How much will China's slowdown hurt us?

David Cameron with Chinese President Xi Jinping at Chequers last October. Credit: PA

How embarrassing is it for George Osborne and David Cameron that their big foreign policy initiative of last year was to woo China and its cash, at a time when China is being transformed from the motor of global growth and prosperity to the source of damaging instability?

This morning there was confirmation - if any were needed - that China last year grew at its slowest rate since 1990, and that the deceleration continued in the last three months of the year.

Its lessened annual growth rate of 6.9% may look spectacularly fast compared with ours. But the crocked mature economies of Europe are not useful comparators.

The point is that even on official figures that few believe, China's growth rate has fallen by more than 30% since 2008. And its underlying growth rate is probably nearer 4%.

In some parts of China, such as the rust belt on the border of North Korea, where I was filming recently (for another broadcaster - ahem), there is probably no growth at all: there are derelict factories everywhere, the detritus of ill-judged excessive expansion.

As I said on last night's News at Ten, this matters to all of us at a time when China is the world's second biggest economy, and on one important measure its biggest.

Its slowdown, the lessening in its appetite, is the big reason why the price of oil and commodities has collapsed.

In the UK, we are painfully aware that China's huge excess capacity in heavy industry, especially steel, is why our steel businesses are in such deep trouble.

It's why huge countries and companies - from Brazil, to Russia, to swathes of Africa and the Middle East, to Asia - are in trouble.

Some of these businesses and nations will struggle to pay their debts, with damaging consequences for the value of our savings and pensions, and the health of the banking system.

China invested in construction, property and infrastructure with developers among the heaviest borrowers in the Asian high-yield sector. Credit: Reuters

The collapsing oil price is having an unpredictable and potentially troubling impact on the balance of power in the Arab world.

Also, the reversal in the rising prosperity of much of Africa will worsen the migration crisis, as noted yesterday by Klaus Schwab, the founder of the World Economic Forum (where I am headed today).

In Britain, we are less directly exposed to China than - say - Germany, which is no longer coining it from selling cars and industrial plant to the Chinese. But a slowing global economy makes the UK more riskily reliant on shopping and domestic investment.

And our twin current account and government deficits - on our dealings with the rest of the world and in the public sector - will remain worryingly intractable.

In a best case, fixing our economy becomes harder. In a worst, we could be staring recession in the face again, sooner than we would like.

So what is happening in China is the big economic event in the world, as it has been since the great boom began in 1998.

And what should cause us serious concern is that the worst is not over.

The fundamental cause of its current instability is that when the banking crash tipped the world into recession in 2008, and we stopped buying Chinese exports, Beijing tried to keep the show on the world by encouraging the mother of all lending and investing sprees.

China invested - in industrial plant, property, housing, road, rail, airports, bridges and infrastructure - at a rate faster even than Japan during its lethal 1980s boom years.

The indebtedness of China has increased by more than 100% of its national income or GDP since 2007, a rate of rising debts faster even than the binge that led to our great crash of just a few years ago.

Beijing knows this can't go on. But what should worry us is that it has not yet found a way to end its addiction to debt-fuelled growth: the economy has slowed, but debts are still growing faster than national income.

The world got much richer during China's unprecedented years of expansion. We will all now pay a price as China's miracle turns into something else, possibly even a nightmare of crash, political volatility and social strife.

We just don't know how big that price will turn out to be.