Analyzing China’s economy can feel like an exercise in futility. The political system presents a certain version of economic reality via official data, while media reports and market prices provide another. A glowing macroeconomic picture of stable and high rates of GDP growth contrasts with micro-level stories of bankruptcy, defaults, and redundancies. Measures of economic performance in China are often not directly comparable to those in other countries. Many aspects of China’s economy look unsustainable in the long term, but it is difficult to identify any particular problem that Beijing authorities cannot manage effectively in the short term. The potential for economic crisis in China is always present, but a crisis is never quite there. That need for better diagnostic tools of meaningful financial stress in China drove the development of the China Economic Risk Matrix, similar to a threat matrix in security parlance. The risk matrix attempts to track developments within the key areas of financial risk in China where changes in Beijing’s credibility can have an outsized impact on financial stability. It is not a predictive tool but a diagnostic one—more like a flood warning system rather than a signal that a particular dam will break.
This report is made possible through generous support from the Smith Richardson Foundation.