China's growth model is no longer suited to the global economy, Mohamed El-Erian says

• China's growth model is no longer suited to the global economy, Mohamed El-Erian said.
• Exports have fallen, and growth in Europe and the US will likely be muted for the foreseeable future, he said.

China's disappointing post-COVID recovery highlights the country's misalignment with the global economy, Mohamed El-Erian wrote.

After an initial burst of first-quarter growth, China's industrial output, investment, and consumer activity have all cooled sharply. The country now teeters on the edge of deflation, while second-quarter GDP pointed to continued weakness.

In a Project Syndicate column, the chief economic adviser at Allianz attributed China's recent slowdown to three main factors.

"First, as the most recent trade data show, the global economy no longer supports China's domestic growth dynamics," El-Erian said, noting that Chinese exports in June dropped 12.4% and imports declined 4.1%.

That's as top trade partners in Europe suffer from sluggish growth, while the West has begun "de-risking" away from China with the US curbing trade and investment.

Second, El-Erian said Beijing is torn between reverting to its traditional top-down stimulus measures versus a more bottom-up approach that unlocks more economic dynamism.

Third, the end of China's draconian zero-COVID restrictions late last year hasn't resulted in across-the-board spikes in household, business, and property demand, he added.

"Given that growth in Europe and the US is likely to remain subdued for the foreseeable future, and with the global economy still reeling from the impact of the most aggressive wave of interest-rate hikes by central banks in advanced economies in several decades, China cannot count on globalization to rescue its faltering growth model," El-Erian wrote.

In addition, companies diversifying supply chains away from China will hit foreign direct investment, and US national security priorities will add more restrictions on trade and investment, he added.

Rather than hope for the rest of the world to save China's economy, El-Erian suggested that Beijing look inwards and re-orient political policy towards an effective growth model.

However, in China this is especially challenging, as the country suffers from political inconsistency. Where the central government may push for macro-level directives, their adoption is often limited by on-the-ground realities, such as worries about exacerbating local debt.

But approaching policy from the micro-level is also difficult, leaving China in a "muddled middle," El-Erian wrote. Local governments have only so much autonomy, and solutions may be restrained in an aging population and high unemployment.

"The country's industrial-policy framework has yet to strike the right balance between macro-level directives and providing sufficient operational autonomy at the micro level," he said.