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The Coming China Shock

For years, China has defied the widely held view that political openness is necessary for long-term economic development. But recent macroeconomic developments now suggest that the country's exceptionalism is nearing its expiry date, with potentially devastating effects for the global economy.

CAMBRIDGE – In September 2018, we argued that China’s economic and foreign policies were defying the “laws” of economics and geopolitics, and warned that the situation could not last. Since then, our assessment has been borne out, and our concerns have deepened.

Until recently, China had been able to pursue a unique development path, owing to the government’s far-reaching control over the economy (and society more generally). But those days are over. The country’s internal debts are mounting to unsustainable heights, and domestic investment levels have passed the point of diminishing returns and are veering toward negative territory.

Moreover, China’s strategy of fostering exports, promoting industrial “national champions,” and expropriating foreign technology has crossed the threshold of what the West, especially the United States, is willing to tolerate. Chinese President Xi Jinping’s Belt and Road Initiative is showing all the signs of imperial overreach. Not only does the BRI’s lending far exceed participating governments’ borrowing capacity, but its loan terms have become increasingly onerous – indeed, usurious – as Harvard University’s Ricardo Hausmann recently observed.

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