US-China trade war and mounting debt risk disaster 10 years after the global financial crisis

Over the past decade, we have learned that a serious banking failure with risky balance sheets can feed into a major international financial crisis. That, in turn, is big enough to cause an economic crisis, as we saw with the Great Recession. The downturn in growth, trade and productivity that followed also opened up the possibility of a new contagion today.

The global financial crisis, which I confronted as governor of the Reserve Bank of New Zealand at that time, masked some very important developments that in the ensuing years have fostered both recovery and new risks. One of the biggest has been continued strong growth in China, which helped keep world production growth buoyant thanks to huge Chinese fiscal stimulus.

During this period, China has increased its domestic value added and pushed up the value chain, in line with its “Made in China 2025” policy. Notably, it has boosted its share of trade in fast-growing markets, harnessing easing measures driven by practical engagement with other Asia-Pacific Economic Cooperation member economies, and invested heavily under the Belt and Road Initiative.