Will China’s Growth Provoke a Global Credit Crunch?

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“How The Growth of Emerging Markets Will Strain Global Finance”
in McKinsey Quarterly
December 2010

An interesting look at how capital demands in emerging markets have the potential to drive up interest rates and make it more difficult for some businesses elsewhere in the world to borrow capital to drive growth. The authors, two senior researchers at the McKinsey Global Institute and a McKinsey consultant in New York, suggest that a falling global savings rate could choke economies in the face of rising demand.

As a remedy, they call for governments around the world to re-balance their economies away from consumption and toward savings. If the authors have anything working against them, it is timing. At a point where governments are trying to stoke consumption as a way out of the global recession, speaking on behalf of austerity falls on deaf ears (Greece, anyone?)

Economists like Arthur Kroeber would have more fun dismantling the argument, but as a layman I can see two factors that inveigh against the authors, in China at any rate. First, much investment in China is badly spent, with some sectors taking in more capital than they need and others coming up short. Part of the answer then is not increasing savings, but finding incentives to deploy capital more efficiently.

Second, while Chinese savings rates are likely to decline, th question is whether those rates will decline faster than incomes are growing. China’s GDP is still relatively low. If you double China’s GDP and the savings rate drops from 50% to 30%, you still wind up with a 20% net increase in available capital. Again, the challenge is how to drive a unit of economic growth with greater efficiency. If you can drive efficiency in emerging economies, the capital will be there.

These thoughts aside, the article is worth reading for its treatment of global capital as a single, shrinking pool that is going to be increasingly stretched to serve the needs of the BRIC economies.

One thought on “Will China’s Growth Provoke a Global Credit Crunch?

  1. Pingback: So How Are We Doing After The Credit Crunch Of 2007 | Talk Money Blog

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