China’s economy is decelerating significantly. And its financial system is leveraged more than most emerging economies.
This cocktail of risks have some experts worried that China’s economy will land hard and spiral into a financial crisis.
Unfortunately, historical precedent doesn’t offer much comfort.
“Sustained periods of high investment enabled Asian economies to achieve faster growth, but this has typically led to banking / foreign exchange crises,” warn the economists at Deutsche Bank. Here are two bullets from their recent “The House View” report:
- “Japan’s growth has averaged ~1% since 1991 compared to 4.65% in the previous decade”
- “Thailand (-10.6%) and South Korea (-5.7%) experienced sharp GDP contractions in 1998 as foreign capital dried up during Asian crisis”
“China’s near 50% investment rate is far larger than other Asian economies during their take-off periods,” they add.
To be clear, a financial crisis is not Deutsche Bank’s base case scenario. But it’s a scenario that’s not totally unrealistic.