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IMF: China's Economy in Urgent Danger


The IMF released a study of China’s economy today that carried a dire warning: reform soon or risk a crash.

“Since the global crisis, a mix of investment, credit and fiscal stimulus has underpinned activity,” the assessment reads. “This pattern of growth is not sustainable and is raising vulnerabilities. While China still has significant buffers to weather shocks, the margins of safety are diminishing.” Currently, the report warns, China’s formal banking system is at risk, its so-called shadow banking sector is “less regulated” and unstable, and local governments commonly make risky investments without sufficient collateral.

Perhaps most precarious of all is the real estate market. In order to accommodate hundreds of millions of villagers that the authorities are relocating from farms to cities, China is heavily investing in new accommodations and even building brand new cities. The theory among Chinese authorities and international analysts alike is that city dwellers spend more, and boosting domestic consumption and productivity is vital. There’s no way to know how this unprecedented enforced migration will play out, but already there is concern about towns and buildings built for thousands at great expense, but so far almost entirely empty.

Chinese leaders are aware of the structural reforms they need to implement in order to guide the economy onto a more sustainable path. The question, analysts say, is whether Beijing will make reforms now, while there is wiggle room to gradually reorient the economy and a “war chest” of savings to draw on, or if the authorities will hesitate until it’s too late. “In recent weeks,” the Times reports, “Beijing has made it increasingly clear that it is prepared to tolerate a slower pace of growth as it pursues those goals and that there will be no repeat of an aggressive stimulus that followed the global financial crisis.”

“Structural adjustment is a painful thing,” the Chinese Finance Minister said recently, according to Reuters. “It’s impossible to adjust structures if you still want to feel very comfortable and maintain a very high growth rate.”

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  • Andrew Allison

    Did you mean Imminent Danger?

  • ljgude

    Well, we are kinda holding our breath here in Western Australia.

  • lukelea

    Not even the all-powerful Chinese Communist Party can evade the laws of economics in the long-run. Without free people in a free country it can’t even see them.

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