There is a 55 percent chance there will be a Chinese caused global recession according to Citigroup chief economist and former U.K. policy maker Willem Buiter. He defined the recession being a period of sub two percent growth.
“The world appears to be at material and rising risk of entering a recession, led by EMs and in particular by China,” said Buiter.
He said Chinese economic growth would fall below four percent if there was not a huge, consumer focused stimulus plan, which would result in recession for China which is the world’s second biggest economy, and a resulting global slowdown.
Speaking to the media Buiter said the reasoning for his consternation was the huge debt China’s non-financial companies had built up in a relatively short period of time. He said over the last ten years, China’s private sector indebtedness had exploded, exceeding that of the U.S. which he pointed out has a much more sophisticated financial system and advanced economy.
“I think things are financially out of control in China and we are waiting for the regulators and supervisors to bring things back under control and to do for the financial system the kind of things – recapitalizing banks and other systemically important financial institutions – that would give you the underpinning for continued growth,” he said.
Buiter said he was not confident that Beijing could resolve its bloated credit situation and that Chinese policymakers were playing an “extend and pretend” game similar to the European Union’s tendency for short-term solutions to the Greek financial crisis.
“Until the problems in the banking sector, the financial sector generally, and in the corporate sector – the excessive debt burden – is tackled by the government, the only entity that can do it, I think the prospects for resumption of healthy growth in China are dim,” he concluded.
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