Morgan Stanley’s Stephen Roach has been lured into attacking the ‘imminent China collapse’ meme.
In the German newspaper Handelsblatt, he explains how while Western governments jump to action only after economic crises happen, China’s is far more proactive in diffusing economic problems before they become enormous.
‘Unlike policy circles in the West, where there is no appetite to pre-empt bubbles and crises, China views these risks very differently. In the depths of the Asian financial crisis of the late 1990s, the Chinese leadership first adopted a “pro-active” policy strategy—a forward-looking approach that relies on the combination of fiscal, monetary, and regulatory tools to lean against bubbles and financial crises.’
Such arguments certainly sound compelling these days, given the economic problems in the U.S. and Europe most recently. But let’s not get too enamoured with China’s ability to implement proactive policy. It can cause major disasters as well.
For example, China has already damned itself to an elderly demographic time-bomb due to the One Child Policy it proactively created in order to avert a false population crisis. It’s now stuck with a policy-created demographic crisis which will make the U.S. financial crisis look like a cake walk.
Moving on to Mr. Roach’s conclusion:
One of these days—probably sooner rather than later—China will need to get serious in addressing its macro imbalances. I am hopeful that Beijing will use the occasion of the upcoming 12th Five-Year Plan, to be enacted a year from now, to unveil a new pro-consumption strategy that addresses many of these problems. In the meantime, pro-active Beijing policymakers are about to dispel yet another false alarm over the imminent perils of Chinese credit and asset bubbles.
See, the word ‘imminent’ is the key hedge word slipped in to make the argument stand. From a forecaster’s point of view, the odds are surely in your favour if you say that an ‘imminent’ crisis won’t happen. Simple odds are in your favour that nothing major will happen imminently.
Yet most China-sceptics aren’t calling for an ‘imminent’ crisis. They are just saying that China has some very serious distortions in its economy, many of which have been caused by ‘proactive’ policies might we add, and that the risk of a major economic shock is large and growing.
Sure, it’s highly unlikely to happen in the near future, but let’s not forget that many people looked smart for many years saying that an imminent U.S. housing crisis wasn’t at hand since the housing bubble kept going for longer than most expected. The same will be the case for China.
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