China Exports Trouble, Too; The overall effects of a China slowdown could easily knock more than half a percentage point off global economic growth in 2007.

Byline: Stephen Roach (Roach is chief economist at Morgan Stanley.)

China, the so-called factory of the world, has just produced its newest product--a global stock-market correction. The 9 percent plunge in the Chinese stock market late last month was a shot heard around the world. The hows and whys of this contagion speak volumes to the new and important role China now plays in driving the global economy and shaping trends in world financial markets.

There are three key pieces to this puzzle--the first being China's disproportionate impact on the global economy. While a $2.6 trillion Chinese economy amounts to only about 5 percent of overall world output, it makes up a much larger share of the growth in the global economy. In 2006, for example, China's surging economy accounted for about one third the total increase in world GDP. Moreover, during the past four years, China has been responsible for about 50 percent of the cumulative growth in economically sensitive commodities such as oil and a variety of base metals, like aluminum, copper, lead, nickel, steel, tin and zinc. And, as the world's largest saver with the biggest current account surplus, China has played a major role in injecting investable funds into financial markets already awash in excess liquidity.

Second, the Chinese leadership is now signaling that it is determined to slow its economy. That was the central message of Prime Minister Wen Jiabao's annual "Work Report of the Government," delivered at the opening of the National People's Congress on March 5, in which he underscored a targeted slowdown of Chinese GDP growth from 10.7 percent in 2006 to 8 percent in 2007. The prime minister stressed the need for China to rebalance its economy--moving from overreliance on the high-growth sectors of exports and fixed investment toward increased emphasis on a slower-growing and more sustainable consumer-led economy. This message was foreshadowed in the week ahead of the prime minister's pronouncements, when Chinese authorities moved to temper its equity bubble by encouraging state-directed sales of stocks as well as further restricting bank lending.

There can be no mistaking the global implications of the coming China slowdown. If, in fact, China hits the 8 percent growth target announced by Wen, this would represent a 25 percent deceleration from the heady pace of 2006. Adding in China's cross-border trade linkages to neighboring Asian economies, along with impacts on a resource supply chain that stretches from Australia and Canada to Brazil and ...