Wed, Jul 24, 2013 - Page 8 News List

World to pay as China’s boom ends

By Paul Krugman

The answer to that question increasingly seems to be “no.” The need for rebalancing has been obvious for years, but China just kept putting off the necessary changes, instead boosting the economy by keeping the currency undervalued and flooding it with cheap credit. (Since someone is going to raise this issue: No, this bears very little resemblance to the US Federal Reserve’s policies for the US.)

These measures postponed the day of reckoning, but also ensured that this day would be even harder when it finally came and now it has arrived.

How big a deal is this for the rest of the world?

At market values — which is what matters for the global outlook — China’s economy is still only modestly bigger than Japan’s, it is about half the size of either the US or the EU. So it is big, but not huge, and in ordinary times, the world could probably take China’s troubles in stride.

Unfortunately, these are not ordinary times: China is hitting its Lewis point at the same time that Western economies are going through their “Minsky moment,” the point when overextended private borrowers all try to pull back at the same time and in so doing provoke a general slump. China’s new woes are the last thing the rest of the world needed.

No doubt many readers are feeling some intellectual whiplash. Just the other day we were afraid of the Chinese, now we are afraid for them, but our situation has not improved.

This article first appeared in the New York Times.

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