October 10th, 2012
10:44 AM ET

What China’s slowdown means

By CNN Global Public Square

For more “What in the World,” watch "Fareed Zakaria GPS" on Sunday at 10 a.m. and 1 p.m. ET

For the last few weeks we’ve been getting bits of news that add up to something big.

China is slowing down, dramatically. If it continues, it will have a profound impact on the rest of the world. GDP growth has dropped from about 10 percent last year to 7.6 percent in the latest quarter. Now that might not sound like much, but it might just be the beginning: like a dropping ball, we don't know if it has hit bottom yet. What we do know is that it will have widespread effects.

Take the example from Brazil since the 1990s. Brazil’s GDP has fluctuated around an average of 2.5 percent. But there’s a pretty stark correlation between GDP – as commodity prices rise or fall, Brazil's growth rate moves accordingly. The same is true for sub-Saharan Africa. Rates of growth closely track commodity prices. Those prices in turn, will increasingly track with China’s growth.

Australia is another example. It used to be called the “lucky country,” but this past week it recorded its biggest trade deficit in four years. Why? Prices of iron ore and coal are sharply down because of slowing Chinese demand.

From Australia, to South America, Africa, and beyond, China’s unprecedented rise has brought with it a boom for resource-rich countries. As China’s growth slows, the party is going to wind down.

Even the United States is not immune. I was struck by a report in the Wall Street Journal. “In 2009, U.S. met coal exports to China grew nearly six-fold, and grew by the same rate in 2010” Six hundred percent rises! But as China’s steel industry faces a loss this year, demand for U.S. coal has slowed. That’s contributed to layoffs for hundreds of coalminers in the state of West Virginia. Thousands of miners will have their pensions and health benefits reduced.

All these ripple effects lead back to China. To give you a sense of its importance, look at the market for metals. According to the World Bank, China’s consumption of refined metals has jumped 17 times since 1990. Its share of global consumption of these metals has jumped from 5 percent to 41 percent. Over the last decade, while China’s demand has been growing by 15 percent a year, the rest of the world’s has remained constant. China has essentially fuelled global growth in these markets. But now that China’s appetite is waning, commodity prices will fall – indeed are falling.

Oil prices are dropping as well. China consumes only about 10 percent of the world’s crude oil. But over the last decade it has contributed to nearly half of the global rise in demand. According to Morgan Stanley’s Ruchir Sharma, on average, China's appetite for oil has been increasing by 8 percent a year. This year, it’s growing at just a third of that amount – 2.5 percent. Now, if this slowdown is indeed the new normal for China, as many economists suggest, it has immense ramifications. All these countries which count on rising crude prices to balance their budgets – Russia, Venezuela, and many of the Arab states – are all going to struggle.

I don’t mean to paint a picture of doomsday. Despite China’s slowdown, it will continue to grow at more moderate 6 percent to 7 percent in the coming years. It’s a rapid rate for what is now a very large economy. But it will mean that the party is over for many countries and companies around the world. And they need to get used to the new normal.

soundoff (150 Responses)
  1. Hadenuffyet

    I've gardened, canned , raise livestock , and burn wood. Not much I need from globalization.

    October 12, 2012 at 9:43 am | Reply
    • Maersk

      What about that Chinese made dudo you are zucking at this moment?

      October 12, 2012 at 6:30 pm | Reply
  2. truthordare7

    What does it mean? Hopefully, a time for revolution, when the candies run out and the people's frustration spills over to the street and the communist regime is toppled. The time has come for the last bastion of communism to fall and a billion people to be free from the yokes of tyranny and oppression. A time for upheaval, pain, uncertainty, but also a time for freedom, hope, and a new destiny. Hopefully, a world where human ideals are not sacrifced by the west for profit and easy money drawn out of the emaciated hands of oppressed people. Hopefully.

    October 12, 2012 at 12:47 pm | Reply
    • johnny

      A revolution can conveniently and instantly erupt in the States. The stage is like set because everyone has guns and plenty of bullets in the house.

      It will make my fear come true too, I have often wondered how close America have been to a civil or racial disturbances that may result in a revolution by certain section of American society. I suppose it will all depend on the state of the Americn economy, if it collapses and the poor everywhere become desperate, and hungry – we can expect there will be shooting and robbery everywhere.

      October 15, 2012 at 10:55 pm | Reply
      • Bill

        The U.S. has a far more stable political system that China. The average GDP in China is till only around 6K, so you can see the majority of the population are still not getting a slice of the pie. While we have seen the middle class lose some ground over the last five years in the U.S., it has been a steady growth for decades. This is a diffrent world then the repressive Chinese government. Why compare the two?

        October 16, 2012 at 10:01 am |
  3. cedric

    China's never slowing down, just on a nice vacation.

    October 15, 2012 at 10:49 am | Reply
  4. Bill

    China still relies tremendously on exports, but the information shows its vulnerabilities. China's GDP is dropping simply because Europe and the U.S. can no longer afford to keep buying its junk. In the end, its these economies that have been propping up China's. I also feel that China could one day implode, considering that it does not have the most stable political system compared to other nations. China has a tremendous amount of internal conflict, between minorities and government, as well as a growing rift between the new wealthy and poor. A slowdown could amplify these diffences, and riots could result. Every Asian tiger has cooled off, but I am not sure China has the political system in place to control the aftermath.

    October 16, 2012 at 9:58 am | Reply
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