http://commons.wikimedia.org/wiki/File:20090529_Great_Wall_8185.jpg

Is China headed for disaster?

Newly released figures show that growth in China has slowed considerably. Deflation is setting in, according to the figures, due to weaker factory production and debt. Growth for 2015 is expected to be the weakest in 25 years.

Could this be a sign of China headed for economic disaster? Or is China is headed for economic stability instead?

Disaster?

According to The New York Times, Former Treasury secretary Henry M. Paulson thinks so.

“Frankly, it’s not a question of if, but when, China’s financial system will face a reckoning and have to contend with a wave of credit losses and dent restructurings,” wrote Paulson.

In his new, 340-page book on the nation, Dealing With China: An Insider Unmasks the New Economic Superpower, Paulson stresses the likelihood, but not the inevitability of a Chinese economic crisis.

Henry Paulson: Dealing with China

“Slowing economic growth and rapidly rising debt levels are rarely a happy combination.”

Mr. Paulson, along with many other analysts, is worried about China’s trust companies, which often use their profits to give out risky loans. Some have even gone as far as to label them a “time bomb.” However, the former Treasury Secretary wrote that good policy decisions by the Chinese government could avert such a crisis.

Unfortunately for China, transparency is virtually nonexistent in the Communist government. Citizens and the public cannot know the full depth of China’s economic issues if the government has all of the information.

Women working in a Chinese factory.  By Robert Scoble [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

Women working in a Chinese factory.
By Robert Scoble [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)%5D, via Wikimedia Commons

Reform?

According to an article in The Economist, “The robustness rests on several pillars. Most of China’s debts are domestic, and the government still has enough sway to stop debtors and creditors getting into a panic. The country is shifting the balance away from investment and toward consumption, which will put the economy on more stable ground.”

Although growth decreased, the economy still continues to grow. Last year, 13 million new urban jobs were created.

Pessimists are saying that China’s time of crash has come. However, China’s government is working to ensure that such a time never truly comes. The government is loosening control over interest rates and international monetary flow. Financial liberalization is the newest path for the country.

The government is also is sending more government from local to provincial funds, due to high local-government debt rates. Administratively, Prime Minister Li Keqiang has made it slightly easier for private businesses in the country. About 3.6 million private firms were created just last year.

Liberalization can indeed lead to instability, but China’s economic experts in the high ranks have the knowledge to avoid a crash. Reform won’t be easy, but China is beginning to lay the groundwork for a more stable economy.

Conclusion…

As stated in my book Wealth vs. Work: How 1 % Victimizes 99%, I believe that “China will eventually supersede America as the engine of growth and production within the next 20 to 25 years.”

From the point of view of highly qualified analysts, China’s economy is entering a dangerous zone. An economic crisis is definitively avoidable, considering China’s $4 trillion in reserves and experience in finance amongst top-ranking officials.

However, as Mr. Paulson said, “The longer they wait to address this problem, the more costly it will become and the more likely that it will disrupt the real economy.”

Advertisements

3 thoughts on “Is China headed for disaster?

  1. bill griffiths

    It appears that the conflicting forces already in action in China are propelling the country to a future thst is almost like a bipolar disorder: strict academic and industrial excellence vs environmental and social dismay.

    Liked by 1 person

    Reply
  2. Dr. Rajneesh Ahlawat

    Excellent Article Prof. Ornstein ! I’d not be the right person to make predictions but I think the Chinese are pretty pragmatic people. They are the biggest creditor to the biggest economy in the world. More than the Crisis unfolding in China I think the U.S.’s financial condition is more precarious !

    What if China sells the biggest hoarding of its U.S treasury notes (running in couple of trillions of dollars) ? The entire U.S. economy would collapse like a pack of cards but China won’t do it for it’s own benefit (otherwise its hoarding’s value would be reduced to junk). Economic slowdown does not necessarily mean economic crisis but I have read that there are Asset Bubbles emerging in the Chinese Real Estate Market which portends a potential U.S. Sub-Prime like Crisis in China.

    Like

    Reply
  3. Pingback: The U.S. is losing its top spot in the economy, experts say | Excellence vs. Equality

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s