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Slowdown of China's economy is pushing world toward another economic crisis (+video)

China’s high inflation and stimulus-fueled real estate bubble have been aggravated by sagging global demand for Chinese goods. The impact is being felt all across China – and the world. China must move away from export-driven investment to consumption-driven growth.

By Nayan Chanda / October 8, 2012

A migrant laborer wears a safety helmet over a straw hat at a construction site in Pinghu, Zhejiang province in China Sept. 28. Op-ed contributor Nayan Chanda says: As China’s manufacturing sector stalls, so does its demand for raw materials falls, lowering global commodity prices. This could provide a silver lining to developing countries. Weaker Chinese demand could also lower oil prices and divert some foreign direct investment away from China.

Aly Song/Reuters

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New Haven, Conn.

As we mark the fourth anniversary of the financial hurricane that nearly wrecked the world economy, dark clouds are gathering once again. Europe is seized with renewed fear of a eurozone collapse, and as the US recovery continues to stall, the slowdown of the Chinese economy is pushing the world toward a new crisis.

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Commentary: Harvard Kennedy School Professor Anthony Saich explores the future of US-Chinese relations.

A hard landing in China could expose a large number of countries to unforeseen consequences and dash hopes of a global recovery. China’s plight also drives the final nail into the coffin of the once fashionable theory of “decoupling,” which argued for an autonomous economic sphere around China that could soar even as the US economy went into a tailspin.

In the dark days of 2008-09, following the collapse of major financial institutions, China stood out as a beacon of hope, the biggest engine of global growth. Buoyed by Beijing’s $586 billion economic stimulus package in November 2008, the Chinese economy bounced back and was soon growing at its customary 8 percent clip.

The stimulated growth that cushioned the economy from the impact of falling export demand has, however, run its course. High inflation and the stimulus-fueled real estate bubble have been aggravated by sagging global demand. Europe’s appetite for Chinese goods has fallen sharply, roiled by the deepening sovereign debt crisis. With high US unemployment and fears of recession, demand in China’s biggest market is similarly flat. If Beijing were tempted to depreciate the renminbi in a bid to boost exports to the United States, it could trigger an ugly row, especially in an election year.

The impact is being felt all across China. Car dealerships are bursting with unsold automobiles, warehouses are groaning under mountains of unsold goods, and millions of apartments remain vacant. In a bid to liquidate inventories, companies are engaging in vicious price-cutting wars. The latest data show that export orders are falling at their fastest pace since the 2008 crisis. Cutbacks in import orders by Chinese firms are now spreading gloom to three continents.

Germany, Europe’s export engine, sells much of its machine tools and equipment to China but is seeing a fall in GDP growth. The sovereign debt crisis, which has hit European banks, has indirectly affected China’s exports to poorer countries as well. The emerging economies of Africa and Latin America rely heavily on European banks for trade financing, but the lenders have stopped issuing letters of credit.

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