When it comes to major economic imbalances, the most dangerous five words that economic policymakers can utter are “this time will be different”. By lulling themselves into a state of complacency with these words, policymakers tend to delay taking policy action that might prevent the exacerbation of those imbalances and a consequent day of economic reckoning.
If ever a country had major economic imbalances it has to be today’s China. And if ever both Chinese and global policymakers are convincing themselves that this time will be different, it has to be in today’s Chinese economic context.
Perhaps the most striking of China’s economic imbalances is its over-dependence on its property sector to drive economic growth. According to estimates by Harvard University’s Kenneth Rogoff, China’s property sector now accounts for close to 30 percent of its overall economy and for around 78 percent of Chinese household’s total wealth. Those ratios are approximately double the corresponding ratios for other major world economies.
Equally troubling has been China’s seeming addiction to credit expansion to sustain its rapid economic growth. According to the Bank for International Settlements, over the past decade, China’s credit expansion to its private sector increased by around a staggering 100 percent of GDP. Such a pace of credit expansion exceeded that which preceded Japan’s lost economic decade in the 1990s as well as that which preceded the US 2008 housing and credit market bust.