China warned to slow economic growth

A financial expert has warned that China must slow its economic growth to avoid plunging in to debt.

A financial expert has warned that China must slow its economic growth to avoid plunging in to debt.

Speaking to RBS, Peking University professor Michael Pettis said that unless China's economy is rebalanced -- due to its exponential growth and rapid increase in debt-funded investment -- then the country could be facing unsustainable levels of future debt.

"When the European and U.S. 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."

As investment is now the key problem, simply throwing more money at financial issues will not work. Instead, Pettis believes that while debt rises outside of the regulatory framework, officials are now faced with a difficult balancing act. Debt must be lowered and reforms are necessary to pull interest rates up at a sustainable rate in order to not hamper continuing economic growth, but to allow the government to kept debt under control at the same time.

The former Wall Street trader believes that China will see growth rates of approximately 7.5 percent in the first half of 2013, and this growth will slow in the second half if the Chinese government begins to wrestle investment debt under control.

However, as the government drives to rebalance the economy, global markets will be affected. Inflationary pressures are likely to hit global commodity prices, and considering how important China's manufacturing industry is, we may all see the result in the next few years. Pettis concluded:

"There's a well-known economic phrase that when the U.S. sneezes everyone catches cold. When it comes to commodities, that’s true of China."

Read More: RBS

Image credit: Flickr

This post was originally published on Smartplanet.com

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