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Chinese Credit Bubble May Affect Global Economy, Expert Tells Rutgers Conference

Julia Coronado, president and founder of MacroPolicy Perspectives, speaking at a conference hosted by the Rutgers Center for Real Estate. (Steve Lubetkin Photo/StateBroadcastNews.com) Julia Coronado, president and founder of MacroPolicy Perspectives, speaking at a conference hosted by the Rutgers Center for Real Estate. (Steve Lubetkin Photo/StateBroadcastNews.com)

SHORT HILLS, NJ—China is driving the global economic growth cycle but is facing a day of reckoning because of its liberal use of credit, according to Julia Coronado, president and founder of MacroPolicy Perspectives, an economic research consulting firm. Coronado was the keynote speaker recently at a conference hosted by the Rutgers Center for Real Estate.

“China is in the driver’s seat. Just from a pure accounting standpoint, the magnitude of the economy and the level of growth accounts for more than half of growth directly, and then indirectly through its impact on commodities prices and emerging markets, that is the driver,” she said to about 250 commercial real estate market participants at the conference at the Short Hills Hilton.

Coronado’s firm analyzes the US economy from a global perspective with a focus on financial market linkages and demographic realities. She is an executive in residence and a blogger for Rutgers Center for Real Estate and a regular commentator on Marketplace.

Official Chinese statistics are carefully managed and not very useful in analyzing the country’s impact on the global economy, she says.

Pointing to a WikiLeaks disclosure of a comment by Chinese premier Li Kekiang, who was quoted telling a US diplomat that three statistics tell a better story about China’s economy: freight volumes, electricity generation, and loan growth, Coronado uses a proxy “Li Kekiang index” constructed by Bloomberg.

Growth in China in the early 2000s came from fundamental growth in the economy, but more recently, continued growth appears to come from much broader use of credit, she argues. This explosion of borrowing has tipped the scales so that credit in the non-financial private sector in China now represents about 220 percent of GDP.

“China will slow down its economy to rein in the credit bubble,” Coronado says. “The tail wind for the past six to nine months from China is going away and will become a headwind.”

The main good news is that interest rates are unlikely to rise dramatically, but the bad news is that rates are mainly low because of low economic growth and rising uncertaintly, she says. Economic cycles “don’t die of old age, but they often die from credit bubbles,” Coronado says, noting that China’s credit problems could spill over to the global economy, something for commercial real estate investors to keep an eye on.

 

 

 

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