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China slowdown seen as threat to stability
Published on: 2010-01-15
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A hard economic landing for China, fiscal crises in developed countries and broad asset-price collapses are the biggest risks to global stability this year and beyond, according to the World Economic Forum, which meets in Davos this month.

China is one of the biggest concerns in this year’s Global Risk report, partly because of the way it has responded to the global financial crisis and partly because it is one of the only risks yet to be realised from those consistently identified in the report’s five-year history.

The report has been successful in identifying the big risks in the past few years, having flagged up in 2006-2008 asset-price overvaluations, consumer over-indebtedness, oil and food price jumps and the destabilising effects of the US current account deficit.

However, its impact is somewhat muted by the fact that it pointedly has never attempted to forecast how or when these risks would materialise.

This year’s report says the chances of a serious economic slowdown in China are above 20 per cent and would lead to economic losses of between $250bn and $1,000bn. The repercussions would be greater than this because of the country’s central role in areas such as funding developed country deficits and consuming the majority of exports from its south-east Asian neighbours.

The authors of the report said that while China appeared to have navigated the global financial crisis well, it had relied on especially high credit growth to do this, which risked mimicking the asset price bubbles and unbalanced growth of the west before the crisis.

Commercial lending by Chinese banks grew more than 45 per cent between July 2008 and July 2009, according to data from Swiss Re.

“China is on a very unbalanced path of economic growth,” said Daniel Hofmann, group chief economist at Zurich Financial Services, the global insurance group.

This helped to explain why asset price collapses were still high on the agenda, in spite of the pain that the US and western Europe have been through in the past two years. The likelihood of another collapse is also above 20 per cent, according to the report, and would cause global economic losses of more than $1,000bn.

Raj Singh, chief risk officer at Swiss Re, said another significant risk that was gaining importance as countries’ fiscal positions worsened was the need to address chronic under-investment in infrastructure.

“This is not just about the risk to airports or other existing structures in the developed world, but is particularly acute for agriculture and food security,” he said.

He said the last fiscal crises of the 1980s and 1990s resulted in a big drop in agricultural investment, which has never been replaced – and the world had now reached a point where it needed to increase food production by 70 per cent to feed an expected population of 9.1bn by 2020.

Mr Hofmann added that the risks of fiscal crises faced by western countries particularly were not based mainly on “exploding budget deficits” but about the current models for health, education and unemployment protection, which in the US and UK especially “are clearly not sustainable”.

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