In Time Michael Schuman argues that a financial crisis on the level of the one seen by Japan and Korea is inevitable. Here’s why:

• China has used the “Asian Devilment Model” to reach its current levels of growth and prosperity. The steps to this model include exploiting low wages to quickly industrialize with generous amounts of investment as determined by the government, allowing it to ‘direct’ the growth.
• The involvement of the government causes prices to settle at the ‘wrong’ levels. The study of economics has shown that if prices are at the wrong level for an extended period then this will trigger a financial crisis that will lead to a correction of prices.
• In China there is ample evidence that prices are wrong – especially in the property sector. While analysts are correct to note that China needs extensive infrastructure projects to house its people, the type of housing being built is often of the wrong type. It is either too expensive, or it does not meet the safety specifications required by corporations. The multitude of malls seem to mostly be empty.
• Countries that follow the Asian Development model generally have a crisis after about 35 years of following the model. Unless China reforms, this would place a potential Chinese financial crisis around 2015.

To read about what it means for prices to be wrong, other signs that the country is headed towards a crisis, and the things that China could do to prevent such a fate for itself, click here.

Source: Time

Via: Newmark’s Door