Fears of a disruptive unwind of China’s structural imbalances have plagued the market in recent years. Given China’s global significance, such a shock could spell disaster for the world.
There are diverse views on how China’s imbalances may be corrected. Popular expectations fall into three categories: 1) a US-style financial crisis 2) a Japan-style lost decade, or 3) a China-preferred soft-landing.
Exhibit 1 shows three hypothetical paths encapsulate these scenarios. The crisis and lost-decade cases are based on the experiences of the US and Japan during and after the 2008 and early 1990’s crises. The soft-landing path features a gradually maturing economy, with the imbalances unwound by successful reforms.
To determine which path is the most pertinent to China, we have compared its macroeconomic characteristics today with those of the US and Japan before their respective crises. Despite the obvious similarities, there are important differences which help to explain why China has so far avoided a systemic disruption.
Source : AXA Investment Managers