Review of China's Great Wall of Debt

Dinny McMahon

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For Experts

Review

Financial journalist Dinny McMahon reveals how current aspects of China’s economy echo the events that led up to the 2008 financial crisis in the United States: lax economic policy, excessive creation of new money, rising nonperforming loans and self-perpetuating asset bubbles in property markets. The author describes how, instead of tackling underlying structural problems, China’s government unleashed massive stimulus in the form of a building boom that its leaders hope will maintain strong growth. McMahon’s insights reveal a complex nation and the global consequences of its decisions.

About the Author

Formerly a financial reporter for The Wall Street Journal in Beijing, Dinny McMahon holds a fellowship at the Woodrow Wilson International Centre for Scholars.

China responded to a drop in exports after 2008 by stimulating construction.

McMahon shows that when the 2008 financial crisis hit, China’s government sought to drum up sufficient domestic economic activity to fill the gap left by its shrinking exports to the West. The state, the author reports, instructed its banks to turn on the financial faucets and, ever since, vast amounts of cash have flowed into a Chinese construction boom. State-owned companies, helped by their close relationships to public banks, are quietly amassing huge debts. This stimulus strategy has worked so far; the Chinese economy powered through the post-2008 global slump. “As the world salivates at the prospect of China’s economic ascendancy,” the author writes, “it’s China’s economic weakness that should have us all worried.”

The funds set the stage for the biggest construction surge in history, according to McMahon. The need to counter the global downturn and house migrants from the countryside led to runaway building. In one telling statistic, the author discovered that China used more cement between 2011 and 2013 than the United States did during the entire 20th century. Another worrying factor is that China’s banking system quadrupled in size from 2009 to 2018. The initial justification for needing to create housing for internal migrants has in many cases gone by the wayside. The current volume of empty properties, plus those facilities planned or in the pipeline, would be sufficient to house more than China’s total population all over again. This indicates structural problems with incentives in China’s economy. “Beijing’s tolerance,” the author writes, “has unleashed a perpetual-motion machine of debt creation over which it has seemingly lost all control.”

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