So, will China’s problems cause a global crisis? The good news is that the numbers, as I read them, don’t seem big enough. The bad news is that I could be wrong, because global contagion often seems to end up being worse than hard numbers say it should. And the worse news is that if China does deliver a bad shock to the rest of the world, we are remarkably unready to deal with the consequences.
For those just starting to pay attention: It has been obvious for a while that China’s economy is in big trouble. How big is hard to say, because nobody believes official Chinese statistics.
The basic problem is that China’s economic model, which involves very high saving and very low consumption, was only sustainable as long as the country could grow extremely fast, justifying high investment. This in turn was possible when China had vast reserves of underemployed rural labor. But that’s no longer true, and China now faces the tricky task of transitioning to much lower growth without stumbling into recession.