China’s global economic importance has significantly increased in recent decades, particularly in Asia, where trade integration is crucial. China’s medium-term growth prospects are influenced by factors such as income convergence to advanced economies, demographics, domestic reform momentum, and external factors like geoeconomic fragmentation.

The Regional Economic Outlook for Asia and the Pacific assesses the potential effects of ‘de-risking’ between China and the Organisation for Economic Co-operation and Development economies. De-risking strategies, which involve reshoring production domestically or friend-shoring away from each other, can significantly drag global growth, even without new trade restrictions, especially in Asia.

The study reveals that friend-shoring policies do not generate net benefits for third countries in the long term due to trade diversion effects in China and the OECD. The results suggest that third countries should actively pursue reforms to integrate into global supply chains and avoid costly fragmentation outcomes.

Constructive dialogue is needed to resolve tensions and resist costly fragmentation outcomes. In China, the risks of fragmentation on medium-term growth highlight the need for comprehensive structural reforms to help income levels converge more rapidly with advanced economies. This would also have significant positive spillovers for other Asian economies.