Thursday, 25 February 2010

Harvard expert predicts collapse of China’s ‘debt-fuelled bubble’


China’s economic growth will plunge to as low as 2 per cent following the collapse of a “debt-fuelled bubble” within 10 years, sparking a regional recession, according to Harvard University professor Kenneth Rogoff.

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Guanyu 道 said...

Harvard expert predicts collapse of China’s ‘debt-fuelled bubble’

Bloomberg in Tokyo
25 February 2010

China’s economic growth will plunge to as low as 2 per cent following the collapse of a “debt-fuelled bubble” within 10 years, sparking a regional recession, according to Harvard University professor Kenneth Rogoff.

“You’re not going to go a decade without having a bump in the business cycle,” Rogoff, former chief economist at the International Monetary Fund, said in Tokyo.

“We will learn just how important China is when that happens. It will cause a recession everywhere surrounding” the country, including Japan and South Korea, and be “horrible” for Latin American commodity exporters, he said.

China, set to surpass Japan as the second-largest economy this year, has helped pull the world out of its deepest post-war slump. Record lending, soaring property values and accelerating economic growth prompted the government to begin retracting stimulus measures implemented during the global recession.

“Their response to the latest financial crisis clearly raised the risk that they have a debt-fuelled bubble in the economy,” said Rogoff, who in 2008 predicted the failure of big American banks.

While Rogoff said he is not sure what will cause China’s bubble to pop, he said land is “the best bet” as it is “the most common source” of crises. Real estate values in Shanghai and Beijing have “taken a departure from reality”, said the economist, co-author of This Time is Different, a 2009 book that charts the history of financial calamities in 66 countries.

A collapse would depress output gains to 2 to 3 per cent, a “very painful” period which would persist for about a year and a half, Rogoff said. The slowdown will not lead to a Japan-like “lost decade”, he added.

“If there’s a this-time-is-different story in the world right now, it’s China,” he said. “People say China won’t have a financial crisis because there’s central planning, because there’s a high savings rate, because there’s a large pool of labour, blah blah. I say of course China will have a financial crisis one day.”