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China Brakes, World Slows

Here's a trend few investors would have predicted even a few short years ago: China just thinks about slowing its torrid economic growth, and the world's financial markets go into a tailspin.

Case in point: On April 28, Chinese banks reported they would go on a three-day lending moratorium on government orders. The same day, Reuters ran an interview with the premier of China, who promised very strong action to rein in excessive growth. In the U.S., shares of companies selling iron ore, aluminum, nickel and copper to China tanked on fears that the Chinese were about to stop buying the raw materials that fuel their economy.

The damage didn't stop there. The next day, shares of shipping companies sank on fears that a cooling Chinese economy would have less need for the services of oil tankers, container ships and bulk freighters.

That's a lot of global clout for an economy that is about one-tenth the size of the U.S. economy. If you believe the official figures, U.S. GDP is about $11.4 trillion in current dollars. China's GDP is about $1.4 trillion in U.S. dollars.

Why do the words of Wen Jiabao, the current Chinese premier and hardly a household name even in his own country, carry more weight in the financial markets than those of Federal Reserve Chairman Alan Greenspan?

The simplistic answer is sheer size. You probably have your own favorite tidbit about how even a minor shift in the individual behavior of China's estimated 1.3 billion people can change the global economy. Here's my current favorite from an estimate by Chicago agricultural forecasting firm AgResource: If every person in China consumed one more tablespoon of soybean oil annually, world trade in soybean oil would double.

A Make-or-Break Influence

So how did China become the pivot point in the world economic and financial systems? The answer is leverage. The internal structure of the Chinese economy has combined with current global economic conditions to give China even more global impact than its huge population already warrants.

I can count five ways that leverage gives China a make-or-break influence over the global economy.

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