Bank of America/Merrill Lynch ​

The Chinese economy is looking pretty shaky these days. Profits of big industrial companies shrank 0.6% in August versus the previous year, after growing 13.5% in July. And recent data suggest it’s getting harder to stimulate the economy through cheap money. If the China slowdown keeps up, it could be disastrous for countries that sell metal and energy to China.

As the Middle Kingdom’s markets opened up, spurred by its joining the WTO in 2001, an influx of wealth turned villages into cities and cities into metropolises. Since China lacked the natural resources to build and power these new cities, mining sources like Australia and Brazil, and oil-wealthy Saudi Arabia, benefited handsomely, as you can see (charts hat tip to Bloomberg economist Michael McDonough).

Not all of those nations are selling China resources. Japan and South Korea (as well as Singapore and Malaysia) run a tidy business exporting machine tools and electronics. While the electronics business probably would be well insulated from a Chinese slowdown, machine tool exports would suffer if China were to stop building so fast.

Things look grimmer still for oil- and ore-rich countries like Mongolia, Turkmenistan, and Sierra Leone (particularly the latter, which is currently battling an Ebola outbreak of unprecedented virulence).

But though a sharp Chinese slowdown sounds scary, many countries actually would benefit. To understand why, it’s important to get how China has managed to grow so fast for so long.

The secret lies in its economic model, which creates growth mainly through building and manufacturing goods to export. The Chinese government has subsidized this growth by rigging interest rates to make loans for (mostly state-owned) companies cheap, transferring wealth from savers to borrowers. (Japan used a similar model; for a deeper understanding, see this post.) One way to observe this is to compare income and GDP; even though wages have risen quickly, GDP has grown even faster—meaning the state is taking a bigger cut of China’s output than households are. Worse, because the government keeps the capital account closed, households have lousy investment options.

The constant struggle to preserve wealth inclines many households to save—typically for things like medical expenses, education, and retirement—rather than consume. This is why at 34%, China has among the lowest consumption rates in the world.

Big GDP drops typically kill jobs, cause social instability, and drain demand out of the global economy. Not likely in China’s case, as Michael Pettis, a finance professor at Peking University, explained in a recent note.

A gradual slowdown in China, he said, would help boost consumption’s share of GDP, shifting profit away from industry and toward the more labor-intensive service sector. This “rebalancing” would wipe out the hidden transfer from households to industrial companies, which Pettis called “the functional equivalent of an income tax cut, and probably a fairly progressive income tax cut at that.”

This would boost Chinese demand for food, benefiting agricultural exporters in the US and Brazil. And the loss of “subsidized” loans to fund manufacturing would pare away some of China’s export competitiveness—a boon for manufacturers in places like Mexico and Southeast Asia.

There’s a big caveat to all this, though: a housing market collapse. The lack of investment options means that Chinese families have sunk a huge portion of their wealth into homes. A severe dive in prices would leave those households feeling poorer—and, therefore, consuming less.