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The Risks of China’s Failure – and Success

China is the one country that might be able to jump-start the sputtering global economy’s recovery; and yet its own economic growth is based on a foundation that is increasingly showing signs of strain. The dilemma is that both Chinese failure and success carry risks for the world economy.

NEW DELHI – As the world’s financial leaders gather in Washington, DC, for the annual spring meeting of the International Monetary Fund, their hopes – and fears – center on China. After all, China is the one country that might be able to jump-start the sputtering global economy’s recovery; and yet its own economic growth is based on a foundation that is increasingly showing signs of strain. The dilemma is that both Chinese failure and success carry risks for the world economy.

A failure scenario would be unique in post-World War II history. Because China’s economy is so large, the consequences would reverberate worldwide. But, unlike in 2008, when the US dollar appreciated, allowing emerging markets to revive quickly, the renminbi would likely depreciate should China’s economy experience a serious downturn, spreading deflation far and wide.

Other currencies might depreciate as well, some as a result of deliberate policy. Consequently, a China failure scenario could resemble the events of the 1930s, characterized by competitive devaluation and plummeting real economic activity.

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