(MENAFN- Khaleej Times) OVER THE past three years, there's been a remarkable transformation in global perceptions about the sustainability of Chinese growth.
As Europe faltered and the US fought a massively oversupplied housing market, China managed to sail through difficult global economic conditions and seemingly avoided the difficulties that ensnared much of the West. In 2010, the world was convinced that Chinese economic growth would save the world.
China had grown to become the world's second largest economy and many extrapolated this trend to the day that China would be larger than the United States. Few questioned this belief, and investors titled their portfolios towards assets that would fare well in a world of strong continued Chinese growth.
The sustainability of China's high growth rates is now being questioned, and with good reason. Headline GDP growth was 7.6 per cent in the most recent quarter, the sixth straight quarter of slowing growth. Chinese officials at the highest levels regularly comment today about measures to support continued growth.
The credit-fueled investment boom is ending, with serious ramifications for the supply-chain to China. The short of it is that China has simply built too much stuff, and while it will eventually need the currently empty malls, buildings and infrastructure â€" one can even add entire cities to this list! â€" demand for the raw materials used to build them will plunge.
Given that approximately 75 per cent or so of recent Chinese GDP growth has come from capital investing, building less stuff in China has the potential to cut growth rates to the low- or mid-single-digit range.
While the list of casualties may be quite long, three of Wall Street's favourite investments appear particularly vulnerable; two other expected "casualties" may actually stumble through without much pain.
As a result of its building boom, China has had a domineering influence on the market for industrial commodities.
A material slowdown in China will affect other emerging markets despite arguments about decoupling. Even if one believes that the real economies of the emerging markets have decoupled due to domestic consumption drivers â€" though in China, for instance, consumption accounts for about a third of GDP (versus more than 50 per cent in both India and Korea) â€" it's clear that the financial markets remain interconnected. In fact, if anything, the emergence of exchange-traded funds and other pooled investing products has created greater financial interconnections than ever before.
Further, the mere fact that India, China, Russia, Thailand and other developing countries are pooled into a single asset class known as "emerging markets" connects them via portfolio managers that view them as linked.
If Russia were to fall by 20 per cent, for instance, and all other markets were flat, emerging-markets managers would find themselves overweight non-Russia markets. Indiscriminate selling might follow as portfolio managers rebalanced, generating the financial contagion all desperately sought to avoid.
While it is not impossible, it seems unlikely that the world is about to descend into a multi-decade debt-deflation spiral. Some areas may not be so vulnerable.
Paradoxically, China probably won't be a severe casualty of a massive deceleration in investment spending. Social stability is on the top of Chinese leaders' minds, particularly as the country goes through a leadership transition. They will deploy all resources at their disposal to prevent social unrest that might emerge from slower economic growth.
And even if the country grows GDP at roughly 3 to 5 per cent per annum over the next decade, that's impressive growth that will result in a significantly larger middle class: Consumption as a percentage of GDP is destined to rise, creating winners amidst the wreckage and placing the Chinese economy on a more resilient foundation.
Last year, most analysts expected the Chinese economy to eclipse the US economy within 10 years. The combination of a rapid Chinese slowdown and a US renaissance driven by American agriculture and natural gas, i.e, food and fuel, may in fact push the crossover date out by years, if not decades â€" making analyst credibility perhaps the most visible of casualties.
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