Risk of a Chinese Bust?

The World Economic Forum  (WEF) released its annual Global risks report today. As always, it’s an interesting read.   There’s actually a lot of continuity with risks highlighted in 2009,  including fiscal crises, the risk of asset price falls (presumably if some the incipient bubbles burst), chronic diseases and the global governance gaps on dealing with long-term issues relating to the environment, health, development and financial regulation.  With countries exiting recession at different speeds and focused on boosting their domestic growth, more friction on these issues and more delays are a risk. Moreover with the global crisis having been averted by concerted policy action, the willingness to act and coordinate and re-regulate has dissipated.  Ian Bremmer and David Gordon highlighted this concern in the Eurasia group’s risks for 2010 report last week – noting that the divergences between U.S. and Chinese leaders would become even more pronounced in 2010, as the need to be seen to be cooperating has ebbed.  

Speaking of China, the WEF also held over another risk from last year, the risk that Chinese growth could slow below 6%, a concern that we and many others shared early in 2009. In fact this has been a persistent risk included by the WEF each year since 2006, the first such global risk report.  Given China’s role in global markets and global growth, such an outcome would have major implications. Chinese growth has accelerated sharply with accompanying overheating in some sectors.  For now the biggest challenge for China is how to maintain growth while a) advanced economies remain weak, meaning it can’t rely as much on exports as a driver and b) loose monetary conditions are spurring asset bubbles (in property, some food and in commodities).  Chinese policy makers are now trying to cool these bubbles and avoid economic overheating without leading to a bust.  Acting sooner rather than later could lessen the need to be even harsher in the future.

It’s interesting to note that the risk of China sliding to 6% growth is seen as somewhat more likely (over 20%) than a full-blown sovereign debt crisis (10-20%, see a recent RGE analysis for more on fiscal risks) or a major oil price spike (5-10%), though the time horizon of such risks is not clear. An oil price spike could be one of the factors that leads to major problems for China, one of the largest oil importers. With the RMB pegged to the dollar, and the commodity intensity of its growth, high oil prices could constrain Chinese growth and more of a price climb would be passed on to consumers this year, unlike in 2008, reducing the distortions.  Watch for more on RGE’s outlook for China in the coming weeks.