Fears have grown this week that we are on the verge of a new global financial crisis. What’s your view?
China has to change radically its growth model because it’s not sustainable. They talk about increasing consumption, but consumption as a share of GDP has fallen from 50% to 40% to 35%, now it’s 33%. And fixed investment has gone from 30% to 40% and now 50% of GDP.
China is going to have in two years its own hard landing. There’s so much overcapacity, from real estate to infrastructure to manufacturing that unless they change their growth model to rely more on consumption and less on fixed investment, eventually there will be a hard landing in China. So it’s not any more an issue of net exports.
They have reacted to the collapse of their net exports by boosting fixed investment rather than consumption. So they have to radically change their growth model and the sooner they do it the better for them and for the global economy.
Where does that leave China with respect to either a willingness or capacity to react with similar vigour to today’s crisis as they did in 2008?
Well, if there is a recession in the G3, China is going to do more monetary, fiscal and credit stimulus. They’re going to kick the can down the road for another year because in a year from now they’re going to change their own leadership. But that creates even more imbalances because the only thing they know to do is more infrastructure, more real estate, more manufacturing and industrial capacity by the SOEs (state-owned enterprises). So they make the investment bubble even worse and the hard landing is going to be even worse down the line. What they need is radical policies that lead them to save less and consume more. But it will take them 10, 20 years of policy changes to achieve that. I fear they’re not going to do it in time.