ne of the world’s top economists has warned that China’s addiction to debt and reliance on investment-led growth will trigger a severe financial shock when its unsustainable economic model implodes.
Harvard economics professor Ken Rogoff said a hard landing was inevitable for the world’s second largest economy as policymakers try to steer the economy towards domestic consumption.
Speaking ahead of the 10th anniversary of the financial crisis, when BNP Paribas suspended three funds holding US subprime assets, professor Rogoff said “human nature” meant the risk of a damaging financial crisis had not been eliminated by the post-crisis wave of regulation.
A former International Monetary Fund chief economist, he said China posed one of the biggest risks to the economy over the next five years.
The professor, who has long warned of a China slowdown, acknowledged that Beijing had taken “remarkable” steps to manage the slowdown from double-digit growth rates, but said rapid credit growth was unsustainable in the medium term.
No other large Asian country had successfully weaned itself off a reliance on exports and investment and towards consumer spending to drive growth, he claimed.
He said: “Credit has been growing faster than the economy every year, sometimes at double the rate of the economy, and that can’t go on forever. Even if they slow down to the point where credit growth rises at the same rate as the economy, Beijing will have a problem. When you have the train running at such a high speed, one bad patch of track can catch you out.”
The Chinese economy expanded at an annual pace of 6.9pc in the second quarter of 2017, beating its full-year target of “around 6.5pc”.
Economists believe the Chinese economy will slow in the second half of this year as demand in the US and eurozone eases.
Beijing has stepped up a deleveraging campaign as part of efforts to maintain economic and financial stability ahead of a key communist party congress later this year.
Professor Rogoff suggested that the economy could slow quite quickly unless policymakers remained vigilant.
“If they have a slowdown a lot of things will implode on each other, despite the fact that they have managed the economy just brilliantly. At some point the odds will turn against them.”
He added that reckless actions taken by US president Donald Trump posed the biggest risk to the economy today.
The Trump administration has been plagued by questions over its links to the Russian government, while his attempts to repeal healthcare reforms introduced by predecessor Barack Obama have suffered devastating setbacks, hitting a timetable for sweeping tax changes.
Professor Rogoff said: “Our institutions are very strong, but they’ve really never been tested. Many times when a leader is weak he’ll start a war to gain popularity. It may not be a conscious decision but it happens.”