China slowdown is global economy’s biggest threat, Rogoff says

The former chief economist of the International Monetary Fund has told the BBC a slowdown in China is the greatest threat to the global economy.

Rogoff warns that China's slowdown poses the greatest threat to the global economy. Gain insights into the potential implications and challenges discussed in this blog post.
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Ken Rogoff did not rule out the possibility of a calamitous “hard landing” for one of the main engines of global growth.

“China is going through a big political revolution,” he said.

“And I think the economy is slowing down much more than the official figures show,”

Mr Rogoff added: “If you want to look at a part of the world that has a debt problem look at China. They’ve seen credit fuelled growth and these things don’t go on forever.”

British exposure

Last week, the Bank of International Settlements, the global think tank for central banks, said that China’s credit to GDP “gap” – which analyses the amount of debt in an economy relative to annual growth – stood at 30.1%, increasing fears that China’s economic boom was based on an unstable credit bubble.

The Financial Policy Committee of the Bank of England described the figure as “very high by international standards” and will now assess British banks’ exposure to a potential Chinese slowdown.

British banks have $530bn worth of lending and business in China, including Hong Kong.

‘A worry’

“Everyone says China’s different, the state owns everything they can control it,” Mr Rogoff, now Professor of Economics at Harvard, said.

“Only to a point. It’s definitely a worry, a hard landing in China.

“We’re having a pretty sharp landing already and I worry about China becoming more of a problem.

“We’ve taken it for granted that whatever Europe’s doing, Japan’s doing – at least China’s moving along and there isn’t really a substitute for China.

‘Nervous’

Mr Rogoff said that European economies and the US had to ensure they were “on their feet” before any slowdown started to bite.

“The IMF has marked down its forecasts of global growth nine years in a row and certainly the rumour is they’re about to do it again,” he said.

Beyond China, Mr Rogoff said there was a good deal of uncertainty in the world over issues such as whether Donald Trump or Hillary Clinton will win the US presidential election.

He argued it was difficult to judge what Mr Trump would do if he won, and that a victorious Mrs Clinton might have her plans for infrastructure spending, for example, blocked by the Republican House of Representatives.

“I am certainly nervous,” Mr. Rogoff admitted, expressing his concerns. “Probably much more about a Trump victory,” he added, highlighting the uncertainty of what might come next. The unpredictability of the future weighed heavily on his mind.

“I don’t like the [protectionist] trade policies of either candidate. I think free trade has benefitted the States immensely in its leadership position. So watching as an economist, this has been a painful election.”

Brexit impact

Mr. Rogoff emphasized the uncertainty surrounding the impact of Brexit on the UK economy. He stated that it remains unclear due to the inability to define the trade model that will be agreed upon and assess the performance of the European economy when Britain departs from the European Union.

Despite praising the Bank of England’s pro-active response to the referendum result, Mr Rogoff said that central banks were in an increasingly invidious position.

“Monetary policy has its limits – it is not a panacea,” he said.

“It is a little bit the fault of central bankers for allowing themselves to take too much credit when things are good, and [then] getting blamed too much when things are bad.

“But monetary policy doesn’t make an ageing economy young, it doesn’t make an economy which is having little innovation suddenly innovate, it doesn’t make an economy with a Zombie banking sector somehow miraculously healthy.

“I have a concern,” he voiced, expressing worry about the current state of monetary policy. He pointed out that it is being tasked with roles beyond its intended purpose. Specifically, he highlighted the practice of implementing helicopter money, where money is printed and distributed directly to individuals.

“In Europe, central banks are buying up a significant proportion of the corporate debt market – that’s what you do in China, in India, they’re doing that in Japan also.

“There are all sorts of other pressures and I worry in the long run that central banks are losing their independence.”

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