With economic power comes a rise in political and geopolitical power for China, including the possibility of economic bubbles and military aggression.

Question: How is China different from the U.S.? 

Nouriel Roubini:  Well there are differences in China, but there is also the case that there is a risk of asset bubbles in China.  Monetary credit and fiscal policy has been very easy during the crisis to prevent the hard landing of the Chinese economy. But with a 25% of GDP stimulus now the economy is overheating, inflation is rising, monetary and credit growth is excessive.  There are asset bubbles in commercial, residential real estate, and there is a risk that if these things are not controlled eventually—I'm not predicting a crisis in China in the next six months—but eventually those imbalances can lead also to a financial crisis in China. But the nature of it is really probably different from other ones because China has an undervalued currency because its running at current account surplus. So it’s not your typical kind of Anglo-Saxon kind of style of financial crisis. 

Question: What happens when China becomes the dominant economic power?

Nouriel Roubini:  Well China certainly is the second largest economy in the world right now and its share of global GDP and of global growth is rising and it’s not just China.  It is also India, emerging Asia, and other larger emerging market economies, so I think that in the next decade the main trend in the global economy is going to be exactly the rise of China and other emerging markets in absolute and relative terms compared to advanced economies, U.S., Europe and Japan that are in relative and also maybe absolute decline.  With economic power, trading power, financial power there is also a rise in political and geopolitical power as well. So one of the difficult questions is how much of the rise of China is going to be peaceful or not, how much China might be stretching its muscles also into the strategic and geopolitical area as opposed to just to be the economic one, but certainly adding 2.2 billion Chindians, Chinese and Indians, to the global economy and to the global labor force is going to be radically changing the global economies in ways that are not fully predictable.

Recorded November 30, 2010
Interviewed by Peter Hopkins