According to a recently released book written by finance scholar Ning Zhu, unless China’s central government is able to quickly confront the multi-faceted and intertwined challenges facing the country’s economy, the outcome will be catastrophic.
“I think the current model is going to lead to a disaster, to a catastrophe, I think that is well grounded,” Professor Zhu said.
“It’s not a matter of whether, it’s a matter of when the bubble will burst. I want to alert both domestic policy makers and international investors about this quite tangible risk to the financial system.
In “China’s Guaranteed Bubble: How Implicit Government Support Has Propelled China’s Economy While Creating Systemic Risk”, Zhu not only outlines China’s economic challenges, but also imagines a future without the government guarantees that have fuelled record housing prices, the stock market bull run seen in the first half of 2015 and the unsustainable fiscal spending of local governments around the country who are looking for immediate growth with little thought of long-term consequences.
According to Zhu, who is the deputy dean of the Shanghai Advanced Institute of Finance, government support has made China’s economic bubble self-fulfilling and there is still a lack of understanding within China’s leadership about the “gravity and the magnitude of the risks.”
“China’s central government will have to phase out its guarantees to so many aspects of the Chinese economy,” Zhu said, including eradicating cheap loans to state-owned enterprises, and eliminating the growth-at-all-costs mentality that has driven the economy for the past three decades.
According to Zhu, though there has been lip service paid to economic reform at the upper echelons of China’s leadership, the lack of meaningful reform in recent years has made him increasingly concerned that there isn’t the political will, or the “ability and expertise”, to overhaul a system that is intrinsically damaged.
“I wouldn’t say I am that optimistic. I just want to lay out the reality and make the argument that reform is necessary, without reform we are going to have trouble here. Many of China’s problems are interconnected, this reform a highly challenging task. It’s like trying to diffuse a bomb.”