Not too long ago it seemed that everybody loved China.  It was a panacea, a magic bullet, the answer to every question. How can the US avoid recession? China. Why are the stock markets racing higher? China. Why is oil over $140 a barrel? China. You may have noticed that all this cheerleading has gone very quiet, very quickly.

The economists that prophesied China would become the world’s biggest economy by 2015 have changed their tune. Those that recommended investing in China have quickly gone broke.

Believe it or not, China could be next on the credit crunch’s hit list.

The City still doesn’t buy it though. To quote arch-bear Albert Edwards:

“The consensus still touchingly believes that despite a deep economic downturn in developed economies, continued rapid emerging market growth will keep overall world growth resilient.

“My view is that outright contraction of global growth is entirely possible next year.”

I think he’s right. A sharp slowdown in China growth could be the catalyst to global recession.

Ignore the herd

Everyone is agreed that the UK, Eurozone and US are going into recession. They are right about that much.

However, The Fleet Street Letter has been predicting this since August 2007. The “experts” have finally joined us in this prediction. It only took the collapse of Northern Rock, 11 trillion pounds of stock market losses and five interest rate cuts for them to join us.

We must ignore the harmony of opinion, get defensive and harness our inner contrarian.

And that inner contrarian is telling us that even the emerging markets – including the supposedly bullet-proof China – will not be safe in what could be the world’s worst year for economic growth.

Over-heating, social instability, war have always been hypothesised as catalysts of a China meltdown. However, it’s the Credit Crunch that poses the biggest risk to the world’s fourth largest economy.

I, too, was a China bull. However, the landscape has changed so much in the last 12 months that I have had to re-evaluate what I once took for granted. And it is the idea of China’s unstoppable growth that makes me uncomfortable.

With the speed and force of the recession in other developed-world economies, I am not sure that China will be able to weather the storm as well as most are hoping.
What could knock China off course?

The gears are not turning as they once were.

China is slowing down. At the last count, it was growing at 9% a year. That may not immediately strike you as bad news. But, it’s all relative. Last year it was close to 12%, so it has fallen a long way. And that’s not the only bad reading.

PMI, or the Purchasing Managers’ Index is a measure of new orders, inventory levels, production and employment in the manufacturing sector. A reading of below 50 indicates a fall.

At 41.2, China’s PMI didn’t just fall, it crashed to a record low. Forbes Magazine puts it well:

“The economy of the so-called world’s factory is now decelerating.”

Two international surveys measuring PMI independently corroborated the evidence of a cooling Chinese industrial economy.

China bulls argue that the steep falls have been exacerbated by the Olympics, during which the country was officially ordered to a halt. However, even if we see a slightly stronger growth recording in December, the bigger picture is clear… China, like the rest of the world, is slowing down.

Is this a bad thing?

Yes.

China accounts for a quarter of global growth and 5 per cent of global consumption.

If it stops pulling its weight then we could realistically see a global recession as soon as 2009. A China slowdown directly smashes corporate growth for companies in nearly every sector in the stock market.

Now, sceptics will argue that China’s two stimulus packages will help China to spend its way out of recession. That’s right, China has been doing some bailouts of its own. The impact of these multi-billion dollar bailouts remains to be seen and is probably the global economy’s one lifeline.

I hope that this will be enough to re-energise growth in the world’s leading growth market.

However, I fear we may be on the cusp of global recession, and China’s worse-than-expected slowdown will be the catalyst. Unless we’re very fortunate or the Chinese policy makers are very clever then the only question that “China” is the answer to will be:

“What turned the recession global?”