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How the China Bubble Is Wrecking the Global Economy

Don’t let President Obama’s rosy last “State of the Union” distract you—the global economy is in crisis. The stock market has taken a huge plunge in recent weeks, and the price of oil continues to drop. There are many reasons behind this—including the shale oil revolution in the U.S.—but the greatest economic disrupter is the Chinese economy.

Commodity prices are falling across the globe—and it’s not just oil. As Walter Russell Mead argued in The American Interest, “we may be looking at the bursting of a bubble that could dwarf what happened in 2008.” Mead argues that “the China Bubble is bigger than the real estate bubble, and its liquidation could pose bigger risks for world politics than the subprime implosion.”

What the “China Bubble” Is and Isn’t

As Mead explains, “There’s a difference between China and the China Bubble,” as “China is a middle-income developing country bumping up against the limits of a growth model build on massive exports of manufactured goods.” The Chinese economy has a lot of bubbles, from a government-inflated stock market to overinvestment in real estate and manufacturing.

The government is aiming to achieve a ‘soft landing,’ switching the economy away from growth led by manufacturing for export and toward growth led by services and internal consumption, with minimal economic damage.

The China Bubble, however, is an international phenomenon. Producers around the world have been sending China raw materials, which China uses to produce manufactured goods and sell at market. In recent years, China’s economy has grown explosively, and producers got used to its soaring demand. They could keep sending more and more, and China kept buying.

“Producers of everything from cotton to copper to soybeans to silicon chips have assumed that double digit growth in China’s appetite for the components of its industrial machine will continue indefinitely—and they have invested to create the capacity to match this inexorably growing demand,” Mead explained. But China’s great production machine is faltering.

The Chinese government may or may not succeed in keeping its economy stable, but “the inevitable deceleration of Chinese growth that comes with the transition to a less export-dependent economy” will have a massive impact on the global economy.

“Even if China’s economic managers succeed, and the country moves to a soft landing with growth still strong but increasingly based outside manufacturing and the export economy, the global investments predicated on China’s continuing hunger for the commodities and components it needs for a manufacturing export boom will… fail,” Mead wrote. Producers around the world who invested to meet an increased Chinese demand, which fails to materialize, will lose, and lose big.

Producers around the world, from Africa to Brazil, from Thailand to Australia, involved in mining, agriculture, energy, and infrastructure, will be stuck with full storehouses and no one to buy their materials. They invested in higher capacity, expecting a normal return, and will end up unable to sell their goods and get any return whatsoever.

The Signs of Collapse Are Already Here

We are already witnessing this economic bubble burst. “The commodity price crash, a direct consequence of massive over investment in production facilities whose output cannot be sold at a price that justifies the original investment, is already here,” Mead explained. Currencies like Russia’s ruble, the South African rand, the Brazilian real, and the Australian dollar have all seen declining values. South Africa’s currency fell by ten percent this month, reaching historic lows.

Mead writes that “those who have invested on the basis of indefinite high growth of the old Post-Mao China economy are now waking up to the new post-post-Mao reality of sharply lower growth in demand for the key inputs of an export based manufacturing system.”

But the devaluations and economic doldrums are just starting, Mead warned. “The new reality of a much slower growth in China’s demand… is still young and its impact is only now being felt.” In the next few months, more and more producers will realize the “China Party” has ended, and the shock waves will spread through more industries and more markets.

This Collapse Will Have Massive Implications

The collapse has already impacted politics and diplomacy across the globe. From Putin’s strength in Russia to Nigeria’s war against Boko Haram to Venezuela’s opposition to the United States, falling oil prices have shaken up the balance of power. One of the reasons Cuba decided to accept President Obama’s overtures was their fear that Venezuela might implode.

Mead warns that “the fate of democracy in countries like Brazil and South Africa is complicated by the prospective fallout from the commodity crash.” Huge economic shifts like the collapse in commodity prices can tilt the balance of global power, weakening some states and bolstering others.

The United States may have resisted the full effects of the crash so far, but they are likely coming. It’s been 8 years since the last Recession, and history suggests we should be due for another. Brace yourselves, this is just the beginning.