China’s Great Wall of Debt: Shadow Banks, Ghost Cities, Massive Loans and the End of the Chinese Miracle by Dinny McMahon — why it could all go wrong

The Times
By David Smith

There are two key facts worth knowing about the Chinese economy. The first is that its growth rate has slowed, from an average of nearly 10% a year since the great turnaround of the late 1970s to closer to 6.5% (which is also the official target) now. The second is that China’s debt has risen, and that the growth in credit and debt needed to keep the world’s second-largest economy growing has increased significantly since the global financial crisis erupted a decade ago.


In 2008, China’s non-financial debt amounted to 160% of its national income, its GDP (gross domestic product). Eight years later, it had increased to 260% of GDP. Estimates from the People’s Bank of China suggest China has added $12 trillion of debt since 2008, equivalent to the size of the US banking system. China’s banking system has quadrupled in size. Even for a country accustomed to generating superlatives, these are extraordinary numbers.


They are also the nub of Dinny McMahon’s lively book, which should be read by anybody wanting an antidote to excessive western optimism about China. McMahon, an Australian, is a former China-based financial journalist, who worked in Beijing for The Wall Street Journal before taking up a fellowship at the Woodrow Wilson International Centre for Scholars in Washington.


Everything the Chinese authorities would not want written about their economy is here, from corruption and the intimidation of critics to ghost cities, shadow banks and bad loans. Each of them is introduced with a vignette and McMahon has a journalist’s gift for telling a good story. The theme throughout is that China has an economy that, if not rotten to the core, falls well short of the image of strength it likes to present to the world. It has, instead, “deep-seated economic problems”.


China is on course to overhaul America as the world’s largest economy before too long, and has already done so on some measures. The implication of this book, however, is that this is a ragged path to global supremacy and may not be sustainable.


As McMahon puts it in a key passage: “The morass of bad loans in the banking system requires the central bank to keep printing more and more money. Credit needs to continue growing to maintain economic growth, but every yuan of debt generates less economic activity than it used to. In theory, Beijing could allow its perpetual-motion machine of debt creation to continue indefinitely, but the newly created money eventually ends up feeding speculative bubbles, because there are few other places for it to go. In order to prevent the bubbles from popping, and to maintain confidence, the central banks prints more money. All the while, as the size and complexity of the system grow, the potential for something to go seriously wrong increases.”


Does the book convince? It certainly assembles a strong case against believing that there is anything exceptional, or miraculous, in what some have claimed is the Chinese economic miracle. Some of what has happened in China in recent years has, however, been in reaction to the financial crisis in the West. China needed a way of keeping growth going, even if this sat uneasily alongside its long-term ambition.


And if I had a yuan for every report and book I have read predicting doom and disaster for the People’s Republic, I would join the ranks of Chinese billionaires.


The tone of the book is a little relentless, a hammering away at the theme that China’s economy is not what it is cracked up to be and that a reckoning is inevitable. There is no light and shade.


McMahon says at the outset that his account is not about “the bright spots in the Chinese economy, like entrepreneurs building world-beating tech giants, or Beijing’s efforts to develop new markets through its Belt and Road Initiative”. Yet these things are also part of the Chinese economic story, and its future. They might end up being the story,


In the meantime, McMahon has highlighted the vulnerabilities. Those vulnerabilities are not lost on the Chinese authorities. Whether they are able to steer a path through them is the interesting and important question raised by this book.

Dinny McMahon