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Five Wild-Card Scenario

Scenarios can be bounded by what is plausible, believable, or imaginable today in order to form a cohesive story about the future. In our study, we limited ourselves to the development of two scenarios, the Great Reset and Slowing but Growing, to focus on the key differences in projections. But, in thinking about the future of mobility, we do not want to miss any discontinuities that, in retrospect, might emerge as more important. In this chapter, we present a wild-card, or low-probability, scenario. Wild cards are designed to provoke thinking about unexpected events. These assume that certain events have broken with expected trends to move the world in an unanticipated direction. The underlying assumptions of this wild-card scenario originated from comments made at the economic workshop, in which we asked the experts what events might confound the projections they had just made.

The wild card is based on the possibility that China experiences a major debt crisis and ensuing economic stagnation, similar to the wild card we explored in the U.S. scenario project (Zmud, Ecola, et al., 2013).

Debt Comes Due

The central government tried to intervene to stave off the mounting debt ratio but instead precipitated a major financial crisis.

Overleveraging Sparked a Financial Crisis

It began with an effort to curtail lending by cities, whose indebtedness had reached USD 3 trillion by 2013 (Gough, 2013). The goal was to help deleverage the indebtedness of the economy, which had reached what most observers believed was a truly unsustainable level. However, instead of solving the debt problem, the government's actions caused a full-blown financial crisis. A midsize city failed to meet a deadline for a loan payment, and the central government stuck by its 2014 statement that it would not bail out any local governments that could not meet their financial obligations (Qi, 2014). Observers had interpreted this more as a warning than a firm policy, but the city missed a payment and waited to see what would transpire.

It launched a wave of loan defaults, first by firms defaulting on loans made by the shadow-banking sector. With growth already slowing in the early 2010s, many firms were not generating enough profits to service their debts. Many firms were forced to go out of business when they could no longer hide their losses. The crisis revealed that many businesses had been taking out new loans to pay off old ones. Financially sound firms had to use profits to pay for debts rather than for expansion.

Many of these shadow bank-originated loans were short term, so they were coming due. At first, it seemed like the damage might be confined to the shadow-banking sector, but it was also revealed that, in many cases, banks were themselves setting up shadow entities to get around reserve requirements or limitations on loan recipients. The lack of transparency in the shadow-banking sector had been concealing interconnections between the state banks and shadow entities. As a consequence, state-bank balance sheets were not as strong as previously claimed.

Property values, which had already begun declining in 2014, continued falling, with two major effects. First, middle-class homeowners were furious that their main assets had lost value, and, in some cities, this expressed itself in the form of rancorous protests. Second, many of the shadow-banking loans were backed by property, so the collateral no longer covered the value of the loan. Even some state banks had exposure to the property market that was officially booked as some other type of exposure.

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