China has become a major engine of the global economy since joining the WTO in 2001, with its share of global production rising from 2% in 1995 to 16% in 2018, as well as a growing source of final demand. China accounted for about one-third of global growth in the 2000s and helped sustain the world economy in the aftermath of the Global Financial Crisis (GFC). However, China’s growth has slowed markedly in recent years, driven especially by pandemic-related disruption and the ongoing weakness in the property sector. A key question for policymakers is how this will affect different countries, sectors, and firms.

In recent work (Copestake et al. 2025), we study how shocks in China propagate internationally. Building on recent work on production networks (e.g. Baldwin et al. 2023, Örs et al. 2020, Tintelnot et al. 2022), we distinguish between supply-driven and demand-driven fluctuations in Chinese activity to derive three testable predictions. First, because China sits relatively upstream in global production networks, supply shocks in China should generate larger global output effects than demand shocks. Second, both types of shocks are expected to weigh more heavily on countries and firms that are more exposed to China through trade. Third, the type of exposure matters: economies and firms that depend on Chinese inputs should be more vulnerable to Chinese supply disruptions, while those reliant on Chinese demand for their outputs should be more sensitive to Chinese demand slowdowns.

These predictions are tested using newly identified Chinese demand and supply shocks, detailed measures of trade and input–output linkages to China, and a difference in differences local projection approach (Jordà 2005) applied to quarterly country  and firm level data for a large sample of advanced economies and emerging market economies.

Identification of the shock

We identify the composition of domestic shocks driving Chinese activity using a structural vector autoregression (SVAR) framework. Domestic negative demand shocks are identified as those associated with declines in both activity and prices, while domestic negative supply shocks correspond to falling activity paired with rising prices. To strengthen identification, we augment this approach with narrative information on (i) major supply shocks, informed by evidence on supply-side reforms in the 2000s; and (ii) major demand shocks, derived from exogenous monetary policy changes.

The results suggest that both domestic supply and demand shocks contribute to explain overall Chinese activity, with supply shocks playing a larger role during the GFC and demand shocks being relatively influential during the 2014–15 episode of currency volatility and capital outflows.

Figure 1 Demand and supply shocks from the narratively identified SVAR model

Sources: Copestake et al. (2025).

Cross-country spillovers

With these shocks at hand, the analysis examines the cross country spillovers from Chinese supply and demand shocks using quarterly data for 50 advanced and emerging economies over 2002Q1–2019Q4. Figure 2 shows that negative Chinese supply shocks reduce partner country GDP by about 0.15% over two years. Demand shocks have a similar average effect, but materialise more quickly and are less persistent.

Spillovers are larger for countries with stronger trade linkages to China. For a 1% of GDP Chinese supply (demand) shock, the difference in GDP effects between countries at the 75th and 25th percentiles of trade exposure is around 0.05 percentage points – roughly one third of the average unconditional effect.

The composition of trade exposure also matters. Countries moving from the 25th to the 75th percentile of input exposure experience an additional 0.05 percentage point decline in GDP following negative Chinese supply shocks, while countries with higher output exposure face an additional 0.2 percentage point GDP decline following negative Chinese demand shocks.

Figure 2 China spillovers to other countries

Notes: The green triangles present the average impact on real GDP and investment respectively of a 1 percent of GDP shock in China at horizons of 0, 4, and 8 quarters ahead. Error bars denote 68 percent confidence intervals. Standard errors are clustered by country.
Sources: Copestake et al. (2025).

Firm spillovers

The firm level evidence mirrors the country level results. Both Chinese demand and supply shocks lead to economically and statistically significant declines in foreign firms’ revenues and profits.

Exposure to China shapes the magnitude of these effects. Following a negative demand shock, firms with greater export exposure to China experience larger revenue losses, while following a negative supply shock, firms with higher import exposure are more adversely affected. The role of exposure is quantitatively smaller for supply shocks than for demand shocks, reflecting the fact that weaker Chinese demand directly reduces sales for exporters, whereas supply disruptions affect foreign firms’ revenues more indirectly, even in industries that rely heavily on Chinese inputs.

Consistent with this pattern, demand shocks have persistently larger negative effects on firms with strong output linkages to China, while supply shocks have persistently larger effects on firms with strong input linkages (Figure 3). Over two years, firms with high input exposure experience revenue declines about 0.5% larger following a negative supply shock, while firms with high output exposure see revenues fall by about 0.4% more following a demand shock equivalent to a 1% decline in China’s GDP.

Figure 3 Differential firm responses to China shocks by input and output linkages

Notes: The green triangles indicate the differential response of firm revenues for country-industry pairs at the 75th percentile of output (input) exposure, relative to those at the 25th percentile, at horizons of 0, 4, and 8 quarters ahead. Error bars denote 68 percent confidence intervals. Standard errors are clustered by firm.
Sources: Copestake et al. (2025).

Conclusion

The international spillovers of changes in China’s growth depend as much on the source of the changes as on their size. Supply-side disruptions in China tend to have larger global consequences than demand shortfalls, reflecting the country’s pivotal role in supplying intermediate goods to the world. Chinese supply shocks have relatively larger spillovers to countries and firms that source more inputs from China, while Chinese demand shocks have relatively larger spillovers to countries and firms that sell more of their output to China. Understanding these channels can help policymakers and businesses better assess and manage the global consequences of fluctuations in China’s economy.

Authors’ note: The views expressed in this column represent only our own and should therefore not be reported as representing the views of the International Monetary Fund, its Executive Board, or IMF management.

References

Acemoglu, D, U Akcigit and W R Kerr (2015), “Networks and the macroeconomy: An empirical exploration”, NBER Macroeconomics Annual 30(1): 273–335.

Baldwin, R, R Freeman and A Theodorakopoulos (2023), “Supply chain disruptions: Shocks, links, and hidden exposure”, VoxEU.org, 29 November.

Copestake, A, M Firat, D Furceri, and C Redl (2025), “China spillovers: Aggregate and firm-level evidence”, CEPR Discussion Paper No. 21111.

Copestake, A, M Firat, D Furceri, and C Redl (2023), “China spillovers: Aggregate and firm-Level evidence”, IMF Working Paper.

Jordà, O (2005), “Estimation and Inference of Impulse Responses by Local Projections,” American Economic Review, American Economic Association 95(1): 161-182.

Örs, E, B Javorcik, T K Michalski and B Demir (2020), “Financial shock transmission in a production network”, VoxEU.org, 29 October.

Tintelnot, F, M Mogstad, A K Kikkawa, T Komatsu, and E Dhyne (2022), “Foreign demand shocks to production networks: Firm responses and worker impacts”, VoxEU.org, 26 November.