A stunning image begins our exploration of Dinny McMahon’s “China’s Great Wall of Debt”: towering skyscrapers, extravagant shopping malls, high-speed railway networks, and entire cities seemingly emerge out of nowhere in China, a display of unrivaled economic progress. Beneath this gleaming surface, however, lies an insidious problem: an ever-growing mountain of debt that threatens to destabilize the world’s second-largest economy.
“The glittering façade is built not on bedrock, but debt,” writes McMahon. This simple statement encapsulates the central thesis of the book. McMahon argues that the astonishing speed of China’s economic rise has been fueled by a reckless expansion of credit, creating a precarious financial bubble that could have severe global consequences when it bursts.
The book is structured in three primary sections: the problem, the drivers, and the implications.
In the first section, McMahon meticulously details the scale and intricacies of China’s debt problem. He notes that total debt in China’s economy, including government, household, and corporate debt, has ballooned from around 150% of GDP in 2007 to over 300% by 2021. He also emphasizes the hidden dangers lurking in China’s shadow banking system, where unregulated lending proliferates, contributing to the country’s “wall of debt.” He introduces the term “wealth management products” (WMPs), a form of high-yield, high-risk investment vehicles that have grown popular among Chinese investors, thus fueling the country’s shadow banking system.
The second section delves into the drivers of China’s debt-fueled growth model. McMahon probes how China’s unique blend of state capitalism and authoritarianism has created perverse incentives for local governments and state-owned enterprises (SOEs) to engage in wasteful investments, financed by massive debt. He shares haunting tales of “ghost cities” – enormous urban projects built to spur growth but remain eerily uninhabited. McMahon writes, “There are few places where the phrase ‘build it and they will come’ is taken quite as literally as it is in China.”
In the third section, McMahon outlines the implications of China’s great wall of debt, both domestically and internationally. He cautions that a debt crisis in China could trigger a global economic shock akin to the 2008 financial crisis. Moreover, he warns of the social and political consequences within China, as a severe economic downturn could undermine the Chinese Communist Party’s legitimacy, potentially causing internal instability. McMahon concludes by reflecting on China’s efforts to “rebalance” its economy away from debt-fueled investment and towards consumption, a monumental task fraught with considerable challenges and uncertainties.
McMahon provides a sobering analysis of the risks embedded in China’s economic model. He illustrates that, while the economic “miracle” of rapid growth and development has lifted millions out of poverty, it has also created a financial house of cards that could collapse with devastating effects. As he states, “China’s economy is like a spinning top. It can keep spinning only as long as it keeps being propelled.”
Through his book, McMahon not only shines a light on China’s great wall of debt but also challenges the notion that China’s rise to global economic preeminence is inevitable. “The Chinese Miracle,” he suggests, “might not be as miraculous as it appears.”
While McMaho makes some valid points, let’s look at the counter-perspective.
Understanding China’s Unique Economic Structure:
The book heavily emphasizes the perilous implications of China’s debt, yet it seems to neglect the unique structure of the Chinese economy. Most of China’s debt is domestically held, meaning the government owes money to its citizens rather than foreign creditors. This critical distinction fundamentally changes the nature of potential defaults and financial crises in China, as compared to Western countries.
The Role of State-Owned Enterprises (SOEs):
While McMahon critiques SOEs’ inefficiencies and the ‘perverse incentives’ they create, it’s important to remember that SOEs play a crucial role in China’s economic model. These entities help maintain social stability by providing employment and preserving economic order during crises. Though debt-ridden, many of these enterprises are backed by the state, thus reducing the risk of systemic defaults.
Neglect of Policy Responses:
McMahon’s analysis seems to overlook the Chinese government’s awareness of the debt problem and its ongoing efforts to de-risk and de-leverage the economy. It has introduced measures to regulate shadow banking, reduce corporate debt, and stimulate domestic consumption. While these efforts face significant challenges, their omission from the narrative may present an overly grim outlook.
The Growth versus Stability Debate:
The book’s focus on ‘ghost cities’ highlights the inefficiencies of China’s investment-driven growth model, but it arguably oversimplifies a complex issue. China’s urbanization drive aims not just for immediate economic growth but also long-term rural-urban migration and economic modernization. Some of these ‘ghost cities’ have gradually filled up over time, indicating the need for a nuanced understanding of this strategy.
The Impact on Global Economy:
While McMahon is right to caution that a Chinese debt crisis could have international repercussions, the extent of this impact may be overplayed. Many countries have limited direct exposure to China’s domestic debt. Though indirect effects through global supply chains could be significant, they are hard to predict and may not necessarily lead to a global economic shock akin to the 2008 financial crisis.
Yes, there are risks and challenges posed by China’s debt problem, but we must also appreciate the unique aspects of China’s economic model, its policy responses, and the nuances in its growth strategy.
When approaching the issue of China’s mounting debt, it’s crucial to consider historical precedents from similar economic situations. The debate echoes a notable instance from the late 20th century, Japan’s “Lost Decade,” offering insights and lessons applicable to our analysis.
Japan, like China, experienced an economic boom in the latter part of the 20th century, marked by heavy investment, asset price inflation, and growing debt. The subsequent economic stagnation in the 1990s, commonly referred to as the “Lost Decade,” resulted from the bursting of this bubble. However, unlike China, Japan’s economy was highly integrated with the global financial system, making the country vulnerable to external shocks.
China, while sharing some similarities with Japan’s situation, also presents notable differences. Firstly, as we mentioned before, China’s debt is mostly domestically held, providing the government with greater control in managing defaults. Secondly, China’s state-driven economic model and controlled financial system provide buffers against shocks and allow for policy interventions that were less available in Japan.
Nevertheless, the concerns raised by McMahon about unsustainable debt growth, inefficiencies in state-owned enterprises, and risky shadow banking activities are valid. These echo the issues Japan faced, such as over-reliance on real estate and stock market speculation for economic growth. If unchecked, these could potentially lead to a similar slowdown or crisis in China.
However, we should also consider China’s significant policy responses, much like Japan’s efforts during its economic stagnation. Japan undertook structural reforms, financial sector cleanup, and fiscal stimulus to combat the crisis. Similarly, China has been proactive in addressing its debt problem and rebalancing its economy, demonstrating its ability to learn from historical precedents.
While China’s debt levels and economic model present significant risks that could lead to a slowdown or crisis, the country’s unique circumstances and policy responses mitigate these risks to a certain degree. The key to navigating this complex issue is continual vigilance, robust regulatory measures, and a commitment to economic reform, drawing lessons from historical precedents like Japan’s “Lost Decade.”