Interesting paper from economics professor Wing Thye Woo on whether China's explosive growth is sustainable.

The question he raises: is China headed for a car crash? Could we see a correction that will be labelled as the Great Fall of China? This is one of the big risk issues for the global economy and business around the world.

His paper What are the High-Probability Challenges to Continued High Growth in China? says that if we compare the Chinese economy to a speeding car, then are three classes of failures that could result in a car crash:


1. hardware failure where there is the breakdown of an economic mechanism, like a budget crisis, or a banking crisis.

2. software failure where the flaws in governance create problems. Possible scenarios would include the high-growth strategy creating so much inequality, and corruption that it produces social unrest results and/or the state not being able to meet the rising social expectations.

3. power supply failure, a situation akin to the engine being turned off or the car running out of fuel. This would happen if there was an environmental crisis or if China's exports collapsed because of a trade war.

He writes: "My assessment is that the highest probability event in hardware failure is the weakening of China's fiscal position; the highest probability event in software failure is social disorder, and the highest probability event in power supply failure is water shortage. And my ranking of the probability of these three specific negative events in descending order is social disorder caused by outmoded governance, water shortage as a result of inept environmental management, and fiscal crisis generated by the repeated recapitalization of the state banks and the rapid aging of the population."

Despite these reservations, he remains cautiously optimistic.

But there are some caveats. First, the revolutionary changes to China's economy are technically difficult to implement. How do you set up, for example, safety nets that are sufficient? And secondly, some of the potential losers could successfully undermine the changes.

Is China's economy headed for a car crash? China's economic growth is driven by state-directed bank lending and foreign investment so the answer is critical for businesses and economies around the world.