re: Tracking the Shanghai & Shenzhen markets: AFTY nears its August trough

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China is such an economic colossus that a few percentage points shaved off its growth can have enormous effects. Consider the numbers: From 2007 to 2011, China’s annual economic growth averaged 10.6 percent, says the International Monetary Fund. For the next three years, the average was 7.6 percent. The figure for 2015 is widely estimated at 6.9 percent. The fallout is now spreading.

Although China has a massive trade surplus, it’s also a huge importer — almost $2 trillion worth in 2014 — and so its slackening demand is a major cause of the global crash in oil and commodity prices.

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Without predicting this sort of calamity, some observers see the present slowdown as the start of a long descent. “China is going to stagnate,” says Derek Scissors, a China expert at the American Enterprise Institute. That doesn’t mean a collapse, he says, but rather a slow drift to growth rates of 1 percent to 2 percent. These would equal today’s American and European rates, even though China won’t have caught up with U.S. and European living standards.

China faces two problems, says Scissors, that dampen economic growth: high debts and an aging and stagnant population. The older population will shrink the size of the labor force; fewer workers will crimp the economy’s output. (Between 2015 and 2040, China’s working-age population — ages 15 to 64 — will fall by about 14 percent, projects the U.S. Census Bureau. That’s nearly 140 million people.)

Meanwhile, debt — for households, businesses and government — soared by $20 trillion in the past eight years, says Scissors. Debt service will squeeze borrowers’ ability to spend and propel economic growth.

In theory, more innovation could overcome both problems. But Scissors dislikes China’s prospects, because the Communist Party won’t fully embrace free markets and doesn’t protect “intellectual property” (patents, copyrights: the fruits of innovation).

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