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Added by on 2014-01-04

I know, it’s seems odd to speak of problems and the need for reform in the world’s fastest growing big economy. But China has built up imbalances in that economy for some years now and they are not sustainable for much longer. Even before the financial crisis, China’s top officials were aware that the economy was, in Premier Wen Jiabao’s own words, “unstable, unbalanced, uncoordinated, and unsustainable.” It needed to wean itself off cheap credit and undergo market reforms. Since then, in response to the global economic slowdown, China pumped even more easy money into its economy. The result, according to Morgan Stanley’s Ruchir Sharma, is that China’s total public and private debt is more than 200 percent of GDP, an unprecedented level for any developing country. Sharma points out that while it used to take one dollar of debt to produce one dollar of Chinese GDP growth, today it takes $4 to produce that same dollar of growth. Businesses and local governments have piled on debt. The property boom has accelerated. Without serious policy changes relatively soon, this is a bubble that is going to burst. I’m not ready to bet against China. Its leadership has shown itself to be capable of difficult decisions and smart execution. And if the leaders do manage this transition well, China will emerge stronger, and of course become the largest economy in the world. If they don’t, they will likely face a slump and perhaps political tensions that bubble up in the wake of a slowing economy. For more on this, watch the video or read the TIME column

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CNN, Fareed Zakaria, Featured

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