Is China’s Role as Global Growth Engine Finally Over?

Investors are worried that China’s decade-long run as the world's growth engine may be over— along with unprecedented demand for commodities and ultra-cheap labor and parts for manufacturers.

Stocks fell Monday partly on such fears, while traders dumped assets such as copper and shares of Caterpillar.

Flag of the People's Republic of China
Kick Images | Photodisc | Getty Images
Flag of the People's Republic of China

The reaction came after China cut its GDP target for this year to 7.5 percent, which would represent the slowest economic growth in eight years. That compares to an average growth rate of 11 percent over the last decade.

“The golden age of infrastructure investment is behind us now,” wrote Dong Tao, Credit Suisse chief economist for the Asia region, in a report that helped fuel the selling after Premier Wen Jiabao announced the lower growth forecast. “The golden age of the housing boom is behind us now” too, along with the boom in exports and tailwind from policy stimulus, said Tao.

The iShares FTSE/Xinhua China 25 ETF , which has more than doubled over its eight-year existence, got slammed by almost 3 percent. But derivative plays off the China growth engine got hit as well, including the Materials SPDR ETF and the Energy SPDR ETF.

In the last 10 years, Caterpillar’s stock has more than quadrupled on sales of earth movers and construction equipment to China. The Energy SPDR and Materials SPDR have climbed 170 percent and 60 percent respectively.

“The China building explosion was, and is, unsustainable and appears to be hitting a wall,” said Steve Cortes of Veracruz LLC. “The straw breaking the back of the breakneck Chinese expansion was Europe's slowdown as the country is still dangerously dependent on exports.”

China consumes an amazing amount of the world commodities, representing 62 percent of the world’s market share in iron ore and 59 percent of the soybean market, according to Credit Suisse. It buys 29 percent of the world’s copper , almost 30 percent of “container lifts,” and 11 percent of all oil, according to the research firm.

And at the same time, as spending on its own economic buildout peaks, its role as the so-called world’s factory is becoming more difficult to fulfill.

“China’s competitiveness has been weakened because of surging salaries among the migrant workers and continued appreciation of the RMB (Renminbi) ,” said Tao in the Credit Suisse report.

Shares of technology companies were also among the hardest hit Monday on fears that their costs of manufacturing could go up. Shares of Apple, which makes its iPhones and iPads there, had one of their worst days of the young year.

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