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China sows seeds for next global downturn

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 and the bear-market run in emerging markets between 2013 and 2015, emerging market policymakers were forced to confront credit excesses and competitiveness challenges through supply-side reforms, which paved the way for over half a decade of productivity growth and strong exports to a consuming China.

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