Gary Shilling says China "will grow old before she grows rich." (Photo: AP)

Turmoil in China’s stock market may be roiling markets around the world, but China’s role in the global economy and global markets is something quite different, according to Gary Shilling, president of an economic and consulting firm that bears his name.

“China is really fading from the global scene as a prime mover,” he said.

China now is a lot like Japan was in the 1980s, says Shilling. Its housing bubble has collapsed, a huge run-up in stocks has reversed, and its population is declining. “China won’t disappear, but as far as being the center of attention on the global stage, that is probably over,” says Shilling.

Global markets are just coming to realize that China’s role in the global economy – where it’s still ranked No. 2 – is shrinking, says Shilling, noting in an interview with ThinkAdvisor that China’s ranking mostly reflects high income due to its huge population. 

In the meantime, markets are still reacting to revelations that China’s economy is a lot weaker than expected and the emperor really has no clothes, Shilling says.

That might explain why global stock markets plummeted today after Chinese stocks plunged 7%, triggering a trading halt for the second time this week, and why oil prices slid to a 12-year low just above $32 a barrel and copper prices slid to a seven-year low.

“A lot of investors really thought China was independently growing and didn’t acknowledge the reality that its economy was still export led,” says Shilling. This, despite government policies to pivot the economy to one driven by consumer demand, including multiple devaluations, interest rate cuts and support for equities markets.

In the latest economic data reports, Chinese exports fell for the fifth straight month, down almost 7% from the previous year, despite multiple devaluations of its currency, and imports tumbled almost 9%, down for the thirteenth month in a row.

China’s government has been targeting 7% GDP growth but that is unlikely to be achieved, even if it’s reported that way, says Shilling, who doesn’t believe the official numbers.

China’s “glory days of double-digit growth through exports and debt-driven infrastructure spending are over,” Shilling writes in his latest outlook report.

“The international shock and awe resulting from globalization and the shift of manufacturing from North America and Europe to China as well as other emerging economies is essentially finished. China is the only major country in modern times that will grow old before she grows rich.”

In the meantime, Shilling expects commodity prices will continue to decline as a result of China’s slowing economy and more instances of China stealing Western technology in order to stay competitive. 

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