China aims to be a stabilizing force as global financial markets gyrate

The receding threat of a trade war has given investors a chance to re-focus attention on the global economy, and this has brought a spate of worrying news about the pace of growth around the world.

Back in late April, a series of surveys of euro-area economic sentiment showed solid gains: that’s the spring when we ordinarily start to see the effects of the new tax cuts and other stimulus kicking in.

The pace of the recovery continued unabated this spring: if you look at other data, like corporate profits, you see expansion well into the double digits.

Anecdotal reports from China, even among export businesses, suggest that exporters are well-prepared to increase production, at least in the short term. That’s important because the export-driven high-growth model that took shape in the 1980s and 1990s, before the global financial crisis, was one of the key drivers of China’s past growth rate.

Such robust growth in export markets may well lead to significant overall growth, perhaps even at a bit above the Chinese target of 6.5 percent. But it also raises the probability that the economy, after years of rapid expansion, will suddenly begin to slow substantially.

And if China should end up with lower overall growth, its increasing role as a global growth engine may well raise new worries about the implications for the world economy.

For instance, if China’s troubles translate into a pullback in investment that lasts for a year or more, or slowdowns in growth of other high-growth emerging markets, it would really do serious damage to world growth. It would also, very probably, cause financial volatility to skyrocket.

But that’s not what’s occurring today. At least for now, China’s slowdown is contained. And much of what’s wrong with the Chinese economy is temporary, brought on in large part by a sudden housing market downturn that has forced China’s leaders to scale back expectations and loosen the reins on the economy.

It’s noteworthy that, while every poll of Chinese households shows rising anxiety about the macroeconomy, the Chinese stock market is humming along nicely. (That’s right: nobody’s panicking about a slowdown.)

We can’t know how severe the slowdown will be, but we can say this: If, over the next year or two, China’s slowdown gathers steam, it will probably drag down other economies quite substantially.