Why You Should Care About China's Imminent Slowdown

Derek Thompson Mar 10 2011, 1:15 PM ET

Behind the housing bubble, there was a bet that home prices would continue to rise and home owners would continue to make payments. When home values stopped rising and home owners stopped paying, the deck of cards collapsed.

Behind the global recovery, there is another gamble afoot. The new bet says that China will continue to grow near 10% a year, that the Chinese government will continue to invest in new cities and buildings, and that the country will continue to gobble up commodities at a scary clip. According to numbers I attained from Goldman Sachs, China represents 40% or more of the global market for cotton, copper, lead, zinc and aluminium. This ferocious appetite in turn feeds emerging markets in South America and Africa that unearth these metals and US corporations like John Deere and Caterpillar that build capital goods to dig them out of the ground.

That's why we should all be paying attention to what some economists warn could be China's imminent slowdown. The country projects a 40 percent reduction in yearly growth over the next five years. Some analysts suspect that they're deliberately underselling their economy's heat. But if and when China's demand for metals does abate, international markets and emerging economies will feel it in a big way...

China has been able to grow so rapidly by shifting large numbers of underemployed workers from agriculture to manufacturing. It has an extraordinarily high investment rate, on the order of 45% of GDP. And it has stimulated export demand by maintaining what is, by any measure, an undervalued currency.

But, in response to foreign and domestic pressure, China will have to rebalance its economy, placing less weight on manufacturing and exports and more on services and domestic spending. At some point Chinese workers will start demanding higher wages and shorter workweeks. More consumption will mean less investment. All of this implies slower growth...

In recent work, Kwanho Shin of Korea University and I studied 39 episodes in which fast-growing economies with per capita incomes of at least $10,000 experienced sharp and persistent economic slowdowns. We found that fast-growing economies slow when their per capita incomes reach $16,500, measured in 2005 US prices. Were China to continue growing by 10% per year, it would breach this threshold just three years from now, in 2014.

Read the full story at Project Syndicate.