The Soft Underbelly of China’s Growth

China’s explosive economic growth hinges on the rest of the world, radically changing the global production chain and challenging the global trading system. If China maintains its growth momentum over the next two decades, the global system will face huge challenges. Indeed, the question is not so much whether the global system will endure the imbalances spawned by China, but how severe those imbalances will prove to be.

Much of the concern over the past few years has centered on America’s yawning current account and fiscal deficits, and its effort to get China to let the yuan float more freely against the dollar. China, by contrast, sees its growth as tied to a stable currency, and may not want to introduce a more flexible exchange-rate regime, even after the 2.1% revaluation in July, pending alleviation of structural problems for which it is extremely difficult to set a timetable.

In fact, even as China’s economy has boomed over the past decade, structural adjustment in its domestic sectors slowed, mainly owing to political constraints. The banking system remains unhealthy and fragile; capital markets are dying.

https://prosyn.org/ZvS4GOe