WITH LESS CHINESE SUPPORT, BRICS TUMBLE / THE WALL STREET JOURNAL

Heard on the Street

With Less Chinese Support, BRICs Tumble

By Justin Lahart

Updated Dec. 30, 2014 9:46 p.m. ET

Everybody knew China couldn’t expand like gangbusters forever. What is so surprising is how many investors seem to have been unprepared for what would happen when the slowdown arrived.

For a decade, China has been a linchpin for a lot of people’s views on where the global economy was heading. As this emerging market legged its way into the developed world, it would consume an ever-greater share of raw materials to meet its infrastructure needs and accommodate its rising middle class. That would push demand, and prices, for commodities higher, providing a powerful boost for countries like Russia and Brazil, pushing their stature higher, too.

This all fit nicely with the idea put forth by Goldman Sachs economist Jim O’Neill in 2001 that global economic power was shifting toward Brazil, Russia, India and China, or the BRICs. And for much of the past 10 years that view was right. Investors and companies that bought into the BRIC growth story (in practice the BRC growth story; other than supplying a vowel, India didn’t play a big role) profited.

But over the past year, it has become clear that China’s economy can no longer sustain the pace needed to push the story along. And, lately, the wheels have started to come off. Prices for commodities are down sharply, Brazilian stocks are at five-year lows and Russia is in crisis.

These problems may have only just begun.

China’s official statistics will likely show gross-domestic-product growth of about 7.5% this year, or about what the government targeted. But investment spending, the driving force behind Chinese demand for raw materials and heavy equipment, has likely been increasing slower. That is a consequence of Beijing’s recognition that this has come to represent a larger share of the economy than the country can productively absorb.

Indeed, investment already represented a major portion of China’s economy before the financial crisis. As the country tried to keep growth aloft through the global recession that followed, investment’s share of GDP went higher still, rising to 48% in 2009 from 42% in 2007, according to the World Bank. Nor did it retreat afterward: In 2013, investment was 49% of GDP, compared with about 20% for advanced economies like the U.S., Japan and Germany.

With China likely to target GDP growth of about 7% next year, with slower growth in the years to follow, the country’s period of breakneck investment has likely come to an end. And anybody who was geared for it to continue could be in trouble.

As is evident already, the effect is particularly pernicious in the energy arena. Supply developed to meet rising demand can’t be simply turned off because that demand isn’t arriving as fast as anticipated. This has contributed to the pressure on oil prices and isn’t likely to let up soon.

Oil-exporting nations like Venezuela, Russia and Iran will face pressure for a while, along with much of the energy sector.

The same dynamic is at work for other commodities. This will hurt the economies not just of developing commodity-producing countries like Brazil, but developed counterparts like Australia and Canada. An array of companies operating in the commodities arena, from steelmakers to copper miners, also are at risk.

And then there are all the companies that have been helping China build up its infrastructure and invested heavily there. Caterpillar employed about 25,670 workers in Asia at the end of last year, compared with about 7,499 in 2007, while in the U.S. its payroll hardly budged. For such firms, the transition away from China-led growth will be tricky to manage.

It is still early going; nobody can be sure how quickly China will adjust or how far the BRIC thesis will unravel. The only certainty: It is going to be messy.