Ripple effect of China's slowdown

While the world's financial recovery could be clouded, there are also reasons for optimism

While China's 7.3 GDP growth figure for the third quarter is higher than the consensus expectation of 7.2 percent, it indicates the slowest pace of growth since the 2007-09 global financial crisis.

It is the second consecutive quarter in which Chinese GDP growth lagged 7.5 percent, a benchmark that had been widely considered as the lowest level that the Chinese government was willing to accept.

What remains unclear is whether such a slowdown reflects a fundamental shift in Chinese leaders' approach of putting more emphasis on the quality instead of the speed of Chinese economic growth.

Alternatively, it may be just a transition through which the many mini-stimulus packages and targeted-stimulus packages remain yet to take effect and boost Chinese GDP.

On one hand, a slowdown in Chinese economic growth seems inevitable and even necessary, to help the country successfully manage its transition from an investment-driven growth model to a consumption-driven model. After all, a large fraction of its economic growth has been achieved by pouring increasing investment into the economy, which provides little support to eventual household consumption, and little room for the marketplace to play a greater role in the economy. Hence, some argue that China's growth has to slow down even further if China is to succeed in its target of reforming its economic growth model.

While correct in principle, a sharp slowdown brings considerable concern not only to the government, but also leaders worldwide. Commodities prices, which heavily rely on the speed of global economic growth, have already felt the pinch and dropped across the board since the start of this year. Related to this, the currency and equities markets of some countries rich in natural resources, such as Australia and Canada, have also been experiencing pressure.

A slowdown in China, even a moderate one, casts greater clouds on the pace and even likelihood of a healthy and sustainable global recovery from the fallout of the 2007-09 global financial crisis. China contributed more than one-third of global economic growth at certain points since 2009, and has become the major force in driving the global economy out of recession.

Such heroic efforts did not come without a price and consequences. After the 4 trillion yuan ($654 billion, 514 billion euros) stimulus package in 2009 and the accompanying tremendous increase in Chinese credit supply, China is now dealing with the aftermath. Bubbles in the real estate sector and many other speculative areas, worsening overcapacity problems in almost all leading industries, and ballooning leverage and debt problem at both corporations and local governments, are now all posing challenges for the next steps in economic reform.

Much of the rest of the world, however, faces a different, if not opposite challenge. Europe and Japan, the other two major economic forces other than the United States among the developed economies, are both struggling with lackluster economic growth and aging populations. A contracting labor force and decreasing demand have forced companies in Europe and Japan to turn their attention to the huge and booming market in China. In addition, European companies have made considerable foreign direct investment in China in order to operate directly in the world's most populous market.

Such bets have played out nicely and brought handsome investment returns. Now that China's economy is slowing down and labor is not as cheap and attractive as it was a decade ago, what will the impact be for European companies and economies, many may wonder.

It should come as no surprise that the European economy will be unavoidably affected by the slowdown in China. After all, China now ranks among the top trade partners for both Europe and Japan, and they can ill afford a major slowdown in their major trade partner in this ever-increasingly integrated global economy.

Worse, some have started worrying about a negative-feedback spiral down scenario, one in which the slowdown in China may trigger a slowdown in economic recovery in other major world economies, which eventually feed their way back to hurt China's exports and economic growth.

I am not as pessimistic.

For one, despite the slowdown in Chinese economic growth, an increasingly large middle-class generation is taking shape in China. With increasing wealth and more diverse interests and demand, this newer generation of consumers will become increasingly attractive to foreign companies that excel in specialized areas and higher-end products.

It used to be that only the very top end luxury products from Europe, such as Louis Vuitton and Gucci, were favored by Chinese consumers for conspicuous consumption or network gifting. Recently, more European brands and lifestyle products, ranging from French wine and Scottish whiskey to Swiss-made watches, have become fashionable in China, and their exports have surged.

Further, with the US Federal Reserve becoming increasingly confident of the economic recovery in the US, the largest world economy, at least for the moment, will gradually step out of the doldrums of the past few years and contribute its own share to global economic growth at last.

Finally, many more, albeit smaller emerging economies, such as the newly coined MINTS countries, Mexico, Indonesia, Nigeria, Turkey, and South Korea, have gradually shown their vitality in helping China grow the size of the entire group of emerging economies, which will make the global economic recovery more balanced, and therefore sustainable.