Uncertainty in China

Published on Author goodk17

Panos Mourdoukoutas, a professor at Long Island University and contributor at Forbes, has written a piece on uncertainty in China’s and the US’s economy. He points out that there are currently some rather bleak outlooks on China. He cites author Richard Vague, who warns that expanding private Chinese debt could lead to a ‘crisis’. He made the claim that most major recessions are caused by excess private debt. While this a slightly contentious claim, it does seem to worry many people including Vague, who is a managing partner at Gabriel Investment.

Even if too much private debt does not cause recessions, as economists Scott Sumner firmly asserts, an excess of public uncertainty is also probably not a good signal for the Chinese economy. As has been stated earlier, the Chinese government is not, or at least does not seem to be, concerned about the country’s economic health. However, public fear, founded or not, could have a real negative impact on the Chinese economy.

Source: http://www.forbes.com/sites/panosmourdoukoutas/2015/04/04/nobody-knows-where-the-chinese-economy-is-does-anyone-have-a-clue-where-the-us-economy-is-heading/

2 Responses to Uncertainty in China

  1. Of course Leland Miller gave us information on this. As you note, neither government debt-to-GDP levels nor private credit/GDP are tightly linked to … anything. However, when debt is used to purchase long-term assets, well, it’s very hard to attach an objective value to a stock or piece of real estate, and so prices are apt to deviate from any particular putative equilibrium. More important, they can deviate for a long period of time (= “bubble”) and shift suddenly when expectations shift (= “crash”).

    Now we may want to look at changes rather than levels and then ask more about who holds debt, how it is linked to real estate and equity [long-term asset] prices (if at all) and so on.

  2. I wonder if it more the volatility of the debt-to-GDP levels that are spooking the public. Like the Prof said, stock prices and real estate prices tend to bounce around any equilibrium in the long run, which can cause volatility. High degrees of volatility however, do not necessarily mean that the economy is in trouble.