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China dangers “huge errors” in taking motion: Ex-IMF chief economist

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China risks “big mistakes” in cracking down on large parts of its economy, from technology to tutoring to real estate, said a former chief economist at the International Monetary Fund.

“I am very concerned about China because to some extent they are attacking the basis of their previous growth,” Raghuram Rajan told CNBC’s “Squawk Box Asia” on Friday.

“At some point you have to give up this growth method and move on to a new one. The question is, try to do it too fast and do it less to help growth, ”he said.

China has relied on cheap labor and cheap finance to grow its economy, said Rajan, who was the IMF’s chief economist from 2003 to 2006. The move away from this growth model creates “enormous” uncertainties, although it is necessary, he added.

So you are essentially doing a lot of things at the same time. If you do that, you run the risk of making big mistakes.

Raghuram Rajan

Professor of Finance, Chicago Booth

If house prices fall due to government measures, homeowners will feel poorer and local governments could lose revenue from lower land sales, he said, pointing out that local governments are an important source of funding for local businesses.

“Basically, you are doing a lot of things at the same time. There is a risk of big mistakes, ”says the professor.

The economic challenges China is facing have led major banks to lower their growth forecasts for 2021 for the world’s second largest economy.

‘Higher Longer’ inflation

Rising inflation is a major challenge for the global economy, warned Rajan.

Inflationary pressures appear to be less transitory than central bankers thought, said Rajan, who served as governor of the Reserve Bank of India from September 2013 to September 2016.

Big central banks like the Federal Reserve and the European Central Bank have suggested that spikes in inflation are temporary and would eventually subside.

However, Rajan said there are signs that higher prices may last longer than expected.

Supply constraints – a source of accelerating inflation – have spread across sectors and countries, he said. And soaring energy prices have caused electricity restrictions that are “even more damaging” to global supply chains, which are already grappling with major bottlenecks, he added.

In the US, higher home prices have spiked rents and it would take time to translate into higher consumer prices, the professor said.

“When you put all of this together, it suggests that inflation would be higher for longer,” said Rajan.

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