Michael Pettis said that the authorities faced their first real economic challenge in rebalancing their economy.
He warned that something had to be done fast to deal with the country’s rapidly rising increase in debt-funded investment.
The Peking University professor – who specialises in Chinese financial markets – said that resulting debt levels were growing at an “unsustainable” pace in China, meaning that debt was growing much faster than the country’s capacity to service it.
“When the European and US economies started to slow down in 2007, the Chinese responded with a massive surge in investment,” he said.
“They already had the highest investment rate in the world and they raised it significantly. But the consequence was a truly unsustainable increase in debt. In January and February this year, China saw its largest ever increase.”
He added: “Although the country has faced financial crises before, it previously resolved them by investing heavily. But this time that won’t work because investment is the cause of the problem.”
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