A Chinese Economic Melt Down Like The 2008 Melt Down In The USA?

CHINA

From There to Here

China has become the full-throated defender of globalization in recent years.

At the recent Fortune Global Forum in Guangzhou, for example, Vice Premier Wang Yang reiterated China’s support for open markets and opposition to protectionism, Bloomberg reported.

Free marketeers like the editors at the Economist have responded by praising Chinese President Xi Jinping and his administration. “Fears that Xi Jinping is bad for private enterprise are overblown,” read an October headline in the British magazine.

But people worldwide still need to be watchful when their fates in the global economy are hitched to a country of more than 1.3 billion people.

The International Monetary Fund recently released a report that said Chinese local governments, businesses and individuals were accumulating alarming levels of debt that could set the stage for a crisis resembling the 2008 Wall Street meltdown.

Some of the IMF’s findings should make anyone who remembers 2008 leery. For instance, staff at the People’s Bank of China has remained the same for 10 years while the country’s financial sector has doubled in size.

Worryingly, the bank didn’t see a problem. “Our financial system has a relatively strong capability to fend off risks,” bank officials told Caixin, an English-language Chinese business news website.

Basing its findings on stress tests of Chinese banks, the IMF suggested China focus less on growth, which leads folks to borrow, and instead enact financial reforms to prevent risky lending and force banks to hold more money in case of a crisis.

But, as CNBC explained, China needs the debt to keep flowing in order to maintain its current annual growth rates of more than 6 percent. Otherwise, the prosperity that has been revolutionizing the world’s most populous country in recent decades could stall, triggering instability. Growth might fall by as much as half if Beijing orders creditors to turn off the tap, the news service said.

Xi might have a plan. At the Communist Party’s national congress in October – when members elevated him to a status previously enjoyed only by Mao Zedong and Deng Xiaoping – Xi stopped short of dictating a growth target, unlike his illustrious predecessors. That gives him wiggle room to cool the economy down if necessary.

A South China Morning Post columnist argued that naysayers are often wrong about the Chinese economy. The country is ably navigating the challenges of shifting from an export-driven economy to a consumerist model, he argued. For instance, China is investing heavily in clean tech to offset cuts in polluting industries.

Nobody should be staying awake at night worrying about a Chinese recession. But political debates in Washington might be the least of the world’s problems right now.