While there have been positives on the global political front like France electing a liberal as its President and the US administration dialling back from some of the election rhetoric, worries pertaining to China remain, former Reserve Bank of India (RBI) governor Raghuram Rajan said on Friday.
Speaking to television channel CNBC in Singapore, Rajan, now a professor of finance at the University of Chicago Booth School of Business, said banks are in a “much safer place”, following the global financial crisis. He explained that while the overall level of risk in the economy hadn’t diminished, if you make banks safer, the risk has to go somewhere else.
Rajan added the US Federal Reserve’s decision to raise interest rates slowly and steadily is quite reasonable. “I think the Fed has said repeatedly that this is going to be a slow and measured process and it is not going to back away from it unless the data change considerably,” he added.
Rajan said there were aspects of the shadow financial system that were now “a little more worrying”, particularly the high default rate on US student loans. Citing data from the Consumer Federation of America analysis of US Department of Education data, CNBC said that the number of people who have defaulted on their federal student loans increased 17% from 2015 to 2016.
Rajan said the risks of student loan defaults were compounded by expectations that the US Federal Reserve would continue to increase interest rates. According to Rajan, since the US economy is getting close to full employment and with skilled labour being hard to find, it is quite possible to see a turnaround in wage growth.
“So my worry is that it should not happen that suddenly we see a jobs report that has a substantially higher wage growth than what the market expected,” he added.
“One of the worries is with the Chinese administration trying to tighten both regulation and monetary policy in an attempt to deal with potential problems in the shadow financial system,” Rajan pointed out.
And if the tightening gets excessive, do they have the ability to unwind quickly, he asked. “From a regulatory perspective, what they are doing right now makes sense the question is how much tolerance there is for slowing growth,” he added.
Earlier this week, Moody’s had downgraded China’s credit ratings for the first time since 1989 and said that it expects the financial strength of the economy to erode in coming years.