BNP IP: China in der Krise?

Many observers believe that China is in a financial and economic meltdown. Such a concern is causinganxiety and panic everywhere. China is the world’s second largest economy and largest trading nation.Given its growing economic influence around the world, bearish observers clearly think that when Chinasneezes, the rest of the world may catch a cold.

But what do the facts tell us about this gloomy narrative?

Essentially, there are two kinds of financial crisis: 

1) an external account crisis, which arises when foreigninvestors/creditors lose confidence in a country’s economic fundamentals and profligate government, or

2) a banking crisis, which usually stems from the wholesale market funding an asset bubble that aggravates a country’s bank balance-sheet mismatch problem when the bubble bursts.

To remedy an external account crisis, the country concerned usually has to devalue its currency andrestructure its foreign debt. With a banking crisis, the remedy typically involves recapitalizing the country’s domestic banks to contain systemic panic. As China has neither a fully convertible capital account nor a fully floating exchange rate, such a closed system reduces the likelihood of a full-blown financial crisis in its economy.

Clearly, China does not face an external account crisis. Its basic surplus (i.e. current account balance plus net foreign direct investment inflows) amounts to 4% of GDP and its foreign exchange reserves amount to more than 40% of GDP (Charts 1 and 2). These levels are enough to cover more than two years of imports (compared to the safety norm of three months-worth of imports). 

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