China crash?

An extended version of my column on “China’s slowdown” now appears at VoxEU, including academic references.

Someone at Seeking Alpha responds with the following question:  What are the odds of an outright recession in China, with substantially negative GDP growth?

My reply:

This scenario is certainly possible. I have even described financial bubbles-and-crashes as a sort of “rite of passage” that newly arrived economic powers undergo (Holland 1637, England 1720, US 1929, Japan 1990, Korea 1997).  In China the crash would probably come from the accumulation of bad loans (especially in the shadow banking system) and financing of unused capacity (especially in residential construction).

I would put a 25% probability on a Chinese recession happening within the next few years. Even then, however, China would more likely recover before long, as Korea did, rather than stagnate as the US did in the 1930s or Japan in the 1990s-2000s.

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