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Tough times ahead seen for China if bubble pops

Retired Japanese official says soft landing unlikely, social disquiet rising


CHINA’S economy has little chance of achieving a soft landing once the ‘bubble’ in stock market and real estate prices there bursts, according to former senior Japanese finance ministry official Toyoo Gyohten, who now heads one of Asia’s leading economic research institutes.

Meanwhile, resentment over the pace of change in China is growing among social groups ranging from farmers to city dwellers and intellectuals and could erupt, he said.

Mr Gyohten’s bearish comments on China were made at a briefing in Tokyo last Friday shortly after the World Bank predicted continuing strong growth in China’s economy and that it would not suffer greatly from any popping of the bubble in asset prices.

The World Bank analysis that China and the rest of East Asia would be little impacted by a slowdown in the US economy was also challenged by Chinese officials who said that it could be very serious.

World Bank claims that an asset bubble burst in China would have limited impact because it has not been accompanied by a boom in consumption were rejected by Mr Gyohten. The former vice-finance minister for international affairs, now president of the Tokyo-based Institute of International Monetary Affairs, said that fallout from an asset price implosion, in the shape of surging bankruptcies, unemployment and bad loans in the banking system, would be highly damaging to China’s economy.

Six rises in China’s interest rates plus nine increases in banking reserve requirements plus the imposition of administrative controls on bank lending have failed to curb the runaway trend in stocks and other assets prices while inflation has now hit its highest level in ten years, said Mr Gyohten.

Chinese authorities will probably tighten monetary conditions further to contain these pressures, or some other event will trigger an asset bust, he said. ‘Either way, there is little possibility of a soft landing.’

A former chairman of the Bank of Tokyo and now special advisor to the Bank of Tokyo-Mitsubishi UFJ, Mr Gyohten also said that he ‘could not rule out the possibility of a major revaluation of the Chinese yuan,’ owing to growing pressure from Europe as well as the United States for such a move.

‘We cannot deny that the (currency) is undervalued,’ he said, noting that it had risen in value by only around 10 per cent against the dollar since 2005.

Mr Gyohten’s analysis of China’s political situation was even more downbeat than his comments on the country’s economy. ‘At various levels of government (in China) there is increasing corruption and wrongdoing,’ he said.

Social resentment is rising and ‘people are beginning to question the legitimacy of the dictatorship of the communist party. The thing the leadership fears most is revolution.’

Chinese authorities will probably seek to quicken the pace of ‘gradualist’ political reform, he suggested. While the past 30 years have been devoted to establishing China’s presence among the world’s leading economies, the next 30 years will see an attempt by China to cement the market economy and to establish political stability under the leadership of the communist party, he added.


Source: Business Times 19 Nov 07


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