Financial crises follow certain patterns. Harvard Professor Carmen Reinhart analyzed these patterns using 800 years of data, in her book “This Time Is Different.”
Five years after the book’s publication, she finds China is different and not different at the same time.
“The bigger concerns about China are not external debt, but internal debt,” she says. External debts owed in foreign currencies set off the Mexican crisis in the mid ‘90s and the Asian crisis in the late ’90s.
This is where China is different. External debt in China is low, but domestic debt has ballooned to 242 percent of GDP, according to McKinsey. And there are some elements we don’t know about.
“There’s a shadow banking sector in which corporates who had access to international capital markets got into the business of lending to smaller firms, domestic firms that did not have access to international capital markets,” she says.
