A Chinese recession – or even continued sluggish economic growth – would have global repercussions unimaginable even a decade ago. Yet the lessons of slowdowns and depressions in other superpowers appear to have gone unheeded in the Far East.

Could the 'made-in-China' recession arrive before the global economy has properly recovered from the financial crisis? It seems likely.

Economists estimate that Chinese growth has already slipped to 5% (below the official rate of 7%). The recent devaluation of the renminbi together with government interventions to try to prevent the stock market falling suggest that the government is engaged in the economic equivalent of trying to push water uphill. This may work for a while, but eventually the Chinese economy will surely do what every other economy with market elements and foreign trade does: pause for breath. 

Ruchir Sharma, the head of emerging markets and global macro at Morgan Stanley Investment Management, who has been a bear on China for sometime, writes in the Wall Street Journal: “Chinese policy-makers seem unwilling to accept that downturns are perfectly normal, even for economic superpowers, as the US has often demonstrated. Over the past century, the US economy has experienced a dozen recessions and a Great Depression, even as it remained the world’s leading economy.”

What’s critical for China are the domestic political consequences. The unwritten contract that the government has with the people is that the government delivers rising living standards in return for acquiescence on the political front. If the former falls down on the job what will be the reaction of the latter?

That’s why the Chinese government has put so much energy into keeping the party going with large amounts of stimulus ever since the global financial crisis in 2008. In this it is starting to look like some pre-crisis Western policy-makers who failed to see the dangers of having growth driven by asset bubbles and kept putting off the day of reckoning. When it finally arrived, it was much uglier than it needed to have been. 

What’s new about China is the extent to which its economy now accounts for a larger percentage of global growth and trade, such that a slowdown is not merely a domestic affair. China has accounted for one-third of global growth over the past seven years and became the world’s largest goods trader in 2013. 

This means that if China sneezes, other parts of the global economy, especially developing country commodity and inputs suppliers, may catch cold, especially as growth rates have not really recovered from the financial crisis. 

In our recent interview with IMF managing director Christine Lagarde she talked about the "new mediocre" of global growth rates insufficiently robust to meet the expectations of ordinary people in those countries. Add the new mediocre to the 'made-in-China' recession and it is clear: if we are to avert another crisis, global leaders have a lot of serious talking to do at the next G20 summit in Turkey in November. 

Brian Caplen is the editor of The Banker.

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter