The Escape from Balance Sheet Recession and the QE Trap: A Hazardous Road for the World Economy

CHAPTER 6 China's Economic Challenges

China's economy remains strong relative to those of Japan, the United States, or Europe, even if growth has slowed to around 7 percent a year—these nations, after all, have experienced balance sheet recessions and the painful aftermath. The decoupling argument that was so popular in the wake of the Lehman collapse turns out to have been correct in the end.

Readers may wonder why China, with its robust economy and high real estate prices, is being featured in a book about balance sheet recessions. China was actually at risk of falling into its own balance sheet recession in 2008, but it was the first to deal with the situation and did so in a way that was uniquely Chinese.

I used to disagree with the proponents of decoupling, believing that it was exports that had supported China's economy and that a slump in key Western markets would weigh heavily on China as well. Indeed, when the global financial crisis (GFC)-triggered slump in the United States and Europe hit the export industries of China's coastal regions, it was feared that as many as 60 million laborers might be forced to return to their rural homes. Additionally, the authorities were so concerned about the severe shortage of employment opportunities for university graduates that they increased the number of graduate school places in a bid to keep student unrest to a minimum. China also experienced a collapse of its equity and real estate bubbles around 2008, and house prices fell ...