A lot has been said and written about the debt crisis in Europe and headwinds that the US economy is facing. However, it may not be long before China catches the attention of the global economists and policy makers. As we all know, the Chinese economy has been growing at a break neck speed. However, with the backdrop of high inflation and declining exports, how long can it sustain the momentum is a big question.
China enjoys the reputation of world's largest exporter and a significant importer, with partners like the US and the UK on the other side of the trade. As the major global economies still reel under the economic crisis, if China faces a hard landing, the shocks will be felt across the globe.
While there is still time for these fears to come true, it is time that we keep a close track on the developments in China and be prepared for a potential crisis. The ripple effect of the global slowdown can already be seen in a country that thrives on exports. If nothing is done, along with high inflation, the slowdown in demand in other countries can lead to huge layoffs and a resultant slow demand in China itself leading to a political and social destabilization of Chinese society. This can spell doom for the big commodity supplying countries whose economic health will be directly linked to demand in China. Besides squeezing the US and European exporters, it will drag major Asian economies that supply coal, metals and natural gas.
The end result - global trade tensions accompanying an all pervasive slowdown. So what can be done to avoid such a situation? While the chances of a slowdown post a period of sharp growth can't be avoided, the onus will be on policymakers to ensure that this is done in a way so that they can deal with the inflation monster without sacrificing growth too much.