Video: Implications of China's economic slowdown

Interview of Nariman Behravesh on the implications of China's economic slowdown.

Interview Transcript

What is the outlook for China's economy?

China is in a fair amount of trouble. Its growth has decelerated quite dramatically over the last few years. And they'll be lucky to get 6.5% this year, next year, even in the year after.

The problem is that China-partly in response to the great recession, the financial crisis-pumped up a lot of credit, as it were, put a lot of credit into the economy. A lot of that was used to finance real estate, which everybody seems to know about all these empty buildings. But much more troubling is the fact that it financed a lot of excess capacity in key industries, like chemicals, like steel, like automotive, even mining.

And here are a few interesting statistics. The profits of state-owned enterprises have plummeted in the last few years-because all these companies that have been created in all these sectors aren't making any money; they're losing money.

So, for example, in the mining industry, estimates are that 90% of the companies are in the red. In automotive, something like the supplier industry is only operating at a capacity utilization rate of 60%. These are terrible numbers.

So, China has to figure out how to deal with this. And so far, the response of the government has not been very dramatic. It hasn't been very aggressive. But our best guess is, at some point, they'll get worried about the prospects of social unrest that come with slow growth and will do something fairly dramatic in terms of more stimulus.

What are the implications for the global economy from China's slowdown?

China's slowdown has the biggest implications for two kinds of countries. The first are the commodity exporting countries. These are the countries exporting huge amounts of raw materials to China during the boom years. Well, that's pretty much gone away, or going away. So, in terms of their export earnings of countries like South Africa-or others, Chile is another one-these are pretty negative.

The other group of countries, of course, are the countries in Asia. And China plays an important role in the supply chain and the supply networks of a lot of the Asian economies, like Korea, for example, and others. And any slowdown in China has ripple effects across Asia. So, Asian economies are the other ones that will be hurt by the slowdown in China.

Our best guess is that China's growth will slow down, eventually, to around 4% on some sustainable basis. But that's going to take a little bit of time.

Nariman Behravesh is Chief Economist, IHS