Economist warns of potential financial crisis in China and how to avoid them

With debts at local-government level mounting, China has to curb easy credit and open up the financial services sector to private and foreign enterprises, says S. P. Kothari, deputy dean of Sloan School of Management under the Massachusetts Institute of Technology.

Even as property prices continue to rise, some economists, including Kothari, have warned the market is showing symptoms of the housing bubble in the United States that led to the economic crisis in 2008.

S. P. Kothari suggests the authorities curb easy credit and open up the financial services sector.[Photo/China Daily]

But the Chinese situation is unique, Kothari says, in that while people in the US were unable to repay loans and ended up defaulting, Chinese tend to buy homes with cash. The big problem is not with the buyers, but with the local governments.

Chinese local governments have been racking up debt through large-scale constructions. They count on selling land to real estate developers to earn money and therefore encourage them to develop properties.