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The Global Impact of a Slowdown in China

The growth in China — the engine for much of the global recovery, from the U.S. to Germany — is slowing significantly. The issue is just how significant the slowdown will be, and how it will effect global markets.

Where in the world would global growth be without the benefit of a booming economy in China? To see just how closely those forces are aligned, take a look at Monday’s news that business confidence in Germany is higher than it’s ever been. Much of that soaring confidence reflects Germany’s booming exports to China.

About half of Germany’s GDP growth is driven by exports, according to Deutsche Bank Research. “Germany has exactly the right country and product mix in its export portfolio. This is impressively documented by the scale of Germany’s exports to China, nearly 70 percent of which constitute machinery and transport equipment, i.e. capital goods, and which expanded by 45 percent last year,” Finfacts Ireland notes.

The trouble is that growth in China — the engine for much of the global recovery, from the U.S. to Germany — is slowing significantly. The issue is just how significant the slowdown will be, and how it will effect global markets.

Authorities in China are working to slow down the booming economy, which has ignited inflation, now a somewhat lower-than-expected 4.9 percent. It’s still high enough to concern authorities. China’s central bank has raised rates twice this year. Deutsche Bank has lowered its China growth forecast for this year to 8 percent from 9 percent.

The slowdown in China’s growth is bound to have a significant impact on the commodities markets — concentrated in certain areas tied to industrial production. China accounts for about 60 percent of demand growth in iron ore, copper and aluminum, according to Deutsche Bank. Yet it accounts for less than 20 percent of the growth in demand for uranium and corn, which might be less vulnerable to a decline in economic growth.

The slowdown in China is concentrated in certain parts of the economy — fixed business investment and industrial production. “This is important since commodity demand growth for industrial metals is more sensitive to fixed-asset investment and industrial production growth than overall GDP growth,” DB analyst Michael Lewis writes. Crude oil, coal and power prices in China tend to be driven by overall GDP, he finds.

Lewis argues that the slowdown in China will be moderate. But if that decline turns out to be worse than expected, Lewis predicts that certain commodities — corn, coal, and uranium — might be “more resilient.”

If the slowdown in China gets significantly worse, the impact could spread beyond the commodity markets, depressing growth in export-oriented companies in Germany, the U.S., and elsewhere. “The risk in China is that growth falls from 10 percent (in recent years) to 6,” says Hugh Johnson, chief investment officer of Hugh Johnson Advisers in Albany, New York. The odds of such a decline only are about “one in five.”

But should it come to that, “there will be a serious impact,” Johnson warns. “That would mean that world trade would take a real hit. Can you imagine what it means for companies doing business in China?” Such a slowdown easily could reduce global growth by half a percentage point, although it would be unlikely to push the U.S. back into recession, Johnson said.

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