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Economic Worries Weigh on China's Obama Response

The weekend has come and gone, and China still has yet to respond to America’s diplomatic onslaught in Asia last week. This is partly due to the time it takes for a transitioning Communist Party to reach important decisions, but a new piece in the FT spotlights another reason: worries about the country’s (and the world’s) economic future. Wang Qishan, China’s vice-premier and financial leader, gave a talk last weekend in which he warned that China’s financial sector would need dramatic reforms to weather a coming economic downturn:

“Right now the global economic situation is extremely serious and in a time of uncertainty the only thing we can be certain of is that the world economic recession caused by the international crisis will last a long time,” state media reported Mr Wang as saying over the weekend.

These fears are dramatic, but well-founded. The rise of China has been the most dramatic story of the past twenty years, but it was built on a foundation of super-high growth rates that cannot go on forever. An entire generation of Chinese have come of age used to growth rates in the realm of ten percent, while normal growth for most of the developed world is somewhere closer to three percent.  Sooner or later, that will be China’s growth rate as well.

This transition will not be easy, and it may come sooner than many think — a dramatic slowdown in the world economy could quickly pour cold water on Chinese growth and, as vice premier Wang suggests, the consequences for the Chinese financial system could be severe.  Many loans that do well with ten percent economic growth turn bad when growth drops by two thirds, and a financial market crisis could feed back into the real economy, reducing growth even further.

From the outside China sometimes looks like an unstoppable giant; to many officials on the inside, the country seems precariously balanced.  As the leadership thinks about responding to President Obama’s challenge, the economic technocrats are saying that this is the wrong time to make waves.  We shall see how effectively they are able to make that case.

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  • Jacksonian Libertarian

    I have no doubt that China’s insiders, those with access to the Real Numbers on Inflation, Growth, Capital investment, Riots, High Speed rail, Housing, Factory orders, Competitiveness, Currency Manipulation, Foreign investment, etc… Are deeply worried about the future.

  • gs

    When China was depicted everywhere as an irresistible economic juggernaut rolling to its manifest destiny as global hegemon, before formulating expectations I wanted to see the country traverse a business cycle or few. My attitude hasn’t changed now when China looks wobblier.

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