Harvard Economist Says China Is Biggest Threat To Global Economy

Harvard professor Kenneth Rogoff, one of the world’s most well-known economists has warned that the biggest threat facing the world’s economy is China’s debt bubble.

Speaking in an interview with the BBC, Rogoff said that the real picture was grimmer than that what was being projected by the government authorities.

In a statement, Rogoff said,

There’s no question, China is the biggest risk. China has been the engine of global growth that’s been working. We are having a pretty sharp landing already, and I worry about China becoming more of a problem. We’ve taken it for granted that whatever Europe’s doing, Japan’s doing, at least China is moving along. And there isn’t really a substitute for China.

BBC

The Bank for International Settlements (BIS) reported last week that the credit-to- GDP gap for China was at 30.1 percent which the BIS said was a reliable indicator of the possibility of a severe banking crisis. Other international institutions have also highlighted the danger. The Bank of England’s Financial Stability Committee has noted the rapid increase in credit, saying that it was high by international standards.

The latest reports point to China’s economy de-accelerating as this year’s second quarter GDP growth was 6.7 percent, down from 6.9 percent growth in 2015. The IMF expects the country to grow by 6.6 percent this year. According to Rogoff, the global economy has been taking China’s growth for granted and is dependent on the country to bolster weakening growth. A crash in China is likely to have global repercussions as financial institutions worldwide have considerable exposure to the market.

The country has been experiencing credit-driven growth which Rogoff said wouldn’t last for long. He dismissed claims that the credit situation in China was different since it was state owned and could be managed. According to Rogoff, the state could control the situation only until a point. Rogoff stated that the economy has slowed down far more that what the state’s official numbers reveal. Perma-bear Marc Faber had also pointed out earlier this year that the actual growth in China in 2015 was most probably around 4 percent.

Rogoff also highlighted the fact that a political revolution is going on in China along with a sustained crackdown on corruption and a re-focusing of its economy.The Chinese administration is pushing towards a services-oriented domestic consumption-led model, moving away from its successful cheap manufacturing-led export economy. According to Rogoff, the only way to safeguard from the fallout of China’s collapse is to reduce dependence on the country and generate growth internally.

Charlie Harrison

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