Some economists are debating about China’s economic bubble: not about whether the bubble exists (they concur on that point), but WHEN and HOW it will burst.
In your opinion, does this threat really exist? And what are the main risks for the international economy posed by the current situation of the Chinese economy?
The bubbles can be seen from here: they are the result of efforts to compensate for the drop in exports stemming from the global slowdown. First, a real estate bubble. Then a stock market bubble to prevent a rough landing for real estate.
The People’s Bank of China has lowered the reserve ratio to help; meanwhile the stock exchange authorities have tightened margin requirements. Informed local opinion says the bubbles won’t last until 2016. When a slowdown finally does occur, the suppliers of China’s oil and equipment will see their source lists dwindle. As will China’s neighbors, who provide cheap labor and manufacturing. Others, not quite as much.
There certainly is concern that bubbles exist in Chinese markets. Generally speaking, it is not easy to predict when a bubble is going to burst. This is even harder in the case of China since we do not have good, real-time information on the economy in comparison to advanced countries.
The effect of a slowdown in China would be felt by emerging countries exporting energy and mineral and agricultural commodities to China. It would hurt the most where weaknesses already exist. Several emerging countries in Latin America are already running current account deficits and there is worry that a liftoff in US interest rates could strain the balance of payments, and affect real activity in that region. A slowdown in China would add to these problems and complicate the situation in that region of the world.
I am not too worried about China’s economic future. In the last 30 years or so, it has proven to be extremely successful in walking the arduous path toward development: export-based growth, record-breaking rates of investment and a massive accumulation of foreign reserves.
Compared to the feats that its authorities have achieved already (hypothetical bubbles notwithstanding), shifting toward a growth strategy based on the development of its internal market seems relatively easy—and a move that will surely garner widespread popular support.