Investors worried about Ukraine miss the real problem: China – by Eric Reguly (Globe and Mail – March 22, 2014)

The Globe and Mail is Canada’s national newspaper with the second largest broadsheet circulation in the country. It has enormous influence on Canada’s political and business elite.

Rome — What’s scarier if you are an investor with an over-the-horizon view: The Ukraine crisis or the economic slowdown in China?

Blinded by the media glare, you would probably pick the Ukraine crisis, which began last month with the ousting of the country’s corrupt, pro-Moscow president and may have reached its climax this week with Russia’s annexation of Crimea – Vladimir Putin’s Anschluss moment.

But maybe the climax has yet to come. Investors in North America and the European Union are duly worried that the sanctions designed to punish Mr. Putin and his cronies will evolve into full-blown trade, investment and banking sanctions that would severely damage the Russian economy, the world’s eighth largest. Broad, punitive sanctions could in turn trigger retaliatory sanctions that could damage the fragile EU economy (less so the U.S. economy).

We got a hint of the possible mess to come on Friday, when Russian Prime Minister Dmitry Medvedev threatened to raise the price that Ukraine pays for natural gas and sue the country for $11-billion (U.S.) in arrears to Gazprom, the Russian state gas exporter. Russia supplies about a quarter of the EU’s gas. Imagine if it were to reduce or eliminate supplies to the EU. There would be an instant energy crisis, with both sides racing each other into recession.

While sanctions can work well – Iran comes to mind – they tend to work less well when the sparring economies are closely linked, as Russia and the EU are. Killer sanctions are unlikely, although all bets are off if a shooting war starts inside Ukraine.

But as Ukraine dominates the headlines, it is the slow evaporation of China’s heady growth rates that is the real story. What happens in Ukraine matters in the short term. What happens in China matters a lot more in the short, medium and long terms. More reports and evidence come almost every day that the world’s second-largest economy is no longer pursuing growth at any cost. In 2007, the year before the Lehman Bros.-inspired financial crisis, China’s gross domestic product expanded by 14 per cent. Last year it was 7.7 per cent. This week, Goldman Sachs lowered its 2014 China GDP forecast to 7.3 per cent from 7.6 per cent.

Even that figure may be optimistic. Some economists think this year’s true growth figure will be 6.5 per cent, although any prediction is a mix of genuine data, extrapolation and voodoo. As good an indication of any comes from the Merrill Lynch-Bank of America China LEAP index.

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