The Chinese government has already performed one economic miracle – in the 30 years from 1980, it pulled almost 700m people out of extreme poverty. Now it requires another – to wean its fattened economy off a diet of public investment and onto helpings of household spending, at such a pace that it does not give the rest of the world indigestion.
This is a tough ask. The government is persisting with economic growth targets that are too high. That means it continues to lend money to unproductive projects at a rapid rate, leading to a build-up of debt. Eventually the government will have to put up interest rates. This will cause growth to lurch downwards. The global economy is already on high alert for Chinese debt problems, and the reckoning will send commodity prices tumbling and foreign investors scurrying to safe havens. Slimming down some unhealthy firms in the state sector would be good in the long term, but a strenuous workout is needed before the economy gets a clean bill of health.
Jamie Thompson, head of macro scenarios at Oxford Economics, says No.
The relentless increase in Chinese debt certainly raises the risk of market turmoil and a sharp slowdown in the Chinese economy, and there are stark implications for the global economy. But a sudden systemic financial crisis remains unlikely in China, for now at least.
Instead, risks to the global economy appear to be shifting from East to West. This is reflected in our latest global risk survey, which canvases the views of clients, including some of the world’s largest companies. More than a third of respondents now view a Donald Trump presidency as one of the top three risks. While Trump’s plans for the US economy would most likely be diluted heavily in negotiations with Congress, there is a risk that he proves more successful than expected in achieving the adoption of his policies. Based on our modelling, the consequences could be far-reaching – with 5 per cent knocked off the level of US GDP relative to our current central forecast, and undermining the anticipated recovery in global growth.