There have, since the 1990s been two economic stories about China. One is that the growth is stunning and secure, and will continue for a while yet. The other is that the growth is built on an insecure foundation and will soon collapse. Until this year the first story has been the dominant one and the western economists that predicted disaster have made a bit of an ass of themselves. Now, the doomsters are gaining more traction. In its most extreme form the second story is being presented as a collapse in China being the second leg to the global recession of 2008/9.
Well, maybe. Just because people who have bet against China's success have been wrong in the past does not mean that they will be wrong in the future. China is facing financial pressures now and growth will, in the years ahead, inevitably slow as the country's population ages. But a collapse on the scale of what happened in the West does seem at the outer limits of the possible. Anyway, here is a third story, which seems to me the most credible. It comes in two parts.
Part one, is that there will indeed be some disruption in China, but the scale is manageable and it will be tackled successfully by the authorities. Part two, is that insofar as Chinese growth slows as a reaction to this, that actually will benefit most developed-world economies rather than damaging them.
The disruption has begun. There was a small bond default, and the cost of insuring Chinese bonds on the markets on Friday was higher than that of insuring comparable Irish debt. Further defaults are expected to follow. There are also grave concerns about the so-called shadow banking system, which has lent largely on speculative property developments. There is no doubt that the way China avoided recession, by having a huge property and infrastructure boom to offset falling export demand, piled up a huge amount of debt, some of which can never be repaid. But the Chinese banking system, while part-privatised, is ultimately backed by the state – as indeed you might say are the West's banking systems – and the Chinese state is not heavily indebted.
The data is pretty opaque, but the latest numbers that I have seen suggest that central government debt is around 50 per cent of Gross Domestic Product (GDP). Total debt, adding together personal debt, corporate debt, financial market debt and so on, is probably around 250 per cent of GDP, lower than that of Germany, the least indebted of the G7 nations. Besides, if you can grow at 7.5 per cent, as China plans to do, you cut the value of debt relative to GDP pretty fast. It is true that the Chinese need to keep pedalling the bicycle or it will start to wobble and it is true that emphasis needs to shift from investment to consumption. But in relative terms the debts are a lot lower than those of any major western economy, and China does have the example of how not to manage things right on its doorstep, in the shape of Japan.
Let's assume, though, there is a sharp slowing of growth to below the projected 7.5 per cent. What then? China is the world's second largest economy but it is not for most developed countries that important. Indeed for all their growth, the Brics (Brazil, Russia, India and China) are not that important overall. The UK exports more to Ireland than it does to China, India, Russia and Brazil put together. It matters for some western companies exporting there, but if China successfully replaces domestic consumer demand for investment in infrastructure we may end up as net beneficiaries of the shift: fewer unfinished office blocks and more Land Rovers.
At a macro-economic level, slower growth in China would bring another huge benefit: lower energy and commodity prices. In past recessions there has been a fall in both. Indeed the lower oil price was one of the most powerful forces helping pull the world out of recession in the early 1980s and 1990s. That did not happen this time, or at least not to the extent that it did in previous cycles. The result was that we failed to get that boost to demand that we might have expected and the pull out of recession was all the harder.
True, some raw material producers would suffer and in the developed world both Australia and Canada would be hit. However, while primary producers would face a loss of export income, any fall in energy prices would pass through to lower food prices, which would bring benefits to the poorest people. So there would be social advantages too. Finally, there would be a political benefit: lower energy prices would hit Russia hard, for the government depends on oil and gas for something like half its revenue.
The big point here, and I acknowledge it is hard to do the sums with any precision, is that on balance the West is likely to gain from slower Chinese growth. It is the second biggest economy in the world, but it is only the second biggest. If you count the eurozone as a single economy, it is only the third biggest. It will in all probability pass the United States in economic might in another decade or so, but it is not there yet.