China weakness has grave implications

"Although the Australian economy and indeed our stock market was effected by the 2008 Global Financial Crisis, we where in many ways insulated by the strength of China. With this next looming crisis, the Australian Economy will not be so lucky".

One word beginning with 'C' describes the continuing fallout from concerns about China's economic growth and increasing fears that its leadership is unsure about how to manage a slowdown in its economy and unsteadiness in its markets: contagion.

But there is another 'C' word that should be concerning investors as they survey a horror start to the year: capitulation.

While we have not seen markets in Western economies gyrate to the extent they have in China, anxiety is festering about the state of the world economy, geopolitical risks and a belated realisation the main engine of global economic growth is stuttering.

One of the surprises of the early days of 2016 is that China's woes had to an extent been downplayed by market analysts whose record on analysing the world's second largest economy is poor.

What is clear is that China's leadership is facing much bigger challenges than anticipated in its efforts to bring about a transformation of its demand-driven economy to one which is market-based and consumer-led.

This might sound fine in theory, but in practice even the most advanced economies respond unpredictably to attempts to bring about a shift in direction, let alone one that is feeling its way uncertainly towards a market-oriented system.

People tend to forget the Chinese economic model is but a generation-old, and remains very much a work in progress. China's economic growth and development was never going to proceed in a linear manner.

Inevitably, there would be speed bumps along the way. The question is whether China has simply hit a speed bump, or is heading for a hard landing and might end up in a ditch.

The last time China experienced a bumpy ride that threatened to de-rail its modern economic miracle was back in the 1990's when its then Premier Zhu Rongji managed to engineer a relatively soft landing for an overheating economy.

But the difference between then and now is that China's economic importance to the rest of the world bore no relation to what it is today when for the past two decades it has underpinned global growth.

The bad news is that China's growth is almost certainly falling short of the more optimistic forecasts, and possibly well adrift of Beijing's own projections.

China weakness and thus a collapse in commodity prices has grave implications for commodities-dependent countries.

Australia may not be as exposed as some, notably countries in South America and in Africa, but an end to the easy-money commodities boom will claim its share of casualties.

A collapse in commodity prices more or less across the board is weighing heavily on the markets with oil trading at 12 year lows, and no sign of a bottom.

A China slowdown and increasing signs of uncertainty in the country's management of its exchange rate, and its markets coincides with a world that has scarcely been more unstable since World War II.

Geopolitical risks appear to be intensifying with turmoil in the Middle East showing no sign of abating, North Korea's claims of testing a hydrogen device posing fresh challenges to global order, and Europe mired in a refugee crisisthat is sapping the confidence of incumbent administrations.

Last week, investor and philanthropist George Soros warned of a crisis in the global economy reminiscent of the Global Financial Crisis of 2008.

The difference now is that whereas in 2008 it was the US and European banking systems that teetered while Beijing provided the ballast that helped to stabilise things, this time it is China that is unsteady.

By Tony Walker