A global investment house has warned that China faces a financial crisis within the next decade as government and private debt rise to unsustainable levels.
Anatole Kaletsky is chief economist and co-chairman at Hong Kong-based Gavekal Dragonomics and was an economic journalist and commentator for 30 years, including at the Financial Times.
He told The World Today program that a financial crisis in China is almost certain within 10 years.
“I think there is a risk, to almost near certainty, of a banking and financial crisis in China sometime in the next decade, but I think it’s very unlikely to arise for the next couple of years,” Mr Kaletsky said.
“Debt is certainly building up in both the private and the government sector.”
However, Mr Kaletsky warned that there was a more dangerous build-up of debt among households.
“Mortgage lending has been growing very, very rapidly over the last year to the point where Chinese household debt is getting up to the levels that we see in developed countries, in Europe,” he cautioned.
“So debt levels are building up, but they are not yet at the levels that triggered crises in other open, market-oriented economies in the past.”
Mr Kaletsky said recent measures by Chinese authorities to contain financial risk, such as interest rate increases, were working for the time being.
“For the next few years, the Chinese can avert a financial crisis through the combination of fairly rapid changes in monetary policy, a great deal of direct bank regulation and credit regulation, which they still can do because so much of the banking system is state controlled, and the fact that the underlying growth of the economy remains pretty rapid because China is still developing rapidly into a modern consumer led economy,” he argued.
Chinese crash still years off: Kaletsky
Mr Kaletsky also predicted that the Chinese economy will avoid a crash over the next few years, despite slowing growth, as China moves from an export-driven controlled economy to a market-oriented one.
“I think for the next two, three, perhaps five years, it’s possible for the Chinese authorities to keep all these balls in the air at the same time,” he said.
“At some point, the juggling act will fail, because fundamentally and structurally the economy is getting weaker.”
Mr Kaletsky said Australia was at risk from a Chinese banking crisis because of its high dependence on the Chinese economy.
However, he said if Australia could diversify its economy over the next decade then it would not be as hard hit by a Chinese financial crisis.
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“If a serious setback in China doesn’t happen for five to 10 years from now, Australia, if the economy is well managed, should by then have diversified itself sufficiently away from the dependence on resource exports that it would be able to withstand the shock,” he forecast.
“But it is true, of all the large to medium-sized advanced economies in the world, Australia is probably the one that is most exposed to a China shock.”
He noted that Australia was yet to have a recession in a quarter of a century despite the ups and downs of the Chinese economy.
“I think that shows the Australian economy is probably a lot more resilient than many people in this country think,” Mr Kaletsky said.
He also dismissed concerns that a threatened downgrade of Australia’s prized AAA credit rating by Standard & Poor’s would necessarily drive up the country’s cost of borrowing.
Mr Kaletsky said that both Japan and the United States saw their cost of government borrowing fall after they lost their AAA ratings.
“Being downgraded from AAA means that it would to some extent damage the country’s prestige,” he added.
“However you should not overstate the impact of these credit rating impacts on the actual bond yields.”
By Sue Lannin