Throughout much of 2015, investors have been concerned over the risk that the economic slowdown in China will throw the recovery in the developed world, and the US in particular, off course. They need not be so worried. 
While in a world of free flowing capital and freely floating exchange rates a slowdown in the world’s second largest economy would be bad for everyone, in the present case the underlying cause of the slowdown means that it is actually good for the rest of the world.
This stems in part from the country having more or less reached the end of the line with expansion driven by urbanisation, which has spurred very strong growth and gains in per capita income. China’s demographic profile, reflecting the impact of 30 years of its one child policy, means it can no longer bank on moving people from the farm to the factory to fan economic growth.
Data from the US Bureau of Labor Statistics suggest that as labour began to grow scarce in both Chinese urban and rural areas, its costs started to rise. A result of this is that the supply side of the Chinese economy can no longer support the sort of expansion rates we have seen in the past. One way or the other, the country’s growth is going to slow materially.
But with a tight labour market, and without being able to expand the supply side as fast as it needs to, China is not going to be able to control their real exchange rate in quite the same way it has done previously – which has held down both US activity and inflation.
Taken together, this suggests China has started to lose its competitive advantage. This actually applies to the broader slowdown in emerging markets – whose underlying cause is largely to do with a loss of competitiveness and the inability to manage their economic demand sides by using demand from the US for domestic purposes.
None of this is actually a bad thing for the US, from the point of view of maintaining full employment without requiring large asset bubbles. Once the US can maintain full demand – and the same applies to Europe – its growth rate will be determined by how fast its supply side expands.
There is little in China’s slowdown, meanwhile, that is likely to reverse the income gains among those of its citizens who are going to keep buying consumer goods, designs and know-how from the US in the future.
This means a key support remains in place for most Western countries that are not commodity producers but are exporters of the most highly engineered technology or knowledge-intensive goods – as well as consumer goods.
Basically, there are a large number of people in China making something close to $20,000 (adjusted for purchasing power parity) a year and they will most probably continue consuming.
These incomes are likely to grow further, even if China’s total capacity grows more slowly as the farm-to-factory migration ends. And while they will grow at a slower pace, they will increase at something close to the world’s technological growth rate – and that is good enough for maintaining demand for global goods, all-in.
A separate but related point is that the current value of the US dollar just takes the greenback to where it was in about 1995 in terms of its broad, real trade- weighted index. And the currency at that point certainly did not prove much of a hindrance to the US economy, which continued to expand robustly for the next several years. So there is little reason to believe that the dollar today is in any sense too high for the US to continue growing.
In short, investors can take succour that fears of China dragging the West back into recession are unlikely to be realised, which is why we remain bullish on real economic activity both in the US and the eurozone in 2015.
Adam Purzitsky is a senior portfolio manager on the Old Mutual Absolute Return Government Bond fund. The views expressed above are his own and should not be taken as investment advice.