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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Writing recently for Project Syndicate, Lord Adair Turner, Senior Fellow at the Institute for New Economic Thinking, discusses the “great credit mistake” and warns that policy-makers who focus on credit supply constraints ignore the main impediment to growth.
Instead, Lord Turner makes the case that “once the immediate crisis was over, lack of demand for credit played a far larger role than restricted supply in impeding economic growth.” He notes that this argument is made persuasively in an important new book titled House of Debt by Atif Mian and Amir Sufi.
Through analysing US data on a county-by-county basis, Mian and Sufi show that the recession was caused by a collapse of household consumption, and that consumption fell most in those counties where pre-crisis borrowing and post-crisis real-estate prices left households facing the largest relative losses in net wealth.
Furthermore, Lord Turner points out that it was in those US counties, and similarly so in the UK, “that local businesses cut employment most aggressively. For SMEs, a shortage of customers, not a shortage of credit, constrained borrowing, employment, and output.”
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For more information, or to book Adair Turner as a keynote speaker for your conference or event, please contact Leo von Bülow-Quirk at email@example.com or call 0044 (0) 20 7792 8000.