Major Bubbles leave a trail of disarray and confusion – with the potential for a couple policy miscues to unleash mayhem. Think of the political paralysis and upheaval that has befallen Japan for the past 25 years. Think of post-mortgage finance Bubble divisiveness and political polarization here in the U.S. Look at the social tension and confused policymaking in Europe. The bursting of the historic Chinese Bubble has begun the process of eradicating genius while exposing a mess of monumental proportions, as the current market turmoil illustrates today. The question is, can China’s policy makers navigate out of this challenging situation, whilst placing the country in a better place to meet the challenges of a 21st century economy?
Professor Andrew Sheng, a Distinguished Fellow of Fung Global Institute and an Institute for New Economic Thinking Senior Fellow, believes China can make it, even as he acknowledges the difficulties the current leadership faces. For starters, never have so many Chinese owned (over-priced and poorly constructed) apartments. Never have Chinese citizens, governments, financial institutions and corporations accumulated so much debt. Never have the Chinese had so much invested in securities markets. China has zero experience with a multi-trillion (yuan or dollars) “shadow banking system.” Never have so many invested so much in “wealth management” vehicles and other sophisticated financial products, without a clue as to where their “money” was directed. And when it comes to corruption, China can certainly match its western counterparts, to say the least.
The Chinese – apartment owners, bankers, Internet financiers and policymakers – have never experienced the downside of a massive Credit Bubble. Never has China experienced Trillions of “money” that retains “moneyness” chiefly on the perception that the all-knowing central government will safeguard its value. Never have Chinese finance and spending had such major impacts around the world. China does, however, have a long history of financial panics and political instability. This is the challenge which its leadership has to face Sheng discusses how China is seeking to manage the delicate balancing act of liberalizing and opening up its country, whilst seeking to avert a massive uncontrollable debt deflation.