As the current Chinese production shutdowns show, China's regulatory reset could have major consequences and possibly global spillovers. In our base case, the global headwinds are modest, but a faster pace of regulatory tightening will be more serious.

What China's regulatory reset means for its economy: A profound policy shift is under way in China, and policy-makers have initiated a far-reaching and wideranging regulatory tightening cycle. In the near term, production cuts in order to comply with energy intensity targets, slower property activity and near-term funding pressures for property developers will be a significant drag on growth, though there could be at least some offset by policy easing. In this report, we focus more on the medium-term implications and examine the global spillovers.

For China, its regulatory reset will weigh on corporate sentiment and in our assessment lead to slower investment and productivity growth. In our base case, we adjust our 2022-25 GDP forecast down by 40bp to 4.6%Y per annum.

Which regions are most exposed: To analyse the spillover effects, we simulated it through a global input-output model. The results from our input-output analysis suggest that the drag on growth would be manageable in the base case scenario, with an overall drag on global GDP of 11bp. The economies which are most exposed are from Asia (especially Korea and Taiwan), followed by Europe, reflecting the close integration with China in the global supply chain networks.

Among the large economies, the US ranks as one of the least exposed economies in our analysis. Outside this group, Russia and Norway also rank among the top countries affected due to their role as key suppliers of mining and quarrying products.

As was the case with trade tensions, mind the indirect effects: While the inputoutput approach captures many spillovers, we are mindful that it could be only partial. During the tariff escalation from the US, weaker corporate confidence and tightening financial conditions weighed further on growth beyond the increase in tariffs. In our base case, other channels are likely to be small. In our bear case, other channels of transmission outside trade will be more active and in some cases large.