Rogoff Says China Crisis May Trigger Regional Slump (Update1)

By Aki Ito and Patrick Rial
Feb. 24 (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, according to Harvard University Professor Kenneth Rogoff.
"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.
China, set to surpass Japan as the second-largest economy this year, has helped pull the world out of its deepest postwar slump. Record lending, soaring property values and accelerating economic growth prompted the government to begin retracting stimulus measures implemented during the global recession.
"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.
In 2008, China cut interest rates, started rolling out a 4 trillion yuan ($586 billion) spending package and scrapped quotas limiting lending by banks to counter slumping exports.

‘Best Bet’

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.

Migrant Laborers

The global financial crisis left 20 million Chinese migrant laborers unemployed and more than 7 million college graduates seeking work by March last year. In February 2009, a clash between police and about 1,000 protesting workers from a textile factory in Sichuan province injured six demonstrators, rights group Chinese Human Rights Defenders reported.
World exporters are increasingly relying on China as consumers in the U.S. and Europe retrench.
Honda Motor Co. and Nissan Motor Co. are adding capacity in China, which last year overtook the U.S. as the biggest car market. Rio Tinto Group’s sales to China overtook those to North America and Europe in 2009, reaching 24.3 percent of the total from 18.8 percent a year earlier, the mining company said this month.
Chinese policy makers are trying to cool lending that helped property prices in 70 cities climb at the fastest pace in 21 months in January. The government aims to reduce new loans to 7.5 trillion yuan this year from a record 9.59 trillion yuan in 2009. The People’s Bank of China raised the proportion of deposits that lenders must set aside as reserves twice this year to cool the economy.
"If there’s a this-time-is-different story in the world right now, it’s China," Rogoff said in the speech at a forum hosted by CLSA Asia-Pacific Markets, a unit of Credit Agricole SA, France’s largest retail bank.
People say China "won’t have a financial crisis because there’s central planning, because there’s a high savings rate, because there’s a large pool of labor, blah blah," he added.
"I say of course China will have a financial crisis one day."

I think Rogoff might just be trying to sell more compies of is newly minted book. He has been making some bold claims recently. I do agree with his sentiments on China however. The bubble will pop when the economy stops relying on exports to create job growth.

Batman wrote:

I think Rogoff might just be trying to sell more compies of is newly minted book. He has been making some bold claims recently. I do agree with his sentiments on China however. The bubble will pop when the economy stops relying on exports to create job growth.

You're right, unless you just came back from a mission on Maars, i dunno how you could have missed articles where his new book is advertised...

Regarding China, if the Bubble is to pop, I hope that's not too soon, my long stock bucket is currently almost fully invested in Asia riding on it

Batman wrote:

I think Rogoff might just be trying to sell more compies of is newly minted book. He has been making some bold claims recently. I do agree with his sentiments on China however. The bubble will pop when the economy stops relying on exports to create job growth.

Short term, i don't see most of asia weening of export oriented growth... the boldest steps taken is probably by japan so far... but even still thats gonna take a long time to see full effects of that. I would like to see japan star focusing on the Asia region more for trade and developing and improving politcal relations amongst ASEAN and greater Asia.

its kinda like weening off drugs... maybe the pop will be the withdrawl period...

-snapman