Book Review: China’s Great Wall of Debt: Shadow Banks, Ghost Cities, Massive Loans, and the End of the Chinese Miracle
With the death of Mao Zedong in 1978, China began implementing a series of pro-market reforms that radically restructured its economy. In the ensuing decades, these reforms have propelled China’s massive and unprecedented economic growth. Hundreds of millions of Chinese citizens have been lifted out of poverty, and China is on track to surpass the U.S. as the world’s largest economy by 2030. China’s influence on the world stage has increased in tandem with this economic growth, and it has established near total control of the South China Sea, opened a military base in Djibouti, and been at the cutting edge of infrastructure projects in developing countries around the world. These developments make it more important than ever to have a firmer grasp of the economic model underpinning China’s explosive growth.
In his book China’s Great Wall of Debt: Shadow Banks, Ghost Cities, Massive Loans, and the End of the Chinese Miracle, Dinny McMahon, a longtime financial journalist in China, takes a deep dive into the Chinese economic model, examining the dangerous and often unproductive expansionary policies used over the past decade to sustain China’s breakneck economic growth. Ominously, McMahon finds that much of China’s recent growth hasn’t been sustained by real increases in productivity, but rather through the Chinese government financing investment that in the long-run has little hope of paying for itself.
More specifically, McMahon highlights the diminishing returns China’s government has experienced on its massive infrastructure investments, encapsulated in China’s construction of massive new cities that have little hope of being inhabited, and the ascendance of bloated state-owned firms over many of China’s industries, which squander resources that could be better used by the private sector. Many of these aggressive, albeit misguided policies, are motivated by China’s race to increase its GDP before its aging workforce begins to retire, which would shift productive investment towards government spending on social services, making further economic growth more difficult. China will have to grapple with the imbalances in its economic policies, as well as the demographic shifts that have motivated it to adopt them, before fully developing.
Ultimately, McMahon demonstrates that while western observers are right to be alarmed by China’s rising growth and economic influence, these concerns are overblown. China’s economy is facing headwinds, and alarmingly, rather than taking steps to address them, the country’s leaders are doubling down on their flawed approach. In doing this, China is kicking down the road a profound reckoning with the imbalances in its economy, one that has the potential to reverberate across the world. McMahon’s argument might give policymakers in America comfort from the knowledge that China is weaker than it seems, but in our interconnected world the prospect of Chinese economic collapse is equally terrifying.
