Evaluating the Financial Risks of China

The Chinese economy, which is now the world’s second largest economy and the world’s largest trading nation, has become highly imbalanced as a result of an excessive reliance on credit creation and on investment-led growth. As a result, China’s economic growth model is now showing every sign of having run its course. This has prompted the Chinese government to recognize the need for more balanced economic growth and has led it to significantly mark down China’s long-term economic growth forecast.

It would be a mistake for US policymakers to minimize the large adverse impact that a further slowing in the Chinese economy could have on the US economy. Since a change in the economic fortunes in China could have a strongly adverse impact on the world economic outlook and on global financial markets. This would seem to be especially the case at a time that the world economy is drowning in debt and at a time that it is confronted with an unusual confluence of material downside risks. These latter risks include those emanating from last month’s Brexit referendum, from the Brazilian economic and political crisis, and from the serious weaknesses now being revealed in the Italian banking sector.

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