Chinaâ€™s Fall, Not Rise, Is the Real Global Threat: View - Bloomberg Chinaâ€™s Fall, Not Rise, Is the Real Global Threat: View Chinaâ€™s rise to global prominence has long preoccupied the leaders of the developed world. They should be more concerned about what happens if the countryâ€™s growth falters. With its combination of cheap labor, easy money, undervalued currency, heavy investment in manufacturing and focus on exports, the nation of 1.3 billion has built an impressive economic engine. From 2008 through 2010, China contributed more than 40 percent of the worldâ€™s growth. But the Chinese model has its limits, and that has far- reaching consequences for the U.S. and Europe, both of which are increasingly dependent on China. The countryâ€™s share of global exports already exceeds 10 percent, larger than that of Japan at its peak in 1986. Barring some miracle, Chinese exporters canâ€™t expand their market share much further without lowering prices and wiping out their own profits, research by economists at the International Monetary Fund suggests. Chinaâ€™s dependence on exports also makes it highly vulnerable to slowing growth in the developed world, and to rising trade tensions: The U.S. Senate today began debating a bill that could ultimately lead to punitive tariffs on Chinese imports in retaliation for undervaluing its currency. Meanwhile, economic stress is mounting at home. Labor costs are surging as the supply of young, capable factory workers wanes and living conditions rise along with expectations of better wages. Cheap and abundant credit has driven over- investment and pushed up real-estate prices to levels many families canâ€™t afford, adding to social tensions and possibly setting the country up for a bust. Chinaâ€™s approach to managing its exchange rate is fueling inflation, which government figures put at 6.2 percent in August. Well Aware Chinese officials are well aware of the problems their country faces. As Premier Wen Jiabao famously put it back in 2007, the countryâ€™s growth is â€œunstable, unbalanced, uncoordinated and unsustainable.â€ The governmentâ€™s aim, as laid out in its latest five-year plan, is to move away from reliance on exports and spur Chinese consumers to spend more -- an outcome that would benefit the entire global economy by boosting Chinaâ€™s demand for other countriesâ€™ goods and easing the trade imbalances that have contributed to the developed worldâ€™s debt troubles. The implementation will be tricky. Getting people to spend requires the Chinese government to eliminate many of the subsidies -- including cheap labor, low interest rates and an undervalued currency -- that have fueled growth so far. Consumers need more income, so companies will have to pay their workers more. Consumers also need a stronger currency to boost their buying power, so exporters will lose some of their competitive edge. Savers need to earn a high enough return to guarantee their retirements, so banksâ€™ and companiesâ€™ borrowing costs will rise. Unprofitable Industry As a result, vast swaths of Chinese industry could be rendered unprofitable. Bad loans could force the government to step in and recapitalize banks. Fixed investment, which makes up 46 percent of the Chinese economy compared with only 12 percent in the U.S., could fall sharply, undermining the employment growth needed to boost spending. In short, Chinaâ€™s export-driven model could fall apart before consumers are able to pick up the slack. In such a crisis, Chinaâ€™s economic weight would become a liability. The IMF estimates that the impact of Chinese demand on the worldâ€™s largest economies has more than doubled over the past decade. A deteriorating outlook for Chinese imports could send commodity prices plummeting, precipitating heavy losses for investors and risking financial contagion. Chinaâ€™s Fate There is very little the leaders of the developed world can do to influence Chinaâ€™s fate. Trade wars, such as the one the U.S. Senate may be on the verge of launching, will only make the situation worse. Instead, Europe and the U.S. need to focus on limiting their own vulnerability: The longer they keep growing at rates not far above zero, the more likely it is that an unexpected shock -- such as a Chinese crisis -- will tip them back into a recession. In Europe, leaders must move quickly to solve a deepening debt crisis and deal with insolvent banks. In the U.S., they need to take radical measures, including pumping more federal stimulus money into a stalled economy and providing debt relief to underwater homeowners, to clear the way for renewed growth. Over the long term, leaders on both continents need credible plans to stop debt from growing faster than the underlying economies. Prudence requires being prepared for contingencies such as a bad outcome for China. If we donâ€™t solve our own problems soon, we wonâ€™t be ready.