China’s economy has slowed sharply, under the weight of major domestic imbalances. This will hurt global growth, but the impact on the US and European economies looks manageable. The main uncertainty is how the authorities respond. A sharp RMB devaluation, though unlikely, could compound negative spillovers.
China faced serious macro challenges even before the global crash in 2008 but the authorities’ response to weak global demand has compounded these problems. They kept investment high by inflating a credit bubble. Now overcapacity, falling prices, weak profits and high debt levels have combined to cause a sharp downturn.