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Updated Tuesday, March 2, 2010 10:22 am TWN, By William Pesek, Bloomberg

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Harvard's Rogoff gives legs to talk on China crash

Could China be the first emerging economy to escape trouble? It's comforting to think so, and officials in Beijing have had a great year. Stimulus efforts are producing growth of about 10 percent. And investors haven't made loads of money betting against China.

China will need to spend even more to maintain rapid growth. Japan is mired in deflation, Europe is struggling to keep Greece afloat and U.S. unemployment is worsening.

Stimulus efforts were always about holding Asia over until U.S. consumers recovered. The worst recession since the 1930s is still filtering through the biggest economy. So, China is largely on its own in a hostile global environment. Trouble there is worth exploring before it's too late.

“We would learn just how important China is when that happens,” Rogoff said in an interview last week.

Nomura Holdings Inc. says China may provide more than a third of world growth this year as it surpasses Japan's economy. So we're not talking about Thailand crashing. We're talking about what will soon be the second-biggest economy, one on which the world is increasingly relying.

China's influence explains why Hillary Clinton has U.S. Treasuries on her mind. We first saw that preoccupation in February 2009, when Clinton made her maiden trip to Beijing as secretary of state. She shelved human-rights issues in favor of talking up debt.

The White House projects a US$1.6 trillion budget deficit for the 2010 fiscal year, following US$1.4 trillion in 2009. It leaves Clinton and Treasury Secretary Timothy Geithner with quite a bond-sales job. Only, China might not be a reliable buyer of U.S. debt if it needs that money at home to boost growth.

Victor Shih of Northwestern University in Evanston, Illinois, is focusing on another US$1.6 trillion figure. That's how much debt he estimates China's local governments are sitting on. If the argument Shih fleshed out in a Feb. 8 piece in the Wall Street Journal is correct, local debt alone is one-third of China's 2009 gross domestic product and 70 percent of foreign-exchange reserves.

Between the U.S. and China, we're talking lots and lots of debt. Any unraveling on either side of the Pacific would devastate the global economy.

It's becoming less of a Black Swan scenario, and more a crisis unfolding in slow motion. G-2 risks should be of growing concern to investors, the CIA and perhaps even thriller writers.

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