Writing for Project Syndicate, Adair Turner, a Senior Fellow at the Institute for New Economic Thinking, has argued that in order to avoid another financial crisis China “needs to rebalance its economy and introduce more market discipline in its financial system.”
This opinion follows from the fact that industrial value added fell in August, credit growth has slowed dramatically, and housing prices are falling, with sales down 20% year on year. As such, Adair believes that China’s slowdown is the biggest short-term threat to global growth.
Adair notes that after unleashing a credit boom to tackle the 2008 financial crisis, “China is now struggling with a dilemma common to all advanced credit booms. The longer the boom runs, the greater the danger of wasted investment, huge bad debts, and a major financial crisis. But simply constraining new credit supply and allowing bad loans to default can itself provoke crisis and recession.”
Whilst optimists stress that “China is different,” despite the knowledge that no other economy has ever experienced such a boom and avoided major growth setback, Adair warns that risks remain serious.
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