Image: Jim Jubak

Jim Jubak

Let's be honest with ourselves, OK?

China is all that really matters for global stock markets.

If China's economy slows more than expected in 2012 -- and grows at something significantly less than the 8.2% to 8.5% now expected -- it won't really matter what the eurozone nations do about the Greek debt crisis or whether the United States stimulates its economy. In 2012, growth in the world economy will slip far enough to throw the developed world into something very close to a recession, and global stock markets will suffer through yet another painful bear market.

In the short term -- let's say for October, November and maybe December -- what the United States and the eurozone do matters.

If the United States, through some currently unimaginable political alignment, were to implement a significant program of government spending on infrastructure and tax cuts to stimulate the domestic economy, global stock markets would rally.

If the eurozone countries manage to put together some credible package that kicks the euro debt crisis down the road into December and maybe into 2012, then global stock markets would rally.

But the rally wouldn't last long if economic numbers and anecdotal news reports fed into worries about slower-than-expected growth in China.

On the other hand, if the evidence started to point away from the possibility of slower-than-expected growth in China, then a temporary rally on good news from the United States and the eurozone could turn into a lasting rally in global markets.

And I think that China is so central to global stock markets right now that good news on China's growth in 2012 would produce a rally in global stock markets -- and even to a degree in U.S. and European stocks -- even if the U.S. didn't do anything to stimulate growth and European nations wound up with a Greek default. (Although under that scenario, I'd still rather be underweight U.S. and European markets.)

If all this is true, then the big question is, How real are current worries that China will slow more than is now expected in 2012?

China is slowing down

There's no doubt that China's growth is slower than it was. China's gross domestic product grew at a 10.3% annual rate in 2010. In the first quarter of 2011 that growth rate dropped to 9.7%, and in the second quarter it declined to 9.5%. Economic forecasts call for a further drop to anywhere from 9.0% to 9.3% for the third quarter.

This is exactly the kind of controlled slowdown that China's government has been hoping to engineer in order to control inflation -- which seems to have peaked at 6.5% in July -- and to reduce speculation in the real-estate market. It would put China on a path for the 8.3% to 8.5% growth that the consensus is looking for as a bottom to China's growth rate.

Just for the record, I agree with this consensus about China's growth in 2012. But I also recognize that markets are on edge about China. So what are they worried about?

3 worries of China investors

First, even in the best of economic worlds, bringing an economy this big on a predictable glide path is extremely difficult. Most of the time governments overshoot, loosening too much when they're trying to stimulate or tightening too much when they're trying to slow growth. The latter is the worry in China's case.

Second, this isn't the best of all economic worlds. It's unlikely that China's government planners figured a global economic slowdown into their calculations when they were putting in place plans to raise benchmark interest rates or require higher down payments for third homes.

Third, China's official statistics are like those of most governments only more so -- biased to make current conditions seem better than they are and often deeply contradictory. What if statistics and policies don't really reflect or address what's going on in the economy?

Let's take those worries one at a time.