Another prediction of a China bubble

Harvard Professor and former IMF chief economist Kenneth Rogoff talks about a subject we have pondered many times. Bloomberg:

China’s economic growth will plunge to as low as 2 percent following the collapse of a “debt-fueled bubble” within 10 years, sparking a regional recession…“You’re not going to go a decade without having a bump in the business cycle,” Rogoff, former chief economist at the International Monetary Fund, said in an interview in Tokyo yesterday.

“We would learn just how important China is when that happens. It would cause a recession everywhere surrounding” the country, including Japan and South Korea, and be “horrible” for Latin American commodity exporters, he said…“Their response to the latest financial crisis clearly raised the risk that they have a debt-fueled bubble in the economy,” said Rogoff, who in 2008 predicted the failure of big American banks.

While Rogoff said he isn’t sure what will cause China’s bubble to pop, he said land is “the best bet” as it is “the most common source” of crises. Real estate values in Shanghai and Beijing have “taken a departure from reality,” said the economist, co-author of “This Time is Different,” a 2009 book that charts the history of financial calamities in 66 countries.

A collapse would depress output gains to 2 to 3 percent, a “very painful” period which would persist for about a year and a half, Rogoff said. The slowdown won’t lead to a Japan-like “lost decade,” he added. In a speech earlier yesterday, he said China will do “very well this century.” China, the world’s fastest-growing major economy, expanded 10.7 percent from a year earlier last quarter. The World Bank forecasts a 9 percent expansion in 2010.

China may provide more than a third of global growth in this year, according to Nomura Holdings Inc., Japan’s biggest broker. The country’s policy makers aim for a minimum of 8 percent growth annually to create jobs and avoid social unrest. The global financial crisis left 20 million Chinese migrant laborers unemployed and more than 7 million college graduates seeking work

We’ve long wondered when and if China’s cooked books and bad loans would spark a day of reckoning. Logic suggests it has to happen sometime, but it’s hard to imagine it in a country this focused and hard working.

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