China ignores the ‘grey rhino’ threats to its economy at its own peril
Andrew Sheng says its policymakers are rightly being called on not just to watch out for unknown market dangers, but also deal with the known risks to the economy we tend to ignore
Every crisis is best remembered by a concept that explains it in simple terms. The 2007 global financial crisis is described as a “black swan” event – a low-probability but high-impact event. Most swans are white, but every now and again a black one appears. Black swans are difficult to predict, as we don’t see them often, but their impact can be devastating.
Since we are marking the 10th anniversary of the financial crisis, a new term has been coined by Michele Wucker, author of The Grey Rhino: How to Recognise and Act on the Obvious Dangers We Ignore. The “grey rhino” is the highly probable, high-impact yet neglected threat. She includes in that category issues such as climate change, terrorism, financial stress and social unrest.
The People’s Daily, commenting this week on a top-level financial work conference by leaders, exhorted regulators to prevent black swans as well as grey rhinos. This caused a flurry of comments in blogs on what constitutes a grey rhino.
Beijing watches out for ‘grey rhino’ and ‘black swan’ in the jungle of financial risks
An obvious candidate is the property market. Since real estate markets are valued at roughly 2½ to three times the gross domestic product, any sharp correction in prices would put considerable stress on the banking system and national wealth.
The second is the exceptionally low interest rate regime, partly caused by slow growth and the unconventional monetary policies, resulting in peak prices in stocks, bonds and real estate. The system is in a Catch-22, whereby if the US Federal Reserve raises interest rates further, asset prices may collapse, but if interest rates are not “normalised”, productivity remains low, as does growth.
Thirdly, many analysts are concerned about the rising corporate leverage in China and elsewhere.
Fourthly, increasing income and wealth gaps are threatening social stability. So far, in countries with relatively low levels of unemployment, the situation is manageable. But the growing level of youth unemployment is of major concern.
