BEIJING – While parts of the world are dealing with the aftermath of the financial crisis or an emerging sovereign-debt crisis, China is coping with the risk of overheating and/or an asset bubble.
Many factors may be pushing China’s economy in this direction. One of the most worrying is the same which fueled the current crisis in the eurozone: mushrooming public debt. In the eurozone, the problem is member countries’ sovereign debt; in China, the problem is borrowing linked to local governments.
In the eurozone, a bloated social-welfare system, particularly for the rapidly growing population of retirees, and the economic slowdown caused by the financial crisis are key components of the structural debt problem. In China, local officials increased borrowing in order to ensure that their regions’ economic growth rates remain at double-digit levels.
There are, no surprise, commonalities between China and the eurozone. Obviously, debt accumulates wherever people want to spend more than they have saved. But a more specific similarity is that highly indebted eurozone countries and Chinese provinces and counties have been spending too much of a common currency.