China's economy has slowed sharply under the weight of major domestic imbalances. This will hurt global growth but the impact on the United States and European economies looks manageable. Business editor Dene Mackenzie reports.
China's economy had deteriorated recently but the weakness is likely to be more persistent than in the United States, Forsyth Barr broker Peter Young says.
Credit had exploded since 2009 and officials were anxious to curb the boom before it became too large to control, he said.
Tighter credit conditions had exposed China's overcapacity, especially in certain sectors such as construction and heavy industry, prompting a sharp downturn in investment.
''Given investment accounts for around 50% of GDP, this adjustment almost certainly has further to run. The authorities have resorted to targeted and small-scale macro stimulus as they endeavour to steer the economy along a new path.''
On some measures, China accounted for about 15% of global economic growth as measured by gross domestic product (GDP) and was similar in size to the United States.
That meant a slowdown in China would have a significant impact on the rest of the world, including the direct impact of lower global aggregate growth but also through indirect impacts on supply-chain economies (other Asian countries), capital goods producers (Europe and the US) and commodity exporters, such as New Zealand and Australia, Mr Young said.
Beyond the direct effects through growth and trade, a slowing China was unlikely to cause stress on the global banking system and result in another global financial crisis.
China's ''bubble'' had been funded almost entirely by domestic savings and net international savings were a relatively modest contributor, he said.
''The slowdown is likely to exacerbate the massive capital outflows seen already which assist in capping bond yields around the world and underpinning equity and property valuations.''
Slowing top-line economic growth created an uphill battle for the profit growth that drove equity prices higher, Mr Young said.
China's Shenzhen stock index more than doubled in the 12 months ended May.
Although revenue growth was still adding to profits, the rate of growth was slowing each year and was unlikely to be enough to drive 100% equity gains in a year.
Profits could rise faster than top-line revenue growth if productivity cut labour costs.
Productivity in China slowed last year and actually fell in the first quarter of this year - the first quarterly fall ever, he said.
Lower funding costs had supported profits during the past year but not enough to offset falling prices and higher wages.
''Overall, it looks like Chinese equities have run too far ahead of fundamentals to sustain recent record highs.''
Group of Seven (G7) ministers and central bankers recently agreed in principle to include the Chinese yuan as a component in the International Monetary Fund's Special Drawing Rights (SDR) basket.
The Chinese currency was already the world's fifth most important currency in trade transactions so its inclusion would not have much effect, but it would go a long way to giving it legitimacy and encourage many other Asian countries, in particular, to think about pegging their currencies to the yuan, rather than the US dollar, Mr Young said.
''This is part of China's long-term plan and consistent with the establishment of the Asian Infrastructure Bank and the Silk Road initiative, both of which bypass the G7.''
