Paul Krugman: How scary is the China crisis?

2023-08-26 06:26:13

Paul Krugman / The New York Times 26.08.2023 • 07:26

The economic difficulties of the post-pandemic years have led to heated debates. One thing almost everyone agrees on, however, is that the post-coronavirus crisis bears little resemblance to the financial crisis of 2008. So, certainly, the China – the world’s largest or second largest economy, depending on how you measure it – appears to be on the brink of a crisis very similar to what the rest of the world went through in 2008. I cannot claim to understand China well enough to decide whether it will stop the march to that point where everyone suddenly realizes that unsustainable debt is indeed unsustainable. Actually, I’m not sure if any human being, including Chinese officials, knows the answer to that question. Nevertheless, we can answer a more specific question: If China does have a 2008-style crisis, will it also spread dramatically to other countries, especially the US? The answer is clearly negative. As large as China’s economy is, America has remarkably little economic or commercial exposure to the former’s problems.

Now, let’s also mention why the China of 2023 looks like the economies of both America and Europe in 2008. The 2008 crisis was caused by the bursting of a huge transatlantic mortgage “bubble”, the effects of which were magnified by the dissolution of especially the “shadow banking institutions” which functioned as banks, created the investment risk that led to mass withdrawals, but the whole system was anarchic without the safety nets that ordinary banks provide. Today China has a real estate sector even more inflated than that of Western countries in 2008, a highly troubled shadow banking sector, and massive local government debt. The good news is that China is neither Argentina nor Greece, which were hugely indebted to foreign investors. So, in all fairness, China owes itself the debt here, while the central government should resolve the crisis through some combination of bailouts and cutbacks for credit unions. But can Beijing manage the kind of financial restructuring its economy needs? Do employees have sufficient determination or mental clarity to do what is required? I’m worried about the last one. China needs to replace unsustainable real estate investment with higher consumer demand. However, some reports suggest that senior officials remain suspicious of “wasteful” consumer spending and are also mulling over the idea of ​​”empowering people to make more decisions about how they spend their money”. And it’s not reassuring that Chinese officials are responding to the potential crisis by pushing banks to lend more, so to speak, continuing the path that got China to where it is today.