Macroscope | Predicting China’s endgame: financial crisis, lost decade or soft landing?
The first in a series of three articles looking at what lies ahead for the world’s second biggest economy
Rising economic imbalances and persistent growth slowdown have made China a major concern for investors in recent years.
Such concern has been propagated globally by the liberalisation of the country’s capital account and financial markets. Some fear that a sudden and calamitous unwinding of these structural imbalances could spell disaster for the world.
Thanks to the wealth of research available, most investors have by now gained a decent knowledge of China’s structural problems. A debt-laden economy, with an unsustainable growth model; a troubled financial system plagued by non-performing loans and shadow banking risks; a large but closed capital market that is unable to channel liquidity efficiently; and a population base that is ageing at an alarming pace. These are just some of the challenges facing the world’s second largest economy that, as some fear, could terminate its growth miracle prematurely.
Some fear that a sudden and calamitous unwinding of [China’s] structural imbalances could spell disaster for the world
In contrast to the awareness of the problems, little attention has been paid to possible solutions. As a consequence, there is a wide spectrum of expectations on China’s future paths. The perma-bears, for example, have been calling for an imminent financial crisis for some time, while optimists still think a “V or U” shaped rebound is possible. In between, there is the mainstream market which has bought into the idea of an “L”-shaped trajectory, popularised by a policy insider – the “authoritative person” – last year.
In the next three updates of this column, we will try to look into our crystal ball and see what may be lying ahead for China. To do this, we compare its situation today with those economies that made the classic mistakes in addressing their own structural imbalances in the past.
While a comparative analysis of this sort is not new, what separates our analysis from the existing literature is an intense focus on China’s unique economic, social and political characteristics, which we think may allow it to avoid the perils that befell others and chart its own course for the future.
To kick off this analysis, we first examine the prevailing market expectations of what China’s endgame may look like. The most popular views can be summarised in three categories: