China sows seeds for next global downturn

Sid Verma
Published on:

The emerging market sell-off since May is just the start of a painful multi-year adjustment process – and China has blazed a trail for the next downturn. Capital abundance, deflationary pressures and imbalanced global demand continue to drive the 15-year cycle of credit booms and busts.

Imagine it’s 2023. China’s consumption binge – fuelled by a run-down of household savings – eases, triggering fears over global demand. The US’s increasingly export- and investment-led growth model comes under pressure. Chinese government bonds – the risk-free global benchmark, along with US treasuries – tumble to a record low amid safe-haven buying.

After the death of China’s resolutely export-led growth model, which was fuelled by excessive consumption in the US, Beijing delayed the inevitable day of reckoning through a credit-driven investment bubble in 2008, which started to burst from 2013. Mercifully, China’s enforced and disorderly shift to becoming a leading global consumer – coupled with capital account liberalization – has created new sources of global demand for tradeable goods and services from neighbouring southeast Asian economies, the US and the larger markets in Latin America and Africa.

Amid disinflation...