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China Falling? Not so Fast

by Joshua Kurlantzick
July 1, 2013

A woman counts Chinese yuan notes at a market in Beijing on July 1, 2013. Chinese markets stabilized on Monday as investors spooked by last month's cash crunch took heart from a flurry of official reassurances that there is ample liquidity in the financial system. (Jason Lee/Courtesy Reuters) A woman counts Chinese yuan notes at a market in Beijing on July 1, 2013. Chinese markets stabilized on Monday as investors spooked by last month's cash crunch took heart from a flurry of official reassurances that there is ample liquidity in the financial system. (Jason Lee/Courtesy Reuters)

Over the past month, global financial markets have become terrified by the prospect of a Chinese economic slowdown. Last week, the inter-bank lending rate in China jumped precipitously, suggesting that Chinese banks, which for years have been piling up debt lending to state-owned enterprises and building infrastructure, may now be facing a severe credit crunch. China’s money markets slowed to a near halt, China’s stock markets suffered roller coaster whiplash, and many Western fund managers began lightening their China exposure.

Outside the country, bears started a familiar echo:  Chinese banks’ debt loads signal the arrival of an event doomsayers have been predicting for literally three decades – not a slowdown but a meltdown of China’s economy.  A meltdown, of course, would be catastrophic for the international economy, since nearly every other country in Asia is dependent on trade with China –as are, increasingly, most Western multinationals.

But although international markets, the original kind of crowd-sourcing, often deliver the right verdict, this time– as in so many previous cases with China– they just might be wrong. The Chinese economy, the second-largest on earth, is not going to melt down any time soon; in fact, it might still grow more strongly this year than most others in the world.

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