As the global financial crisis wages on, some countries find themselves deep in the trenches of bad credit, a ruinous housing market, and a workforce facing sectoral challenges.

This is starting to ring true for China as well; and as a bad economy becomes part of China’s portfolio, the negative impact on other countries is unavoidable. The Purchasing Manager’s Index (PMI), an index used to measure manufacturing progress in economies around the world, indicates that China’s manufacturing growth has slowed in July for the fourth consecutive month. Although July’s PMI is decreasing at a smaller rate compared to earlier months, the effect that China’s slowing economy has on virtually every other economy is tangible.

The fragility of the China’s vast growth can be felt from another angle of the country’s economy: lending has been rising significantly in the past years from 122% of GDP in 2008 to 171% in 2010, according to Charlene Chu of Fitch, as reported in The Economist. When plugged into The Economist’s Macroprudential risk indicator, it forecasts a 60% chance of a credit banking crisis within the next year, indicating that although the country seems to be chugging along, there is the real possibility of a some economic episode.

With the uncertainty that comes with China’s economy at the moment, a lot of other economies dependent upon China’s economic juggernaut are also in limbo. Taiwan, a country that depends on China’s productivity to stimulate their own economy, will be greatly effected by any kind of slowdown that occurs in China.

The European debt crisis is the newest star in the world economic drama. With Chinese and Taiwanese exports marketed heavily towards Europeans and Americans,  fewer Europeans are likely to spend on electronics and other imports while trying to calm the markets and regain footing.

“The biggest effect on Taiwan from the debt crisis is in terms of exports, particularly in the realm of consumer electronics, which make up close to 40% of the country’s European exports,” says Andrew Schrage, co-owner of Money Crashers Personal Finance. “Generally speaking, exports fell by almost 22% in November 2011 in Taiwan, compared to the same time period in the previous year.”

Schrage explains that while Taiwan and China’s economies seem to be fairly intertwined, the volatility  in Taiwan’s domestic markets has been an overreaction because of the lack of exposure to the European debt crisis.

“The impact is fairly constrained to the industrial sector at the moment,” Keith Fitz-Gerald, author of Fiscal Hangover and The Upcoming Tomorrow says. “But that could change in an instant, because many Taiwanese use core Chinese production as a stepping stone to add value to products that are then, in turn, exported around the world.”

The manufacturing sector in Taiwan relies heavily on Chinese output in order to fulfill manufacturing requirements, but without the strong production that fuels the strong electronics, machinery, and petrochemical industries that accounts for 14.2% of Taiwan’s $298.6bn import business.

China, led only by Japan, provides vital components for Taiwanese companies to put towards the country’s $325.1bn export business (2011).

Along with it’s import and export business with China, Taiwan utilizes China for the majority of the island’s foreign direct investment. With a 2010 law increasing accessibility to Chinese assets by softening banking, securities, and insurance, Taiwan will be more open to Chinese banking which will allow for more fluid transfers of money from the two countries.

As the lines of communication become more open and relaxed, China and Taiwan become more interdependent both financial and economically, things become more complicated when one economy slows. In this case, Taiwan has the potential to experience an economic slowdown similar to the one China is facing.

As the world’s economic slowdown continues, China, along with other countries around the world, plan to avoid the slowdown that is sure to follow the decrease in spending and the lack of investment. While China tries to stay away from the affects of the euro debt crisis and the sluggish American economy, China and Taiwan both aim to circumvent the negative impacts by recently loosening macroeconomic policies.

The Asian Development Bank reports that the People’s Republic of China will slow in the first quarter of 2013, with the MPI increasing at much slower rates than previously expected.

“China currently purchases more than 40% of Taiwan’s exports,” Schrage says. “Therefore, the sooner China can extract itself from the European Debt Crisis and the overall world recession, the better off Taiwan will be.”

While we continue down the road of economic uncertainty, China and Taiwan can expect to experience difficulties while dealing with the affects of the slowdown, and can look forward to continued unpredictability.