From Real Time Economics:
Global markets will increasingly start to feel the effects of China’s slowdown. But maybe not quite in the obvious ways or for the obvious reasons.
China’s manufacturing sector continued to contract in September, according to the latest HSBC survey of purchasing managers, and has now weakened for 11 months running.
The Chinese economy’s weakness has weighed heavily on Chinese equities: the Shanghai Composite Index is now at its lowest level since February 2009, when the world was firmly in the grip of the financial crisis. It has also affected global markets, contributing to a weaker tone in Europe this morning as well as softness in the markets for commodities, particularly oil.
So far, so uncontentious. After all, China is widely considered to have been instrumental in shoring up the global economy in the wake of the financial crisis, thanks to the huge volumes of central bank-driven lending and fiscal stimulus. So a Chinese slowdown is expected to work in reverse.
This bad news might not be so bad, however, if it also represented a Chinese rebalancing away from investment-driven growth, which has been running at an historically unprecedented 50% of GDP. Private consumption is at an equal extreme, albeit in the opposite direction, running at around 36% of GDP.
Consumption is low because China’s household savings are so high, at some 30% of GDP. And this extraordinary savings rate was, in turn, credited with driving down global risk premiums in the years before the financial crisis. That’s because the shortfall in Chinese household spending was the flip side of China’s current account suplus — in not consuming, China was sending its goods abroad. China’s surplus was recycled into demand for foreign assets, primarily bonds and largely U.S. Treasury bonds, the global yield benchmark....MORE