China is not immune to this global recession, says John Crooks. And as the ‘world’s manufacturing plant’ stumbles, it will take down many others with it. Emerging economies that relied on China buying raw materials will be hit hardest. And any developed nation with exposure to these markets will be dragged down too.

This from The Sovereign Society:

If you want to know how far this recession has stretched, look no further than China.

Up through this year’s Olympics, China seemed to be well on her way to becoming the next global economic kingpin. And with good reason.

China has had the fastest growing economy in the world for decades. The Chinese government has amassed trillions in reserves, while building up a trade surplus just last year of US$262.2 billion.

But lately, China’s fundamentals have been breaking down, one by one, like massive dominoes…

• Manufacturing in China just shrank by its largest margin EVER.
• China’s GDP growth for next year is projected to be around 7.5% – that’s down from an 11.5% pace not long ago.
• China recently adopted its own US$586 billion stimulus plan to try to jumpstart growth. (Notice: That’s more than twice China’s trade surplus of last year – it’s also nearly as much as the U.S. plans to spend on its US$700 Billion TARP bailout plan.)
• Housing prices are dropping in Shanghai, Shenzhen and Guangzhou.
• The central bank just slashed rates by the most in 11 years.

These dominoes are knocking down more than just China’s economy…

In fact, trouble in China spells disaster for the rest of the global economy. Specifically, a slowing Chinese economy is a dangerous situation for the United States, its surrounding Asian neighbors, over-exposed and over-indebted developed economies.

Global Manufacturing Clearinghouse Hits the Skids

You can trace all China’s problems back to their now broken export model. For years, China has played the middleman between Asia and the United States.

Their low-cost, cheap-labor production model dictated that they grab input products and other raw materials from nearby developing nations.

The Chinese then used those low-cost resources to build their goods and ship them off to the U.S. and other developed nations. China’s Asian neighbors depended on China to continue this cycle to fuel their own export-driven economies.

As a result of receding liquidity, U.S. consumers (and others) have a shrinking appetite for cheap goods, so they spend even less.

So, China is now losing its best customer, the U.S., thanks to the recession. It is also selling less to other developed nations of the world. This hurts all the emerging Asian economies that depend on China to buy their inputs. It’s a vicious cycle.

Emerging Market Currencies Will Be Hit the Hardest

In short, global capital flow has stopped dead in its tracks. And global demand is drying up. So it’s easy to see why emerging economies’ stocks and their currencies are being hit the hardest.

This is the worst possible environment for emerging economies because they depend on sustained global demand, more so than internal demand. When global capital flows dry up, these emerging economies struggle to make ends meet.

And any developed nations (and their currencies) that have exposure to these struggling emerging markets will ALSO suffer.

This includes several key European countries whose banks are over-exposed on loans to emerging markets and suffocating on massive liabilities. And this includes the euro and pound.

Just as China was vital to the boom, it is critical to the bust. And when that happens, a few currency investors who saw this coming will be in the best position to profit off this global realignment.

But there is no “One-Market” solution to play China’s bust!

Source: Why China Can’t Save the Global Economy