China is heading for a brick wall, says Nouriel Roubini

published 13 May 2011

Perennially bearish investment guru Nouriel Roubini warns that the Chinese economy is about to hit a "brick wall".

Living up to his 'Dr Doom' moniker, he predicts that China's current investment model is unsustainable, and is creating expensive white elephants and unpaid loans. The 52-year-old, who once worked as an advisor to US Treasury Secretary Timothy Geithner, says it will end in "financial crisis and/or a long period of slow growth".

Roubini gained prominence among investors when he controversially predicted in 2005 that "a once-in-a-lifetime housing bust" would bring the "global financial system shuddering to a halt". With most investors bullish on China, the Turkish-born academic again finds himself at odds with the general consensus.

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Roubini's main gripe is that China's economy is too dependent on government investment and export-led industrialisation. At the moment, around 50% of GDP is reinvested in fixed assets, such as housing or airports.

The problem is, says Roubini, "that no country can be productive enough to reinvest 50% of GDP in new capital stock without eventually facing immense overcapacity". He claims this is already evident in "empty airports highways to nowhere (and) ghost towns". When these under-used assets fail to make money the economy will be hit by a "staggering non-performing loan problem".

Pushing up investment in fixed-assets helped China avoid the crisis, and maintain growth during a weak export market. But just like "all historical episodes of excessive investment" the temporary growth rates will come "at a very high foreseeable cost".

James graduated from Keele University with a BA (Hons) in English literature and history, and has a certificate in journalism from the NCTJ. James has worked as a freelance journalist in various Latin American countries.He also had a spell at ITV, as welll as wring for Television Business International and covering the European equity markets for the Forbes.com London bureau. James has travelled extensively in emerging markets, reporting for international energy magazines such as Oil and Gas Investor, and institutional publications such as the Commonwealth Business Environment Report. He is currently the managing editor of LatAm INVESTOR, the UK's only Latin American finance magazine.