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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.

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China’s export engine consumed about 20 percent of the world’s non-renewable energy, 23 percent of major agricultural crops, and 40 percent of base metals. Not surprisingly, the Chinese slowdown has hurt Australia, Brazil, and African countries, which have been feeding China’s export engine with raw materials like metals, agricultural commodities, and petrochemicals.

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As one official of a major Brazilian iron ore company put it, with the Chinese slowdown, the “golden years” are gone. Australia’s BHP Billiton has abandoned plans to build the world’s biggest open-pit copper and uranium mine, and hopes of creating thousands of jobs have been dashed. The falloff in orders for Chinese consumer goods also transmits the pain to South Korea, Taiwan, and a host of other countries engaged in the manufacturing supply chain. For example, Japan’s export of heavy machinery has slumped, leading, in turn, to a drop in the country’s imports of commodities.

Given the extent to which global demand has contracted, China’s main avenue to avoid a hard landing is by engaging in a domestic decoupling of sorts – by moving away from export-driven investment to consumption-driven growth. In the past five years, China has introduced pension and health insurance in a bid to encourage greater domestic consumption. Worried about medical burden and old age, the Chinese have traditionally saved more than they consume. However, persistently high private saving rates suggest limited success in changing economic gears.

As China struggles to rebalance its economy, and as its manufacturing sector stalls, the resulting lower global commodity prices could provide a silver lining to developing countries not endowed with these resources. Weak demand from China could also lower the price of oil and divert some Foreign Direct Investment (FDI) flow away from China. Thanks to strong FDI inflow, China, with its $3.2 trillion reserve, is better prepared to face the storm; but its falling current account surplus has shown that its fortune is not decoupled from the rest of the world.

Nayan Chanda, former editor of the Far Eastern Economic Review, is editor of YaleGlobal Online.

© 2012 YaleGlobal/Global Viewpoint Network. Hosted online by The Christian Science Monitor.

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