Nouriel Roubini: China Is at a Critical Tipping Point
China's growth model is not sustainable but many of the necessary reforms are on hold. "President Xi first wants to consolidate his power, before tackling them," says economist Nouriel Roubini. Watch our exclusive video interview to find out more.
China's growth has been slowing down. Why do you think this slowdown will continue?
Nouriel Roubini: Even the Chinese authorities realize that their growth model, which contains too much saving, too much investment, and which is highly capital intensive, is not sustainable. No country in the world can be so productive that it can take half of its annual GDP and invest it into new capital stock. Doing this causes three problems: firstly, a high number of bad assets in the banks and the shadow banks and many bad investments in real estate and infrastructure. Secondly, excess capacity in industrial manufacturing; and finally, rising bad debts in the private and public sector. The debt ratio of the private and public sector in China today is 250 percent of its GDP and rising.
China is aware that reforms are necessary. They have to redistribute income to the households in order to increase consumption and decrease investment. If that happens, in combination with a declining and aging population, growth will have to slow down as the service sector becomes less productive than capital-intensive manufacturing. If, instead, the rebalancing is delayed, which there is talk of at the moment, then there is a risk that the financial cost of cleaning up the bad assets, bad debt and excessive investment will lead to a bumpier and rougher landing of the Chinese economy. Either way, a growth rate of 5 percent to 6 percent is expected over the next couple of years.
What is your view of the progress of Chinese reforms?
Many of the economic and financial reforms are on hold: namely deposit rate liberalization, deposit insurance, liberalization of exchange rates and capital accounts, as well as eliminating the moral hazard in the activities of the shadow banks. The reason for this may be that President Xi wants to consolidate his own political power. Xi is going against the economic interest and the lobbies that were benefitting from the old growth model: state-owned enterprises, provincial government, the army and the state sector. And once he has established power and is more confident, reforms could be jump-started.
The hope is that Xi will be more like Deng Xiaoping, who also consolidated power and then used it to aggressively implementing structural reform. We will have to see whether all this power is for the good cause or rather for the sake of maintaining the stability of the current system and regime.
How will China's slowdown affect the rest of the world?
In many emerging market economies, several of which are fragile, we now see a stagnation of growth. Global tailwinds have become headwinds due to the slowdown of China, the end of the commodity super-cycle and the fact that the Fed has, however slowly, ended tapering. Over the next few months interest rates will, however, start to rise gradually.
Will China's situation affect Fed policy?
The Fed will not decide its own monetary policy based on global growth and inflation, but rather on the domestic targets of growth, inflation and employment. However, the Fed has already informed us that if global growth were to decrease relative to what the Fed and the IMF expect, and if the value of the dollar were to significantly appreciate further, it could delay a rise in interest rates. This is not because it directly cares about the rest of the world, but rather because the rest of the world affects US economic growth, employment and inflation.