for a detailed review of GPM. Secondly, the GPM results are used as input in Danmarks Nationalbank’s macroeconomic business cycle model, MONA.¹² The shock to the Chinese economy has been scaled to correspond to a decline in GDP growth of 1 percentage point. 

A downturn in China will first and foremost affect the global economy through a direct decline in Chinese demand for goods and services. Then, lower Chinese demand has spill-over effects on economic activity in the rest of the global economy through direct and indirect trade effects. In addition, the Chinese downturn will contribute to greater uncertainty in global financial markets and lead to tighter financial conditions globally. This will further contribute to dampening global growth.¹³  

The results from the GPM calculations show that a decline in Chinese GDP growth of 1 percentage point results in a reduction in global GDP growth, including China, of 0.42 percentage points after four quarters, growing to 0.55 percentage points after seven quarters, see chart 6. A significant part of the effects after four quarters come from the tightening of global financial conditions. The results are in line with estimates from other analyses, where the pass-through of a decline in Chinese GDP growth of 1 percentage point is estimated to be in the range of 0.3-0.6 percentage points after two years.¹⁴  

Danish growth will decline significantly as a result of a downturn in China

To calculate the effects on the Danish economy of a downturn in China, the results from the GPM model are used as input in MONA. In addition to the negative impact on global demand, it also takes into account that a shock to the Chinese economy is of importance to interest rates in the euro area and the United States, the effective krone rate, global inflation, foreign prices and wages as well as the global oil price.¹⁵

The impact of a decline in Chinese GDP growth on the Danish economy is strong and relatively long-lasting. Growth in Danish GDP will be reduced by 0.38 percentage points after four quarters, see chart 7 top. The estimated effect is consistent with estimates from other analyses.¹⁶ The calculations take into account that financial conditions in Denmark will tighten as a result of a downturn in China by assuming higher interest rates in Denmark, which will offset the lower interest rates derived from the euro area. If the tighter financial conditions in Denmark are not factored in, the Chinese downturn will have a smaller and more short-lived impact on Danish growth. The effects on the Danish economy, taking into account the tighter financial conditions, are similar to those in the euro area. 

There are several methods for calculating the effects of a slowdown in growth in China on the Danish economy, and the combination with GPM and MONA is one of them. Another method is to estimate a Bayesian VAR (BVAR) model for Chinese GDP growth and inflation and Danish GDP growth and inflation. The results from BVAR show that a downturn in the Chinese economy has a pass-through on the Danish economy in the same order as the results from GPM and MONA, see chart 7 bottom. However, the effects will be short-lived, which may be due to the BVAR model not taking into account other macroeconomic variables such as interest rates in Denmark, the effective krone rate, global inflation, foreign prices and wages as well as global oil prices. 

China plays an important role for Danish export markets and the Danish economy as a whole. However, parts of the Danish economy are more dependent on or vulnerable to the Chinese economy than others. This applies not only to individual industries’ exposure to Chinese demand, but also in relation to imports of consumer goods and production inputs for Danish production of goods. China is today the largest producer of a wide variety of products and commodities, where global net exports are concentrated on few countries. This may make China particularly critical to parts of Danish trade and industry.

The transport sector and pharmaceutical industry are especially exposed to Chinese demand

The extent to which the individual industries are exposed to the Chinese economy varies greatly. Today, shipping, pharmaceuticals, food products and machinery make up the largest share of Danish exports to China, see chart 8. However, this has not always been the case. Previously, primarily machinery and shipping accounted for the majority of exports to China, but the export share of food products and especially pharmaceuticals has increased substantially in recent years. The changes in the composition of exports over time may, for example, reflect rising income, higher living standards and changing consumption patterns among Chinese consumers. However, the increased exports of food products must also be seen in the context of the outbreak of African swine fever in China, which has led to a rise in Danish exports of pork to China over the past four years. In addition, the strong increases in freight rates in 2021 and 2022 have significantly raised the nominal value of exports of transport services in recent years. 

Taking into account the parts of Danish exports to China that are produced abroad and the parts of Danish value added that end up in China via exports from other countries, Chinese demand is particularly important for the transport service industries – especially shipping. Here, Chinese demand accounts for around 10 per cent of the total Danish value added in the transport sector, see chart 9. In recent years, the importance of Chinese demand to the pharmaceutical industry has also grown. Whereas Chinese demand accounted for less than 1 per cent of Danish value added in the pharmaceutical industry in the mid-2000s, it now accounts for around 6 per cent. However, the US and European markets are still by far the largest sales markets for the pharmaceutical industry. Sales to the US market have especially seen growth in recent years. In 2020, just under 40 per cent and 20 per cent, respectively, of the total Danish value added in the pharmaceutical industry went to the US market and the European market, respectively.

Chinese inputs play a major role in Danish industrial production and exports and may constitute a critical vulnerability for parts of Danish trade and industry

As one of the world’s largest manufacturing countries, China today holds a central position in the global value chains. This also applies to Danish businesses, which increasingly use components made in China in the production of their goods. Gross imports of industrial production inputs from China have thus increased significantly over the years. In 2020, China was the third largest foreign exporter of industrial intermediate products to Denmark, with a share of approx. 7 per cent against less than 1 per cent in the mid-1990s, see chart 10. Correspondingly, the share of Chinese value added in Danish industrial exports has also increased. 

China’s growing importance to Danish businesses is also seen at product level. Out of just under 3,650 product categories of which Denmark is a net importer, China is the largest global net exporter of nearly 1,580 of these categories, see chart 11 top.¹⁷ In line with the expansion and optimisation of global value chains, a significant part of net exports of the products has been concentrated in fewer and fewer countries. Over the years, China has become the largest global exporter of many of these products, with global net exports being concentrated in a few countries. While, in the mid-1990s, China was the largest net exporter of a little more than 100 product categories concentrated on few countries, and where Denmark was a net importer, today this applies to about 600 product categories, see chart 11 below.¹⁸ In comparison, this only applies to about 25 and 70 product categories for the United States and the EU, respectively.

The high concentration of global production and exports in few countries increases the vulnerability of Danish businesses and consumers. During the pandemic, for example, China adopted a very hard line against the spread of the coronavirus, leading to strict lockdowns of the Chinese economy in periods. This made it difficult for both consumers and businesses to obtain finished goods and necessary inputs for domestic production which they normally imported from China. The disruptions to the supply and value chains were one of the reasons for the very high inflation that we have seen in many countries in the wake of the pandemic.¹⁹  

Many of the products that Danish businesses or consumers get from China, they can probably do without for a period of time, or they can find alternatives. This applies, for example, to clothing, textiles and many other consumer goods which constitute a significant part of the product categories, see chart 12.²⁰ These products are thus not directly critical to the Danish economy. 

However, there are also products that are necessary in the production of Danish goods and more difficult to replace with alternative products. These may be specific chemicals, metals or electronic components that are critical to parts of Danish trade and industry. For example, Denmark imports a number of chemicals from China, which are used in, for example, the production of pharmaceutical products.²¹ 

China is also the largest producer and exporter of a number of critical raw materials that constitute a vulnerability to the European and Danish economies.²² This includes production, processing and export of rare earth elements²³ used in, for example, the production of wind turbines and electronic devices.²⁴ In addition, China produces the majority of the world’s solar cell panels and lithium-ion batteries.²⁵ This gives China a completely central position in relation to the green and digital transition.

In recent years, both businesses and political decision-makers have become aware of the supply risk of a high concentration of imports of production inputs from few countries and few suppliers. Questionnaire responses from members of the Confederation of Danish Industry (DI) indicate that many Danish industrial companies want to reduce their supply vulnerabilities by increasing the number of subcontractors in the wake of the corona pandemic and the war in Ukraine.²⁶ Most recently, the European Commission has also presented a number of measures, one aim of which is to make EU countries less dependent on China in relation to critical raw materials.²⁷ This will, for example, be achieved through European production of critical raw materials. However, the establishment of European production of critical raw materials is costly and will take several years.

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