“China simply does not conform to the conventional wisdom about the factors necessary for sustained high growth: a well-developed financial system, the rule of law, democracy.” ~ PBS
China’s growth model has certainly created enormous risks.
Over the past decade and a half, growth has been driven in large part by massive and inefficient investment and an associated buildup of debt, most noticeably in real estate development, as China’s many uninhabited apartment buildings attest.
A financial system is supposed to allocate a nation’s wealth to its most productive opportunities. But even the most generous interpretation of China’s growth success has to acknowledge the inefficiencies and costs associated with a model that has delivered spectacularly in terms of official GDP, but has led to environmental degradation and a massive waste of resources.
The Chinese economy faces several daunting risks.
The first is a surge of capital flowing out of China — basically, people taking their money out of the country — which could destabilize the financial system as well as the overall economy.
The second is a set of concerns about China’s financial system, including the potential instability of the banking system (too many bad loans), wild swings in the stock market and the size of the shadow banking system (informal banking institutions that are not well regulated).
The third set of risks is related to more fundamental aspects of the Communist Chinese economy, political structure and policymaking. These include the possibility of a dramatic GDP growth slowdown, political instability fed by the government’s desire to further tighten its control domestically, and domestic and foreign policy missteps, specifically related to Taiwan.
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