World Economy

China Warns of Global Financial Crisis in 5 Years

China Warns of Global  Financial Crisis in 5 YearsChina Warns of Global  Financial Crisis in 5 Years

The world hasn’t fully recovered from the problems of 2008 which means another crisis is possible, says Director-General of the China Banking Regulatory Commission Min Liao.

"It is likely that the world will face another global financial crisis in the next five years. The reason lies in the fact that many of the problems behind the 2008 crisis remain unsolved. The fragility is still there, for instance in shadowing banking, high indebtedness, a lack of structural reform, the sustainability of emerging markets, and high leverage," Liao said in an interview at the Summit on the Global Agenda of the World Economic Forum in Abu Dhabi, RT reported.

He said the super low-rate environment delayed structural reforms, and market discipline was breached. “The real economy cannot recover to the pre-crisis level in the foreseeable future, and it remains uncertain whether the intensified regulation can control risks from shadow banking and disruptive technologies. Therefore, the next crisis will probably catch us unprepared once more,” said the economist.

Liao urged the tightening of international regulations for shadow banking, which he sees as a threat to the global economy. "China’s recent stock market turmoil testified to the risk amplifying effect of shadow banking, which is armed with new technologies. The concern is the same in the US and Europe," he added.

Take Infrastructure Seriously

One of great ironies of our post-recession world is that savings are at record high, interest rates at a record low, technology is more sophisticated than ever and yet investment in the infrastructure of the future–from power and transport to hospitals and schools–continues to lag far behind every continent’s needs, Gordon Brown, former British prime minister and member of the WEF Global Agenda Council on Infrastructure, said at the forum.

"Instead of doing what we should be doing–building the world of the future–there is a yawning $20 trillion backlog running to 2030. This leaves 18% of the world’s citizens without electricity, 11% without clean water, nearly one in five deprived of basic healthcare and 58 million children denied a first day at primary school.

"A basic failure to invest in roads and rail, especially in Africa, means villages and towns are cut off and the expansion of trade is close to impossible. If climate change is the world’s biggest market failure, we know that without action on infrastructure there is no chance of meeting the new Sustainable Development Goals or of ever eradicating extreme poverty. For us to build the world of the future requires a coordinated effort. Governments, international organizations, banks, businesses and foundations, can all make a difference by developing stronger public-private partnerships. Of course, once they are built, infrastructure can command good returns."

Roads to Better Future

So in the last few years the focus of concern has been the absence of support for potentially bankable projects due to the shortage of investors prepared to take risks. Fortunately, in the last few months there have been signs of progress. Innovative minds are breaking free of the perceptions and constraints that gave us an annual infrastructure gap of $1 trillion between investments needed and investments made.

Having pioneered the initiation of the BRICS bank earlier in the decade, China has again led the way with the announcement of their Silk Road fund, and of the new Asian investment facility. These have made around $100 billion of new public funds available for emerging-market infrastructure over the next two decades.

But new ideas that reshape the relationship between public and private sectors are also reigniting commercial interest in infrastructure investment. At the World Economic Forum at Davos last year regional development banks, aid agencies, the World Bank and the IFC Corporation came together to propose new jointly funded credit mechanisms that will reduce the risk of early-stage investment in emerging-market infrastructure. In the last few months, with the support of the OECD, this has developed into a potential $100 billion credit facility.

Tackling Risks

As these new associations and the Addis Ababa summit recognized, the best solutions may now lie in new innovative forms of public-private partnerships based on the models promoted in Davos last year. The challenge will be to strike the right balance between the risk-taking and the guarantees necessary to get projects–especially initial preparatory work–off the ground.

"The best way to change perceptions is to take risks head on and one by one. We must look at all the many risks that worry potential investors–from regulatory risk, currency risk and construction risk to political risk; from regime change and corruption to governments summarily tearing up contracts–and find practical and enforceable ways of dealing with them, hopefully mitigating them through better systems of public and private cooperation," Brown said.