Is China the World's Ticking Time Bomb?

NEW YORK (TheStreet) -- China has been a major driver of the world economy for years, but now the dragon may have become a global time bomb.

For many years, Americans have been watching China's extraordinary GDP expansion.

During the first year of the financial crisis, 2008, China's GDP growth slowed to 9.6% from 14.2% in 2007. Here in America, GDP actually contracted by 0.03% in 2008.

With expectations that China's 2013 GDP expanded by only 7.5%, investors are concerned about the global impact of the slowdown -- particularly if 2014 turns out to be worse. The Shanghai Composite Index declined 6.7% during 2013. With other economies counting on China as a consumer of their manufactured goods and raw materials, the thought of an economic "domino effect" is worrisome.

During the week ending on Friday, we saw how the economic slowdown in China is now becoming as frightening for the Europeans as it is for the Chinese. On Jan. 6, we learned that the HSBC China Services Business Activity Index fell to 50.9 in December from November's 52.5. The HSBC Composite Output Index declined to 51.2 in December from November's 52.3.

On Thursday, share prices for European mining stocks fell after it was disclosed that China's National Bureau of Statistics reported that the "official" manufacturing PMI fell to 51.0 in December from November's 51.4. Economists were expecting a less-significant drop to 51.2. The HSBC China Manufacturing PMI declined to 50.5 from November's 50.8, consistent with economists' expectations. A reading below 50 indicates contraction.

Last week also brought us a report from economist Dominic Wilson at Goldman Sachs. Wilson explained that there are still significant risks from the buildup of credit imbalances in China, which had been discussed in a July 31 Goldman report, "The China credit conundrum: Risks, paths and implications." Nominal credit growth in China still exceeds nominal GDP growth. Although the difference between the two is expected to decline in 2014, nominal GDP growth is not expected to exceed nominal credit growth, as would be necessary to stop debt-to-GDP ratios from climbing higher. China's big challenge is to maintain the pace of economic growth, while deflating the nation's credit bubble.

The consequences for the global economy which would result from an economic slump in China would first be felt in Australia, which counts on China as its most significant export customer.