Charles Dumas at Lombard Street Research says the economy is suffering a "hard landing" as a result of "years of wasteful investment". This, he says, has raised labour costs while pushing down producer prices, causing a squeeze on profits, which, together with high real interest rates, is depressing capital spending.
Concerns about the state of the economy have led to rising outward investment. Official figures showed the first fall in official foreign-exchange reserves since 1998 in the second quarter, due in part to a rise in private sector holdings of foreign currency. "Money is fleeing the country," says Mr Dumas.
But the slowdown is not entirely cyclical. It also reflects a slowdown in trend growth as the economy matures and shifts away from investment-led growth towards a more consumer-oriented economy. Yiping Huang at Barclays Capital estimates that the country's potential annual growth rate has dropped from more than 10 per cent in 2000-10 to 8 per cent now.
This matters for western investors in part because it threatens to reduce commodity demand. It will, says Michael Pettis of Peking University "inevitably result in falling prices for hard commodities". Also, the rise in China's labour costs means that the supply of ultra-cheap goods to western economies has slowed down. This makes it harder to grow quickly without causing higher inflation.
What's more, as China rebalances towards a consumer-led economy, its trade surplus is likely to fall. Because those surpluses have in recent years been reinvested into western government bonds, this would, in turn, reduce demand for those bonds. This is a long-term process, but expectations of weaker demand should be embedded in lower prices of those bonds now.
A further problem is simply one of uncertainty – about the timing of the cyclical downturn and subsequent upswing and about the scale of the rebalancing. These uncertainties are exacerbated by the possibility, says Rod Tyers of the University of Western Australia, that China could fall into a "middle income trap", in which long-term growth slows sharply as labour costs rise. And such uncertainty is usually bad for equities but good for gold.
