AP Photo/Andy Wong
At the New York Times, Paul Krugman turns his attention to China. Simply put, the Middle Kingdom could be the next domino to fall — after the U.S. financial crisis an the ongoing eurozone crisis — in what now looks like a pitched global battle between regulated finance and finance that, if not purely criminal, isn't exactly above-board.
Krugman zeroes in on the big difference between limited consumer spending in China, surging investment spending, and our old friend, real estate:
Do we actually know that [Chinese] real estate was a bubble? It exhibited all the signs: not just rising prices, but also the kind of speculative fever all too familiar from our own experiences just a few years back — think coastal Florida.
And there was another parallel with U.S. experience: as credit boomed, much of it came not from banks but from an unsupervised, unprotected shadow banking system. There were huge differences in detail: shadow banking American style tended to involve prestigious Wall Street firms and complex financial instruments, while the Chinese version tends to run through underground banks and even pawnshops. Yet the consequences were similar: in China as in America a few years ago, the financial system may be much more vulnerable than data on conventional banking reveal.