China economy

Beware the ‘grey rhinos’ of economic risk or ‘prepare for pain’, analyst warns China

The ‘unintended consequences’ of untethered risks could lead to a ‘huge’ economic fall, author and policy expert says

PUBLISHED : Sunday, 23 July, 2017, 8:33pm
UPDATED : Sunday, 23 July, 2017, 11:37pm

Chinese leaders have their work cut out trying to corral a herd of “grey rhinos” that threaten to crash the country’s economy.

That’s the assessment of Chicago-based author and policy analyst Michele Wucker, who coined the popular term to describe big neglected economic risks. The term slipped into the lexicon of the Communist Party mouthpiece last week after a significant financial meeting.

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“The Chinese government has been wrangling several grey rhino risks at once – how to keep the economy growing and maintain social stability, how to limit the impact of that economic growth on the environment, and how to handle a number of economic and financial imbalances,” Wucker said.

“The more grey rhinos there are, especially interconnected ones, the more dangerous the situation is. In fact, the zoologically correct word for a group of rhinos is, appropriately enough, a ‘crash’.”

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“Grey rhinos” hit the headlines on the mainland last week, after People’s Daily ran an editorial on Monday warning against the predictable events and unexpected “black swans” in the country’s financial system. The piece trumpeted Beijing’s war-against-risk rhetoric at a major financial work conference that endorsed the creation of a “super regulator”.

Wucker said she came up with the term to help decision makers recognise obvious issues and act early in case those problems were out of control.

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A typical example of an ignored grey rhino is the 2008 financial crisis, which prompted many countries to loosen monetary policy, flooding their economies with cheap lending. The US Federal Reserve started raising its benchmark interest rate in late 2015 but monetary expansion had already fed financial speculation, Wucker said.

“If we don’t address the unintended consequences, we’re in for another huge fall,” she said.

Wucker’s book, The Grey Rhino: How to Recognise and Act on the Obvious Dangers We Ignore, was translated into Chinese and published in February.

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She said she had been “blown away” by the reaction in the policy and business worlds, as well as among individuals who applied the metaphor to their own lives.

“Many people had questions about the real estate bubble and other financial imbalances, about pollution and the environment, about the impact of automation on jobs, and about the United States’ retreat from global leadership, particularly on climate change,” she said.

Wucker said the People’s Daily article was open about the grey rhinos in the country and she called for action to be taken to deal with them to minimise any “pain” they cause.

“The editorial is very frank in laying them out: shadow banking, real estate bubbles, capital markets risks, cybersecurity, and potential liquidity shocks. It’s important to signal that policies that likely will cut the value of some financial assets will benefit the country in the long run and prevent more pain.”

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China’s strong headline economic growth, which stood at 6.9 per cent for the second quarter, has failed to dispel concerns about the country’s financial and debt risks. The Institute of International Finance published a report last month saying China’s debt to GDP ratio might have exceeded 300 per cent in May.

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According to Julian Evans-Pritchard, a China economist from Capital Economics, the debt problem might linger for a long time before starting to hurt the economy.

“The question is timing, and how it’s dealt with,” he said.

How to contain financial risk has topped the Chinese government’s agenda since a stock market crash in 2015 wiped out a third of the value of the Shanghai Composite Index in a month. Before the meltdown, newspapers affiliated with the Communist Party were bullish on the stock market and regulators did little to stop speculators inflating the stock price bubble.