The US–China trade war has slowed China’s economic outlook, with direct knock-on effects for Mongolia.
Although China’s economy grew by 5.3% y/y in the first half of 2025, several key indicators showed signs of strain. Imports fell by 2.7%, signalling a weakening of domestic demand, particularly for raw materials. Coal imports dropped 11.1% to 221.7mn tonnes, while real estate investment plunged 11.2% amid continued housing market weakness.
The slowdown in construction has reduced demand for key raw material imports, including coal and metals from Mongolia. Private investment declined by 0.6% and foreign direct investment fell 13.2% compared to the same period in 2024. Profits for large industrial enterprises also slipped 1.1%, suggesting fewer new construction projects in the near future.
Mongolia's economic fortunes have boomed in recent years thanks to Chinese demand for its natural resources, but, particularly where coal is concerned, the boom times could be over (Credit: US Library of Congress, public domain).
This contraction in Chinese demand poses a serious risk to resource-exporting Mongolia, which relies heavily on China as its primary market.
Mongolia's economic structure represents one of the world's most dangerous concentrations of risk. With over 90% of exports destined for China, and mining accounting for 92.1% of total exports, 31.6% of state revenue and 28.7% of GDP, Mongolia has essentially become an economic satellite of its southern giant neighbour. This dependency means that any downturn in Chinese industrial activity translates almost immediately into Mongolian economic distress.
Even worse, not only have export volumes decreased, but coal prices have also fallen. Coal dropped to $110.40 per tonne on July 18, 18.28% lower than a year ago.
Going into 2025, the World Bank projected Mongolia’s economy would grow by 6.3%, driven by rising copper production and a gradual agricultural recovery after a harsh winter dzud (the deadly freeze particular to Mongolia) that killed millions of livestock. However, early indicators suggest a significant deterioration. The country’s 1Q25 growth dropped to 2.4%, the weakest reading seen in three years.
Overall, exports fell by 17.2% y/y, while the manufacturing expansion slowed across all key sectors.
Mongolia is heavily dependent on imports from China and to a lesser extent from Europe and Russia, for finished goods and daily necessities, including shampoo, vegetables and many food items. As a result, imports outpaced exports, with Mongolia recording a trade deficit of $521.9mn in January, and inflation climbing to 9.1% by March.
The medium-term outlook (2026–2027) forecasts stable growth averaging 5.2%, though consumption is expected to slow due to weaker income growth and persistent inflation.
Household debt is also rising rapidly, particularly in urban areas, prompting authorities to increase reserve requirements to 11% and 16% to contain risks.
Mongolia's external debt reached $37.1bn in 4Q24. That represented 157.4% of GDP. With the  country’s population standing at around 3.5mn, the debt translates to approximately $10,600 per capita, one of the world's highest ratios.
Despite Mongolia’s well-executed external debt refinancing and awarded credit rating upgrades, the IMF warns that Mongolia's external vulnerabilities, high external debt and weak external buffers leave it vulnerable to external shocks.
Currently, the central bank, the Bank of Mongolia, only has enough foreign exchange reserves to cover 3.3 months of imports. At the same time, foreign debt has to be serviced in US dollars, and the main source of dollars for Mongolia is exports. However, with exports declining, there will be fewer dollars available to pay off the debt. Compounding the problem, the Mongolian currency, the tughrik, or MNT, is losing value against the dollar, making it increasingly expensive to service the interest on Mongolia’s foreign debt.
In an attempt to mitigate the financial pressures and diversify export markets, Mongolia signed a draft three-year trade agreement with the Russia-led Eurasian Economic Union (EEU) in March. The EEU represents a $14.5bn market comprising Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia, and this partnership is part of Mongolia's broader strategy to reduce economic dependence on China and diversify beyond mining.
The deal covers 375 goods, allowing Mongolia to export primarily agricultural and animal-based products while importing fruits, chemicals and manufacturing components.
The EEU initiative aligns with Mongolia’s Vision 2050 strategy, which aims to transform the country into a leading Asian economy by improving quality of life, boosting economic growth and shifting away from raw material exports. The agriculture sector, despite employing a large share of the population, contributes minimally to both GDP and trade. Expanding agricultural exports is seen as a key step toward value-added production and economic resilience.
However, political instability poses challenges to long-term economic planning. In June, Prime Minister Oyun-Erdene Luvsannamsrai and his coalition government were ousted following youth-led protests demanding transparency. While internal party dynamics played a role, the unrest highlighted growing public frustration with corruption and elite disconnect.
The ruling Mongolian People’s Party (MPP) now controls both parliament and the executive branch, raising concerns over accountability. The government’s collapse may delay industrial projects, including mineral processing facilities, and spook foreign investors.
Still, the EEU deal presents a strategic opportunity for Mongolia to broaden its trading partners, reduce its reliance on China amid global trade realignments, and move toward a more diversified, export-driven economy. However, it is not a complete solution. The overall size of the EEU market is not sufficient to compensate for the potential loss of China as a major export partner or a severe decline in Chinese imports.
BY
Antonio Graceffo, PhD, China-MBA, is an economist and analyst. He has spent over 20 years living in Asia, including seven years in China, three in Taiwan and four in Mongolia. He conducted post-doctoral studies in international trade at the School of Economics, Shanghai University, and holds a PhD from Shanghai University of Sport and a China-MBA from Shanghai Jiaotong University. Antonio has authored seven books on Asia, with a focus on the Chinese economy

Published Date:2025-07-30