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China's Great Wall of Debt: Shadow Banks, Ghost Cities, Massive Loans, and the End of the Chinese Miracle
A stunning inside look at how and why the foundations upon which China has built the world's second largest economy, have started to crumble.
Over the course of a decade spent reporting on the ground in China as a financial journalist, Dinny McMahon gradually came to the conclusion that the widely held belief in China's inevitable economic ascent is dangerously wrong.
In this unprecedented deep dive, McMahon shows how, lurking behind the illusion of prosperity, China's economic growth has been built on a staggering mountain of debt. While stories of newly built but empty cities, white elephant state projects, and a byzantine shadow banking system, have all become a regular fixture in the press in recent years, McMahon goes beyond the headlines to explain how such waste has been allowed to flourish, and why one of the most powerful governments in the world has been at a loss to stop it.
Through the stories of ordinary Chinese citizens, McMahon tries to make sense of the unique--and often bizarre--mechanics of the Chinese economy, whether it be the state's addiction to appropriating land from poor farmers; or why a Chinese entrepreneur decided it was cheaper to move his yarn factory to South Carolina; or why ambitious Chinese mayors build ghost cities; or why the Chinese bureaucracy was able to stare down Beijing's attempts to break up the state's pointless monopoly over the distribution of table salt.
Debt, entrenched vested interests, a frenzy of speculation, and an aging population are all pushing China toward an economic reckoning. China's Great Wall of Debt unravels an incredibly complex and opaque economy, one whose fortunes--for better or worse--will shape the globe like never before.
Over the course of a decade spent reporting on the ground in China as a financial journalist, Dinny McMahon gradually came to the conclusion that the widely held belief in China's inevitable economic ascent is dangerously wrong.
In this unprecedented deep dive, McMahon shows how, lurking behind the illusion of prosperity, China's economic growth has been built on a staggering mountain of debt. While stories of newly built but empty cities, white elephant state projects, and a byzantine shadow banking system, have all become a regular fixture in the press in recent years, McMahon goes beyond the headlines to explain how such waste has been allowed to flourish, and why one of the most powerful governments in the world has been at a loss to stop it.
Through the stories of ordinary Chinese citizens, McMahon tries to make sense of the unique--and often bizarre--mechanics of the Chinese economy, whether it be the state's addiction to appropriating land from poor farmers; or why a Chinese entrepreneur decided it was cheaper to move his yarn factory to South Carolina; or why ambitious Chinese mayors build ghost cities; or why the Chinese bureaucracy was able to stare down Beijing's attempts to break up the state's pointless monopoly over the distribution of table salt.
Debt, entrenched vested interests, a frenzy of speculation, and an aging population are all pushing China toward an economic reckoning. China's Great Wall of Debt unravels an incredibly complex and opaque economy, one whose fortunes--for better or worse--will shape the globe like never before.
288 pages, ebook
First published March 13, 2018
358 people are currently reading
1963 people want to read
About the author
Dinny McMahon
2 books31 followersDinny McMahon spent ten years as a financial journalist in China, including six years in Beijing at The Wall Street Journal, and four years with Dow Jones Newswires in Shanghai, where he also contributed to the Far Eastern Economic Review. In 2015, he left China and The Wall Street Journal to take up a fellowship at the Woodrow Wilson International Center for Scholars, a think tank in Washington DC, where he wrote China's Great Wall of Debt. Dinny is an Australian who currently lives in Chicago, where he works at MacroPolo, a think tank focused on Chinese economic issues.
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Displaying 1 - 30 of 129 reviews
February 12, 2020
Although published in 2018, the author is prophetic about the coronavirus when he closes with the possibility of political problems if China's fast pace of growth slows.
This is more closely-observed and reported observations than economic text by a man who knows China well. For that reason, it is highly accessible to the lay reader.
As the world is experiencing so much right now on the issue of the coronavirus epidemic in Hubei province, it can be difficult to get accurate information about internal Chinese issues. McMahon traces the country's growth to land confiscation, central planning, shadow banking, laser focus on growth by Chinese leaders at all levels, and massive productive efforts by its billion-plus people. Along the way, we learn about asset bubbles, food safety problems, and other issues that have arisen from China's rapid growth.
Highly recommended for those interested in learning more about this significant world player.
This is more closely-observed and reported observations than economic text by a man who knows China well. For that reason, it is highly accessible to the lay reader.
As the world is experiencing so much right now on the issue of the coronavirus epidemic in Hubei province, it can be difficult to get accurate information about internal Chinese issues. McMahon traces the country's growth to land confiscation, central planning, shadow banking, laser focus on growth by Chinese leaders at all levels, and massive productive efforts by its billion-plus people. Along the way, we learn about asset bubbles, food safety problems, and other issues that have arisen from China's rapid growth.
Highly recommended for those interested in learning more about this significant world player.
February 2, 2018
“Markets can remain irrational a lot longer than you and I can remain solvent”, a quote persistently misattributed to the economist John Maynard Keynes, seems the most appropriate comment for this book.
Like a strapless dress, the Chinese economy shouldn’t stay up, but it stays up. The Coming Collapse of China (widely read at publication) predicted the end of the bubble in 2001, and then again in a revised edition in 2012, yet there the bubble still is with us in 2018, big as life and twice as ugly.
This readable and entertaining book wisely avoids getting tangled up in specific dates, but it asks, rhetorically, “How long can this go on?” The author piles on convincing anecdotes about the unwise misallocation of resources by those seek to seek rents, get rich quick, and/or just plain please their bosses. Housing estates sit empty. Zombie state banks fund zombie state enterprises. Accounting tricks and financial legerdemain produce a falsely rosy picture. State funds are syphoned off so executives and bureaucrats can have fancy water fountains, second homes, and expensive wardrobes. Entrenched state-run monopolies protect themselves to the detriment of the public good.
I especially enjoyed the part of this book about China’s salt monopoly -- its genesis as an attempt to protect the health of the masses, its eventual capture by the wealthy and powerful, and its current role as a well-funded and devious roadblock to reform.
The anecdotes about the results of China’s lunatic economic policies are well-written and illuminating, but there’s no evidence that now is the time it will transform itself into a smoldering ruin. There must be books about exactly how bubbles happen, but this is not one of them.
Also, the author says: “[I]t’s almost inconceivable that China’s economic problems could spill over into mass unrest, or at least the sort of unrest the government would be unable to control” (Kindle location 2834).
I have had the pleasure of living in foreign countries (that is, outside the USA), although never in China. One of the many enjoyable things about expatriate living is that you see that, in many ways, other countries have problems even more ridiculously intractable than our own. Of course, this is not to say that other people’s problems are enjoyable, but it counteracts the persistent paranoid drumbeat of the US media (consumed eagerly by those ready to assume the worse) that the rest of the world is about to eat our lunch. The world is not about to eat our lunch. The world has its own problems. The fact that the problems of totalitarian dictatorships are often better concealed only means that they may be allowed to become enormous and unfixable by the time they no longer can be concealed from the public.
I received an free unfinished galley of the ebook for review. Thank you to Netgalley and Houghton Mifflin Harcourt for their generosity.
Like a strapless dress, the Chinese economy shouldn’t stay up, but it stays up. The Coming Collapse of China (widely read at publication) predicted the end of the bubble in 2001, and then again in a revised edition in 2012, yet there the bubble still is with us in 2018, big as life and twice as ugly.
This readable and entertaining book wisely avoids getting tangled up in specific dates, but it asks, rhetorically, “How long can this go on?” The author piles on convincing anecdotes about the unwise misallocation of resources by those seek to seek rents, get rich quick, and/or just plain please their bosses. Housing estates sit empty. Zombie state banks fund zombie state enterprises. Accounting tricks and financial legerdemain produce a falsely rosy picture. State funds are syphoned off so executives and bureaucrats can have fancy water fountains, second homes, and expensive wardrobes. Entrenched state-run monopolies protect themselves to the detriment of the public good.
I especially enjoyed the part of this book about China’s salt monopoly -- its genesis as an attempt to protect the health of the masses, its eventual capture by the wealthy and powerful, and its current role as a well-funded and devious roadblock to reform.
The anecdotes about the results of China’s lunatic economic policies are well-written and illuminating, but there’s no evidence that now is the time it will transform itself into a smoldering ruin. There must be books about exactly how bubbles happen, but this is not one of them.
Also, the author says: “[I]t’s almost inconceivable that China’s economic problems could spill over into mass unrest, or at least the sort of unrest the government would be unable to control” (Kindle location 2834).
I have had the pleasure of living in foreign countries (that is, outside the USA), although never in China. One of the many enjoyable things about expatriate living is that you see that, in many ways, other countries have problems even more ridiculously intractable than our own. Of course, this is not to say that other people’s problems are enjoyable, but it counteracts the persistent paranoid drumbeat of the US media (consumed eagerly by those ready to assume the worse) that the rest of the world is about to eat our lunch. The world is not about to eat our lunch. The world has its own problems. The fact that the problems of totalitarian dictatorships are often better concealed only means that they may be allowed to become enormous and unfixable by the time they no longer can be concealed from the public.
I received an free unfinished galley of the ebook for review. Thank you to Netgalley and Houghton Mifflin Harcourt for their generosity.
April 5, 2018
This is a critical and more popularized (nontechnical) account of recent development issues in the Chinese economy. The focus is on the Chinese parallel to the problems with the US financial system leading up to the 2008 crash and the Great Recession that followed it. China, of course, is different in aspects that ultimately stem from developments in the US and Europe. State control of the economy is stronger and it is used to permit and even encourage the use of more and more lending to keep Chinese growth going and thus avoid recessions or slowdowns and the serious political consequences that would follow when hundreds of millions of workers were forced to deal with stalled growth.
McMahon is a good writer and appears to be a capable and knowledgeable observer of the Chinese financial scene. His argument; focuses on the question of sustainability - how can Chinese growth continue, especially when it is pushed along by forces that threaten to encourage asset bubbles, corruption, wasteful construction, and other vices threaten to stall growth. This is one of the better versions of arguments that have been around for a while and that generally go under the heading of “Crony Capitalism”. This is an informative and sobering view of Chinese growth and makes recent developments around trade wars and military buildup even scarier. High growth for an extended period of time seems too good to be true and one wonders when the smart money will leave, if it isn’t already doing so - look at real estate prices in Vancouver, B.C. for example.
... but this is not the first warning about China in its current boom and McMahon is not the first to talk about Chinese bubbles - and yet the Chinese government seems to muddle through and figure out a way to handle the potential crises that come its way. Perhaps the world as we know it is not ending yet and perhaps Mr. McMahon has more of a critical perspective than is needed or justified.
There is a dichotomy between positive and negative stories about Chinese economic growth. Yes, there are good strategies and increasing product quality. On the other hand, there is corruption and there are too many lapses in product quality. So reality is somewhere in between? For now? It is interesting to see how this dichotomy of views is common for US economic history as well. On the one hand, there is the rise of a highly innovative and high volume mass manufacturing economy while on the other hand there are the Robber Barons as well as the scammers who keep calling me on my land line. There is efficiency and corruption. There is innovation as well as corner cutting.
I guess that large rapidly growing economies are complex and defy easy explanation. Dinny McMahon’s book on Chinese debt problems is fun to read and contributes to the discussion. If one is interested in Chinese business, this is a good book to read.
McMahon is a good writer and appears to be a capable and knowledgeable observer of the Chinese financial scene. His argument; focuses on the question of sustainability - how can Chinese growth continue, especially when it is pushed along by forces that threaten to encourage asset bubbles, corruption, wasteful construction, and other vices threaten to stall growth. This is one of the better versions of arguments that have been around for a while and that generally go under the heading of “Crony Capitalism”. This is an informative and sobering view of Chinese growth and makes recent developments around trade wars and military buildup even scarier. High growth for an extended period of time seems too good to be true and one wonders when the smart money will leave, if it isn’t already doing so - look at real estate prices in Vancouver, B.C. for example.
... but this is not the first warning about China in its current boom and McMahon is not the first to talk about Chinese bubbles - and yet the Chinese government seems to muddle through and figure out a way to handle the potential crises that come its way. Perhaps the world as we know it is not ending yet and perhaps Mr. McMahon has more of a critical perspective than is needed or justified.
There is a dichotomy between positive and negative stories about Chinese economic growth. Yes, there are good strategies and increasing product quality. On the other hand, there is corruption and there are too many lapses in product quality. So reality is somewhere in between? For now? It is interesting to see how this dichotomy of views is common for US economic history as well. On the one hand, there is the rise of a highly innovative and high volume mass manufacturing economy while on the other hand there are the Robber Barons as well as the scammers who keep calling me on my land line. There is efficiency and corruption. There is innovation as well as corner cutting.
I guess that large rapidly growing economies are complex and defy easy explanation. Dinny McMahon’s book on Chinese debt problems is fun to read and contributes to the discussion. If one is interested in Chinese business, this is a good book to read.
April 27, 2018
“The Chinese Communist Party made a deliberate decision in the late 1990s to build the biggest steel industry in the world, even though China lacks most of the things you need to make steel—namely raw materials and affordable energy,” said Jim Darsey, executive vice president of Nucor Corporation—the biggest steelmaker in the United States—in a submission to the U.S. Congress. In 2015, the U.S. steel industry lost twelve thousand jobs. That year, facing massive overcapacity problems at home, China exported 112 million tons of steel, more than what was produced by the United States, Canada, and Mexico combined, a feat made all the more amazing given that ten years earlier, China was still a net importer of steel. “These imports aren’t coming here because the United States is an uncompetitive place to make steel. The opposite is true. We have plentiful raw materials, low-priced energy; and we have the most productive steel workers in the world,” said Darsey. “But we cannot compete with foreign governments who are willing to pour unlimited resources into growing an industry that does not have to yield any rate of return.”"
“Bridestowe was soon swamped with daily tour buses of Chinese buying teddy bears, which Ravens had named Bobbie. Bobbie had become so popular in China that, despite Bridestowe’s being the biggest lavender farm in Australia, the demand overwhelmingly outstripped the amount of dried lavender that the farm was capable of producing. According to the Australian Lavender Growers Association, all the lavender in Australia just wasn’t enough to satisfy the Chinese teddy-bear demand.”
“...and in Paris, Gucci and other luxury brands have experienced something similar to Ravens and his teddy bears, with some stores imposing strict quotas on sales to guard against busloads of Chinese tourists from instantly buying out all available stock.”
"as of mid-2016, there were forty thousand people in Australia employed as personal shoppers—known in Chinese as daigou, which literally means “buying on someone’s behalf”—for households back in China. Daigou have made headlines in Australia for repeatedly sweeping supermarket shelves clear of milk powder, causing shortages of infant formula for local residents. As a result, supermarkets now impose limits on how many tins of formula any given shopper can buy.”
“Chinese are among the most optimistic people in the world, particularly when it comes to expectations about personal wealth. In 2016, Pew Research found that 70% of people it surveyed in China said they expected that their financial situation would improve over the next year despite the slowing economy, and 80% said they thought their children would have a better standard of living than themselves. In the United States, in contrast, 60% of respondents expected their children to be worse off. In the United States, real wages have stagnated since the 1970s, meaning that if you have stayed in the same job for the last forty years, your weekly pay doesn’t go any further today than it did when you first started working. In China, if you have been in the same job for the last seven or eight years, you have seen your income double.”
“On my first trip to China, in 1994, large groups of people, curious about foreigners, followed me around the streets. Today, there are Chinese police on patrol in Rome to provide help to the hordes of Chinese tourists who descend on that Italian city every year. There was a wall of cabbage stacked along the hallways of my apartment building when I was a student in Beijing in 2001 that people had stockpiled to get them through the winter. Today, there are apps that allow people in Beijing to book chefs to come prepare food in their homes.”
“Frustration will grow when Chinese no longer have the resources to compensate for the state’s failure to protect people’s health and well-being. This also means that a slowdown in the Chinese economy—let alone a recession or a crisis—will be as much a political event as an economic one.”
“Bridestowe was soon swamped with daily tour buses of Chinese buying teddy bears, which Ravens had named Bobbie. Bobbie had become so popular in China that, despite Bridestowe’s being the biggest lavender farm in Australia, the demand overwhelmingly outstripped the amount of dried lavender that the farm was capable of producing. According to the Australian Lavender Growers Association, all the lavender in Australia just wasn’t enough to satisfy the Chinese teddy-bear demand.”
“...and in Paris, Gucci and other luxury brands have experienced something similar to Ravens and his teddy bears, with some stores imposing strict quotas on sales to guard against busloads of Chinese tourists from instantly buying out all available stock.”
"as of mid-2016, there were forty thousand people in Australia employed as personal shoppers—known in Chinese as daigou, which literally means “buying on someone’s behalf”—for households back in China. Daigou have made headlines in Australia for repeatedly sweeping supermarket shelves clear of milk powder, causing shortages of infant formula for local residents. As a result, supermarkets now impose limits on how many tins of formula any given shopper can buy.”
“Chinese are among the most optimistic people in the world, particularly when it comes to expectations about personal wealth. In 2016, Pew Research found that 70% of people it surveyed in China said they expected that their financial situation would improve over the next year despite the slowing economy, and 80% said they thought their children would have a better standard of living than themselves. In the United States, in contrast, 60% of respondents expected their children to be worse off. In the United States, real wages have stagnated since the 1970s, meaning that if you have stayed in the same job for the last forty years, your weekly pay doesn’t go any further today than it did when you first started working. In China, if you have been in the same job for the last seven or eight years, you have seen your income double.”
“On my first trip to China, in 1994, large groups of people, curious about foreigners, followed me around the streets. Today, there are Chinese police on patrol in Rome to provide help to the hordes of Chinese tourists who descend on that Italian city every year. There was a wall of cabbage stacked along the hallways of my apartment building when I was a student in Beijing in 2001 that people had stockpiled to get them through the winter. Today, there are apps that allow people in Beijing to book chefs to come prepare food in their homes.”
“Frustration will grow when Chinese no longer have the resources to compensate for the state’s failure to protect people’s health and well-being. This also means that a slowdown in the Chinese economy—let alone a recession or a crisis—will be as much a political event as an economic one.”
March 3, 2020
It's a very good book on the topic. There are numerous China economics or "plans" out there which are nationally proclaimed or advertised within China. Or written about too. And also many more by non-Chinese from the outside looking in to Chinese fast paced progress. This is nearly the opposite of that method. It's "from the inside".
As glad as I am that I read it, I don't think it is easy to understand. Not so much the economics of specifics in various categories of goods, resources, uses, plans etc.- they are NOT. But far more in the crux of where Communism bottom line ownership and the mix of more local or groups' "ownerships" in direction or outcome or profit "come in". It's truly convoluted. At times it is the worst of both or three systems, and at other times just plain deceitful to 1 or 2 parts of the "mix".
Looking at this author's experiences inside the system and observable beyond the factual resources- it does help you understand the immense problems that are certainly bricks fired which contain immense flaws that are supposedly there to be set into the strength of the very foundations of financial and "prosperous for the most Chinese excellence".
I'm glad I read it- I knew about all the manipulation of Chinese money's "worth"- but it's far more flawed than just that factor. Lots of top down miserable decisions have been made going down the entirely wrong paths.
As glad as I am that I read it, I don't think it is easy to understand. Not so much the economics of specifics in various categories of goods, resources, uses, plans etc.- they are NOT. But far more in the crux of where Communism bottom line ownership and the mix of more local or groups' "ownerships" in direction or outcome or profit "come in". It's truly convoluted. At times it is the worst of both or three systems, and at other times just plain deceitful to 1 or 2 parts of the "mix".
Looking at this author's experiences inside the system and observable beyond the factual resources- it does help you understand the immense problems that are certainly bricks fired which contain immense flaws that are supposedly there to be set into the strength of the very foundations of financial and "prosperous for the most Chinese excellence".
I'm glad I read it- I knew about all the manipulation of Chinese money's "worth"- but it's far more flawed than just that factor. Lots of top down miserable decisions have been made going down the entirely wrong paths.
February 28, 2018
The gigantic difference between China’s Great Wall of Debt and everything else you read about China in the financial press is this comes from decades of following developments from the inside. Whereas news items offer financial analysis, ratios, percentages, projections and bottom lines (none of which can be trusted), Dinny McMahon derives insight from repeated personal visits, interviews and knowledge of current affairs as a financial reporter for pretty much all his adult life. An Australian whose parents forced Chinese on him as a child, McMahon was drawn to China repeatedly until he moved there for good. He provides a western journalist’s perspective on a complex economy.
Chinese finance is amorphous. The rules are ignored, and the government intervenes often and often bizarrely. The central government put a floor under interest rates, allowing banks to make money automatically. (They say a small dog could occupy the chairman’s seat and every bank would make as much money.) Banks promote scams for third parties. They operate shadow banking themselves, selling products the government doesn’t want them to or which are too new to have rules. When loans go bad, it can be the depositors who take the hit, even though that’s not what they signed up for.
The biggest driver is real estate. It has come to the point where the land is insanely more expensive than the building could ever be. (The Chinese call this paying more for the flour than the bread.) So Chinese buildings are low quality, badly designed and badly built. And everyone and every company is about real estate. There are manufacturers that are financed by their real estate plays. Local governments evict longtime residents to give land to developers for profit. Nationwide, loans are in the trillions of dollars. This “ball of money” drives up asset prices and creates bubbles in new products almost daily. Businesses import way more raw materials than they or the entire industry can ever use, to employ as collateral for more loans, often just to speculate in real estate. The constant inflating and bursting of asset bubbles has created an epic portfolio of bad loans. The extent is hidden first by the banks, then further by the central government, so that no figures have any validity. But everything appears stable.
Then there’s business: Chinese startups need a good 200 official stamps to open, and any number of made-up infractions can close them unless palms are well greased. McMahon tells of one business that simply closed, because no one knows what the rules are, and officials were on a rampage. Companies pay off police and cover their expenses, and police act directly on their behalf against customers, complainers, and the public. But then, this is a country with a thriving business in fake receipts to be claimed by the purchaser. As one victim found out the hard way, “The issue has been elevated. You just have to be punished. There’s nothing we can do.”
Despite all the distortions, President Xi has chosen to turn the economy towards supply-side economics, or voodoo economics as it was known at its invention. Rather than stop the extortion, the bribes, the fines and the confiscations that honest state institutions would ensure, Xi is pumping up business and production. His party’s main fear is social unrest. As long as people feel better off than last year and look forward to more, the unrest (there were 180,000 incidents in 2010 alone) will be controllable. The government is on a treadmill to oblivion, but so far, it is keeping up.
David Wineberg
Chinese finance is amorphous. The rules are ignored, and the government intervenes often and often bizarrely. The central government put a floor under interest rates, allowing banks to make money automatically. (They say a small dog could occupy the chairman’s seat and every bank would make as much money.) Banks promote scams for third parties. They operate shadow banking themselves, selling products the government doesn’t want them to or which are too new to have rules. When loans go bad, it can be the depositors who take the hit, even though that’s not what they signed up for.
The biggest driver is real estate. It has come to the point where the land is insanely more expensive than the building could ever be. (The Chinese call this paying more for the flour than the bread.) So Chinese buildings are low quality, badly designed and badly built. And everyone and every company is about real estate. There are manufacturers that are financed by their real estate plays. Local governments evict longtime residents to give land to developers for profit. Nationwide, loans are in the trillions of dollars. This “ball of money” drives up asset prices and creates bubbles in new products almost daily. Businesses import way more raw materials than they or the entire industry can ever use, to employ as collateral for more loans, often just to speculate in real estate. The constant inflating and bursting of asset bubbles has created an epic portfolio of bad loans. The extent is hidden first by the banks, then further by the central government, so that no figures have any validity. But everything appears stable.
Then there’s business: Chinese startups need a good 200 official stamps to open, and any number of made-up infractions can close them unless palms are well greased. McMahon tells of one business that simply closed, because no one knows what the rules are, and officials were on a rampage. Companies pay off police and cover their expenses, and police act directly on their behalf against customers, complainers, and the public. But then, this is a country with a thriving business in fake receipts to be claimed by the purchaser. As one victim found out the hard way, “The issue has been elevated. You just have to be punished. There’s nothing we can do.”
Despite all the distortions, President Xi has chosen to turn the economy towards supply-side economics, or voodoo economics as it was known at its invention. Rather than stop the extortion, the bribes, the fines and the confiscations that honest state institutions would ensure, Xi is pumping up business and production. His party’s main fear is social unrest. As long as people feel better off than last year and look forward to more, the unrest (there were 180,000 incidents in 2010 alone) will be controllable. The government is on a treadmill to oblivion, but so far, it is keeping up.
David Wineberg
February 25, 2018
I have to admit that my understanding of the contemporary Chinese economy is limited to a few media cliches which portray China as simultaneously threat and saviour. They are taking our jobs. They are buying up our strategic assets. They are making friends worldwide while the West makes only enemies. They are a nation of savers, not borrowers. Their investment keeps our fragile economies afloat. Chinese consumers will save us from our next recession.
This book presents a more realistic appraisal of the state of the Chinese economy. Each chapter focuses on a different area, to show how corruption, lies and the endless accumulation of debt are fuelling both private and public expansion in areas from local government to housing to financial services. This is a balanced analysis by someone with a strong knowledge of the country. For example while he laments new towns that have been built to no clear purpose and remain largely unoccupied, the author also acknowledges that massive urbanisation has taken place in China without the vast slums and favelas of comparable countries.
He wisely avoids specific predictions about the future (there is a sense that 'this can't go on forever' but we've been saying that about the London property market for years and it still does) but he does end by considering the impact of Chinese consumers on the West and how over-reliance on the ?Chinese to solve our problems may be misguided.
If I had one criticism, it would be that I'd have liked less anecdote and more analysis, but overall this is a useful introduction to the general reader who wants to understand more about the workings of the Chinese economy and its effect on the rest of the world.
*
I received a copy of China's Great Wall of Debt from the publisher via Netgalley.
This book presents a more realistic appraisal of the state of the Chinese economy. Each chapter focuses on a different area, to show how corruption, lies and the endless accumulation of debt are fuelling both private and public expansion in areas from local government to housing to financial services. This is a balanced analysis by someone with a strong knowledge of the country. For example while he laments new towns that have been built to no clear purpose and remain largely unoccupied, the author also acknowledges that massive urbanisation has taken place in China without the vast slums and favelas of comparable countries.
He wisely avoids specific predictions about the future (there is a sense that 'this can't go on forever' but we've been saying that about the London property market for years and it still does) but he does end by considering the impact of Chinese consumers on the West and how over-reliance on the ?Chinese to solve our problems may be misguided.
If I had one criticism, it would be that I'd have liked less anecdote and more analysis, but overall this is a useful introduction to the general reader who wants to understand more about the workings of the Chinese economy and its effect on the rest of the world.
*
I received a copy of China's Great Wall of Debt from the publisher via Netgalley.
June 13, 2018
Description: A stunning inside look at how and why the Chinese economy is barreling towards disaster and the impact its collapse would have on the rest of the world
The premise of this is opposite to Destined for War: Can America and China Escape Thucydides’s Trap?,where Allison's pov is more perplexing to the rest of the planet's equilibrium.
Popped this into the larder and will re-visit when Javanka's case comes fully into focus. At this point, I really do feel sorry for the average Joe citizens who are so busy attaining social points that they are distracted from the mythology-building, kicking the ball down the road financial choices.
The premise of this is opposite to Destined for War: Can America and China Escape Thucydides’s Trap?,where Allison's pov is more perplexing to the rest of the planet's equilibrium.Popped this into the larder and will re-visit when Javanka's case comes fully into focus. At this point, I really do feel sorry for the average Joe citizens who are so busy attaining social points that they are distracted from the mythology-building, kicking the ball down the road financial choices.
July 4, 2022
Sometimes you read a book and it's more like a bunch of longread articles strung together than a cohesive book. This look at China's economy was one of those.
Individually, almost every chapter was a fascinating look at a part of the Chinese economy. Whether it's stories of cities levelling mountains in bitter pursuit of investment by companies, or the strange tale of a Tasmanian lavender farm whose lavender-stuffed teddies attracted too many Chinese customers, each section is interesting and readable.
What stopped it reaching the heights of a great book were two things.
Firstly, the book felt light on analysis of the political situation. Yes, there was some, but the overall tone of 'China is skating on thin economic ice and it's only just holding it together cos it's run differently to Western states' felt like it was missing a few pieces of explanation as to why this might be. Those pieces are almost certainly tied up in how the CCP runs things.
The other oversight, for me at least, was the uncritical analysis of economic systems overall. Towards the end of the book, China's economy is analysed in terms of how it can become a Western style consumer economy, with no examination of whether that is actually a good thing or not. The environmental impact of its activities is weirdly absent in these chapters, and indeed overall.
A decent but limited read. Definitely one where if you are asked for an interesting fact, there are an abundance of those, but overall there's a limited scope to how the topic is covered.
(Should also note this book is very VERY pre-pandemic in tone.)
Individually, almost every chapter was a fascinating look at a part of the Chinese economy. Whether it's stories of cities levelling mountains in bitter pursuit of investment by companies, or the strange tale of a Tasmanian lavender farm whose lavender-stuffed teddies attracted too many Chinese customers, each section is interesting and readable.
What stopped it reaching the heights of a great book were two things.
Firstly, the book felt light on analysis of the political situation. Yes, there was some, but the overall tone of 'China is skating on thin economic ice and it's only just holding it together cos it's run differently to Western states' felt like it was missing a few pieces of explanation as to why this might be. Those pieces are almost certainly tied up in how the CCP runs things.
The other oversight, for me at least, was the uncritical analysis of economic systems overall. Towards the end of the book, China's economy is analysed in terms of how it can become a Western style consumer economy, with no examination of whether that is actually a good thing or not. The environmental impact of its activities is weirdly absent in these chapters, and indeed overall.
A decent but limited read. Definitely one where if you are asked for an interesting fact, there are an abundance of those, but overall there's a limited scope to how the topic is covered.
(Should also note this book is very VERY pre-pandemic in tone.)
May 10, 2022
Knyga per realaus gyvenimo pavyzdžius perteikia kaip veikia Kinijos ekonomika. Man atrodo mes labai dažnai įsivaizduojame, jog vakarietiškais principais verslas paremtas ir bandom vertinti per tą prizmę, tai aiškesnis supratimas kokia apskritai ūkio struktūra leidžia vertinti kitaip.
October 23, 2018
Last few years, I have come across few economic journals which highlights China’s meteoric rise over the past half century. The nation is pinned as an exemplar about the impact of opening an economy to the global markets. One of the major defining moment was in 1978 where groundwork was laid for future reforms. Soon they shifted from collective farming to the household responsibility system. This was immediately followed by allowing foreign capital to enter China, thereby boosting regional economies. The other key moments were the opening of Shangai stock exchange and introduction of China to the World Trade Organization(WTO). The liberalization transformed China from an agrarian society to an industrial powerhouse. They have become a major global exporter. Its economic spectacle has astonished the world. For decades, Europe and the United States have been considered as twin engines for driving world economy. With its economic ascendancy, there is high prospect for China becoming the third engine. The world will know in next few years whether the prediction is right or it’s simply a fallacy. China’s economic and political ascent seemed inevitable. However, China has deep rooted economic problems that required reform and political leadership before it can assume the role of a rich nation that will drive the growth of the world. It’s wrong to assume that decision makers are infallible. A radical change from China’s current course is required before this century becomes a China’s century. Let’s find out China’s economic weakness that is sending insinuation signals, which have been keeping the world worried.
The number of zombie companies are increasing in China. What is a zombie company? A zombie company is defined as the one which is heavily indebted, doesn’t generate enough revenue to pay their interest on debts, cannot reduce the principle amount and cannot be restructured as well. Their ability to repay interest depends on the continuous low interest rates. Astonishingly these companies are kept afloat by local governments. These loss making companies cannot pay corporate tax but they contribute to value added tax that’s collected on the sale of manufactured goods. Shutting down these companies means losing a big chunk of fiscal revenue. Local officials go out of their way to keep these zombie companies alive by forcing banks to lend money, finding another firm to merge it or forcing employees to take a pay cut. The said factors along with domestic protectionism and subsidies have resulted in Chinese industries capable of producing far more than actually needed. The upshot is that due to these zombie companies, the Chinese economy is stuck with all these extra factories, which undermines the health of entire industries.
Throughout China, there are hundreds of cities that have everything, required for modern urban lifestyle like high rise apartments, waterfronts and skyscrapers. One thing is missing but that is the most important one without which a city cannot flourish and sustain. The missing part is the people. These cities are built to the point of near completion before it’s being populated by people. During the interim period most of the building stood empty. The cities were built to accommodate millions of people but it however remained empty. Such cities are called ghost cities. There are also instances when a city became empty after people moved to other locations after financial crisis affecting that part of the region. Now regardless of the surfeit of ghost cities in China, it’s being dismissed by economists with respect to China’s big picture. Despite its proliferation, the economy hasn’t suffered. In pursuit of blind and mindless growth, the concept of urbanization has been hijacked by local governments. These are the products of unconnected local planning.
It’s difficult to measure precisely but China’s debt has been increasing at an alarming rate. The state owned companies have borrowed incredible amounts. Though the state firms contribute to only quarter of the economy but they account for 60% of all the corporate debt. These borrow from government banks ultimately means that government is responsible for it if something goes wrong. Did the loans given to the state firms serve any national interest? It’s not always. Only fraction of the debt can claim to be strategic. Somehow things have been managed in a latent manner as of now but future looks risky. The President Xi Jinping had said that China’s financial system have two great vulnerabilities- state owned firms and debt. The country has accumulated so much debt that economists predict a financial crisis, which is much extensive compared to Greece economic ruin.
Another factor which is not of immediate concern but may present a big risk in future is shadow banking. This is any nonbank credit that does not follow the careful and thoughtful regulation of an ordinary bank lending. It includes P2P, which is a decentralized model where two individuals interact to buy or sell goods and services directly with each other, without an intermediary third party. A P2P platform Yooli was launched as an experimentation and alternatives to state run financial system. It emerged during vast wave of financial democratization. Earlier people were starved of such options. Compared to bank, the returns are decent. This has been embraced by all strata of society. In terms of asset size relative to bank, it’s not a risk but the concern is the pace with which it’s growing. The irony is that counterintuitively, banks are involved. Shadow banking has also weakened Beijing’s control of the economy by allowing banks to lend more than the permissible limit. The banks have been adroit by designing the system as opaque, so that Beijing is not able to know how much credit they have generated. Banks have been also willing to accept third party guarantee to those companies which don’t have a collateral. Sometimes private companies too guarantee each other. Such arrangement has opened bank credit to a swath of small private firms. This threatened growth, stability and reform efforts.
Land exploitation has been one of the major source of popular unrest in China. Entire villagers have rioted against their land being taken by the government. The promoters and developers have teamed up with thugs to intimidate farmers. As per the law, the farmers have a claim over the land they cultivate. The farmers used to get thirty years of lease that prevents village chieftains from arbitrarily distributing lands in favour of family and friends. However, such leases provide no protection against the government officials next level up. In the guise of public interest, local government has the authority to acquire lands. Sometimes, amusement parks, ornamental lakes and golf courses are built on this land. Even if then land is not available, extreme measures are taken up by the authority. Now what is that? I was thunderstruck to learn that. Dongfeng Motor company is an automobile manufacturing company which has a joint venture with Nissan motors. Dongfeng asked for eighty acres of land from a city called Shiyan’s authority. The city however couldn’t provide that. So Dongfeng decided to move the headquarters of two of it’s unit. Fearing that the motor city could become an abandoned city, the government settled on a plan to create four hundred square miles of new land by levelling the mountain. Land is sometimes also reclaimed from sea to build factories.
In the 80’s , price of most of the things was set by the government. As things stand now, the government controls only energy prices and few freight rates. The communist government no longer controls the economy as it once did. The authorities are willing to open the shackles of explicit state control and replace them with markets. However, they still fully retain the right to intervene whenever they don’t like what markets are doing. The Chinese meddling makes the economy look opaque to not only foreigners but to the Chinese as well.
China has benefitted immensely after joining the WTO. It became world’s workshop producing mass market manufacturing goods and that too cheaper than anybody else. However, the price advantage is in wane. Quarter of American companies have moved some of their operations out of China or planning to do so because of rising cost. The wages have risen so much. The labour intensive industries like clothing and toys are moving in droves to places like Bangladesh where worker wage is quarter to their Chinese counterparts. Some are moving to Vietnam where wage is half as expensive in China.
Still amidst all these, there is a silver lining. The Chinese consumers have been playing a big role in driving the world economy. The automobile giant Volkswagen makes half of its total global sales in China. They are also contributing to one third of global sales of luxury bags and watches. American movies are now being more popular in China than locally made films. The ticket sales are so vital to Hollywood studio that they are casting Chinese actors for the role in the movie and that too in a positive manner. Chinese students in huge numbers are moving to USA, UK and Australia, thereby providing vital source of additional funding to overstretched institutions. Chinese seems to be ubiquitous, wherever there is an economic growth.
We love to pull China down. We love to highlight them in a poor light. Most of the aforementioned issues are a matter of concern in any developing nation. Why blaming only China. It’s success despite being a communist country has astonished the world. What to expect from this book? The book focuses on debt. Why and how state firms and local governments borrowed so much? How the financial system has accommodated them and why these things have been allowed to get out of hands? The book gives the narration on the mechanics of Chinese economy. The book is not about politics or senior Chinese leaders' insights. The book also does not mention anything about reform to clean up bad loans or close factories. The book is also not about bright spots like China’s effort to develop new markets through it’s much debated Belt and Road initiative. The book neither seeks to attempt to forecast when things are likely to unravel. Before going for this book, better align your expectation from it. If you have read “parable on blind men and an elephant”, then please recall. A group of blind men were asked to inspect an elephant by touch. The man who landed on the trunk felt it like a thick snake. The man who reached its ears felt like a kind of fan. To another man, leg seemed like a pillar. While for others, side was like a wall and tail like a rope. Each man had a different version of the animal. Now your elephant is China and a group of blind men suggesting that this elephant can never be interpreted precisely. The citizen never excoriates the government for definite reason. So it’s not easy to extract information from the citizen so easily. Still, the author has done a commendable job here in penning this book. It’s not easy to write on China due to its geographically large area, diversity, arcane political system, opaque economic system and the culture of secrecy.
The number of zombie companies are increasing in China. What is a zombie company? A zombie company is defined as the one which is heavily indebted, doesn’t generate enough revenue to pay their interest on debts, cannot reduce the principle amount and cannot be restructured as well. Their ability to repay interest depends on the continuous low interest rates. Astonishingly these companies are kept afloat by local governments. These loss making companies cannot pay corporate tax but they contribute to value added tax that’s collected on the sale of manufactured goods. Shutting down these companies means losing a big chunk of fiscal revenue. Local officials go out of their way to keep these zombie companies alive by forcing banks to lend money, finding another firm to merge it or forcing employees to take a pay cut. The said factors along with domestic protectionism and subsidies have resulted in Chinese industries capable of producing far more than actually needed. The upshot is that due to these zombie companies, the Chinese economy is stuck with all these extra factories, which undermines the health of entire industries.
Throughout China, there are hundreds of cities that have everything, required for modern urban lifestyle like high rise apartments, waterfronts and skyscrapers. One thing is missing but that is the most important one without which a city cannot flourish and sustain. The missing part is the people. These cities are built to the point of near completion before it’s being populated by people. During the interim period most of the building stood empty. The cities were built to accommodate millions of people but it however remained empty. Such cities are called ghost cities. There are also instances when a city became empty after people moved to other locations after financial crisis affecting that part of the region. Now regardless of the surfeit of ghost cities in China, it’s being dismissed by economists with respect to China’s big picture. Despite its proliferation, the economy hasn’t suffered. In pursuit of blind and mindless growth, the concept of urbanization has been hijacked by local governments. These are the products of unconnected local planning.
It’s difficult to measure precisely but China’s debt has been increasing at an alarming rate. The state owned companies have borrowed incredible amounts. Though the state firms contribute to only quarter of the economy but they account for 60% of all the corporate debt. These borrow from government banks ultimately means that government is responsible for it if something goes wrong. Did the loans given to the state firms serve any national interest? It’s not always. Only fraction of the debt can claim to be strategic. Somehow things have been managed in a latent manner as of now but future looks risky. The President Xi Jinping had said that China’s financial system have two great vulnerabilities- state owned firms and debt. The country has accumulated so much debt that economists predict a financial crisis, which is much extensive compared to Greece economic ruin.
Another factor which is not of immediate concern but may present a big risk in future is shadow banking. This is any nonbank credit that does not follow the careful and thoughtful regulation of an ordinary bank lending. It includes P2P, which is a decentralized model where two individuals interact to buy or sell goods and services directly with each other, without an intermediary third party. A P2P platform Yooli was launched as an experimentation and alternatives to state run financial system. It emerged during vast wave of financial democratization. Earlier people were starved of such options. Compared to bank, the returns are decent. This has been embraced by all strata of society. In terms of asset size relative to bank, it’s not a risk but the concern is the pace with which it’s growing. The irony is that counterintuitively, banks are involved. Shadow banking has also weakened Beijing’s control of the economy by allowing banks to lend more than the permissible limit. The banks have been adroit by designing the system as opaque, so that Beijing is not able to know how much credit they have generated. Banks have been also willing to accept third party guarantee to those companies which don’t have a collateral. Sometimes private companies too guarantee each other. Such arrangement has opened bank credit to a swath of small private firms. This threatened growth, stability and reform efforts.
Land exploitation has been one of the major source of popular unrest in China. Entire villagers have rioted against their land being taken by the government. The promoters and developers have teamed up with thugs to intimidate farmers. As per the law, the farmers have a claim over the land they cultivate. The farmers used to get thirty years of lease that prevents village chieftains from arbitrarily distributing lands in favour of family and friends. However, such leases provide no protection against the government officials next level up. In the guise of public interest, local government has the authority to acquire lands. Sometimes, amusement parks, ornamental lakes and golf courses are built on this land. Even if then land is not available, extreme measures are taken up by the authority. Now what is that? I was thunderstruck to learn that. Dongfeng Motor company is an automobile manufacturing company which has a joint venture with Nissan motors. Dongfeng asked for eighty acres of land from a city called Shiyan’s authority. The city however couldn’t provide that. So Dongfeng decided to move the headquarters of two of it’s unit. Fearing that the motor city could become an abandoned city, the government settled on a plan to create four hundred square miles of new land by levelling the mountain. Land is sometimes also reclaimed from sea to build factories.
In the 80’s , price of most of the things was set by the government. As things stand now, the government controls only energy prices and few freight rates. The communist government no longer controls the economy as it once did. The authorities are willing to open the shackles of explicit state control and replace them with markets. However, they still fully retain the right to intervene whenever they don’t like what markets are doing. The Chinese meddling makes the economy look opaque to not only foreigners but to the Chinese as well.
China has benefitted immensely after joining the WTO. It became world’s workshop producing mass market manufacturing goods and that too cheaper than anybody else. However, the price advantage is in wane. Quarter of American companies have moved some of their operations out of China or planning to do so because of rising cost. The wages have risen so much. The labour intensive industries like clothing and toys are moving in droves to places like Bangladesh where worker wage is quarter to their Chinese counterparts. Some are moving to Vietnam where wage is half as expensive in China.
Still amidst all these, there is a silver lining. The Chinese consumers have been playing a big role in driving the world economy. The automobile giant Volkswagen makes half of its total global sales in China. They are also contributing to one third of global sales of luxury bags and watches. American movies are now being more popular in China than locally made films. The ticket sales are so vital to Hollywood studio that they are casting Chinese actors for the role in the movie and that too in a positive manner. Chinese students in huge numbers are moving to USA, UK and Australia, thereby providing vital source of additional funding to overstretched institutions. Chinese seems to be ubiquitous, wherever there is an economic growth.
We love to pull China down. We love to highlight them in a poor light. Most of the aforementioned issues are a matter of concern in any developing nation. Why blaming only China. It’s success despite being a communist country has astonished the world. What to expect from this book? The book focuses on debt. Why and how state firms and local governments borrowed so much? How the financial system has accommodated them and why these things have been allowed to get out of hands? The book gives the narration on the mechanics of Chinese economy. The book is not about politics or senior Chinese leaders' insights. The book also does not mention anything about reform to clean up bad loans or close factories. The book is also not about bright spots like China’s effort to develop new markets through it’s much debated Belt and Road initiative. The book neither seeks to attempt to forecast when things are likely to unravel. Before going for this book, better align your expectation from it. If you have read “parable on blind men and an elephant”, then please recall. A group of blind men were asked to inspect an elephant by touch. The man who landed on the trunk felt it like a thick snake. The man who reached its ears felt like a kind of fan. To another man, leg seemed like a pillar. While for others, side was like a wall and tail like a rope. Each man had a different version of the animal. Now your elephant is China and a group of blind men suggesting that this elephant can never be interpreted precisely. The citizen never excoriates the government for definite reason. So it’s not easy to extract information from the citizen so easily. Still, the author has done a commendable job here in penning this book. It’s not easy to write on China due to its geographically large area, diversity, arcane political system, opaque economic system and the culture of secrecy.
April 21, 2018
Dinny McMahon China's Great Wall of Debt: Shadow Banks, Ghost Cities, Massive Loans and the End of the Chinese Miracle is an engrossing, and well-researched examination from a variety of perspectives on how the Chinese economy has functioned and grown so fast, and the increasingly hard to ignore challenges it faces in the future.
This book is a great example of an extended journalist piece. Many different stakeholders, from senior politicians, nouveau business executives, Australian marketers of lavender infused Teddy bears, Lancaster, SC textile operations, empty cities and far off manufacturing regions are highlighted in an engaging manner.
He makes the case through anecdote and firm example of how China has grown through heavily leveraged growth in materials and mass infrastructure and building construction. And he is very clear of the social cost involved: villages with only grandparents and children, parents unable to pass on farmland to children, the empty massive new empty apartments with secretaries with nothing to do, and the vacuousness of empty consumption of material goods.
Most importantly, he shows how real reform at the local level will be very hard to achieve going forward. China for a generation has played off the strength of a centrally planned state. It is easier to make financial and construction and manufacturing deals on a mass scale on a nationwide level. The waste and petty corruption that exists though is simply not able to be reformed without causing a lot of real pain in the future for so many interested groups. Surprisingly to me, the level of income inequality and its rate of growth between the new wealthy (the ones that require Chinese policeman in places like Rome where they descend upon in large numbers), and the massive millions who simply are not gaining economically, and have less cultural leverage.
As a starting point for understanding the modern Chinese economy and its effects from a variety of fresh perspectives makes this an accessible and interesting read for anyone interested in these global economic concerns.
This book is a great example of an extended journalist piece. Many different stakeholders, from senior politicians, nouveau business executives, Australian marketers of lavender infused Teddy bears, Lancaster, SC textile operations, empty cities and far off manufacturing regions are highlighted in an engaging manner.
He makes the case through anecdote and firm example of how China has grown through heavily leveraged growth in materials and mass infrastructure and building construction. And he is very clear of the social cost involved: villages with only grandparents and children, parents unable to pass on farmland to children, the empty massive new empty apartments with secretaries with nothing to do, and the vacuousness of empty consumption of material goods.
Most importantly, he shows how real reform at the local level will be very hard to achieve going forward. China for a generation has played off the strength of a centrally planned state. It is easier to make financial and construction and manufacturing deals on a mass scale on a nationwide level. The waste and petty corruption that exists though is simply not able to be reformed without causing a lot of real pain in the future for so many interested groups. Surprisingly to me, the level of income inequality and its rate of growth between the new wealthy (the ones that require Chinese policeman in places like Rome where they descend upon in large numbers), and the massive millions who simply are not gaining economically, and have less cultural leverage.
As a starting point for understanding the modern Chinese economy and its effects from a variety of fresh perspectives makes this an accessible and interesting read for anyone interested in these global economic concerns.
May 14, 2018
It’s a good book that gives an accessible overview of issues within the Chinese government. Despite the title it’s sober and does not claim to make predictions of imminent collapse. I find this book well worth reading for an understanding of today’s and tomorrow’s China.
July 14, 2022
Outstanding Book
This was a truly outstanding read on China's economics.
One of the better recent books on China I have read - and I read a lot of them.
Definitely don't miss this book.
5.0/5
This was a truly outstanding read on China's economics.
One of the better recent books on China I have read - and I read a lot of them.
Definitely don't miss this book.
5.0/5
October 30, 2020
Growth sustained by debt, an outlook on the Chinese Economy.
China has a debt problem. According to Trading Economies, a consultancy, China’s debt-to-GDP ratio has increased by 121 percent since 2000, while the same ratio for OECD countries is less than 54 percent . China’s economic growth, closely correlated to deficits, have slowed from 14 to 6 percent between 1993 and 2019 . Growth seems to dependent on further debt expansion. Why is China’s growth dependent on debt? This essay will answer how growth is sustained, arguing for three critical economic drivers, affecting the outlook for China. Growth expectations drive soaring debt levels on three levels in society, the state governed bank sector, local government and private housing markets.
Firstly, state banks provide low rate, government-backstopped loans to state firms, practically providing unlimited supply of capital at low costs. The inefficient allocation of loans suggests waste capital expenditure, driving the state government’s portfolio of bad asset liabilities.
Secondly, local government debt is driven by two main causes, increased land prices and public works. Land prices have soared due to hiking demand for housing development and public works. Local government seize farmland, which is used as collateral for new loans to finance public work projects. The public works projects generate tax revenue, but not enough to cover debt liabilities and interest payments. Therefore, local government solvency depends on access to capital for public works, escalating local government debt burdens.
Finally, housing development has increased private debt, mainly in two ways, consumer debt and construction. Consumer debt because industrial demand for labour has increased competition for urban housing, raising prices for housing and land. High land prices and development projects in anticipation for further urbanization have caused construction and property companies to accumulate vast debt burdens.
To conclude, these are three factors, causing China’s debt burden.
China has a debt problem. According to Trading Economies, a consultancy, China’s debt-to-GDP ratio has increased by 121 percent since 2000, while the same ratio for OECD countries is less than 54 percent . China’s economic growth, closely correlated to deficits, have slowed from 14 to 6 percent between 1993 and 2019 . Growth seems to dependent on further debt expansion. Why is China’s growth dependent on debt? This essay will answer how growth is sustained, arguing for three critical economic drivers, affecting the outlook for China. Growth expectations drive soaring debt levels on three levels in society, the state governed bank sector, local government and private housing markets.
Firstly, state banks provide low rate, government-backstopped loans to state firms, practically providing unlimited supply of capital at low costs. The inefficient allocation of loans suggests waste capital expenditure, driving the state government’s portfolio of bad asset liabilities.
Secondly, local government debt is driven by two main causes, increased land prices and public works. Land prices have soared due to hiking demand for housing development and public works. Local government seize farmland, which is used as collateral for new loans to finance public work projects. The public works projects generate tax revenue, but not enough to cover debt liabilities and interest payments. Therefore, local government solvency depends on access to capital for public works, escalating local government debt burdens.
Finally, housing development has increased private debt, mainly in two ways, consumer debt and construction. Consumer debt because industrial demand for labour has increased competition for urban housing, raising prices for housing and land. High land prices and development projects in anticipation for further urbanization have caused construction and property companies to accumulate vast debt burdens.
To conclude, these are three factors, causing China’s debt burden.
April 16, 2021
This work from Mr. McMahon is a well-researched effort based on his years as a financial journalist, split between working for the Wall Street Journal in Beijing and with Dow Jones Newswires in Shanghai. He deserves credit for the lengths he travelled to bring fascinating vignettes to tell this story such as the state-owned enterprises that dominate the salt market that artificially keep prices high. Although salt ceased being a major source of state revenue some time ago, this entrenched interest meant large state-owned enterprises enjoyed treatment that stifled competition from private firms. While published in 2018, this was insightful to read in light of Chinese state firms defaulting on nearly US$11.1 billion worth of debt in 2020 and to think about how the Chinese corporate sector will continue to face credit-market stress.
November 5, 2019
There are some books that you read and more or less can grasp idea of what is going on. This one is book about machine with 1.5+ trillion moving parts - more you read, less you understand. Looks to me like China is huge Ponzi scheme which is keep going as long as the government willing to play the music. To get successful in China means taking bold and aggressive steps and when shit hit the fan - the governments (people's taxes) will be responsible to bail you out. One idea that book clearly gave me that I don't understand China's economy.
April 4, 2022
A wonderful introduction to the growth engines of China and the consequences of these. It might be a bit too judgemental given how China has lifted so many people in such a short time onto the middle class. Tldr; China funds itself through fraudulent debt at 2008 financial crisis levels.
June 4, 2018
Well written and informative. The author seems to have done their research.
November 11, 2025
A bit dated (2018) but the basic messages are still relevant today and prompt the question when does the bubble finally burst? They always do, eventually.
December 2, 2023
The author offers a compelling and insightful exploration of China's complex economic landscape, navigating through the intricacies of China's debt-fueled growth, offering a nuanced understanding of the challenges and risks inherent in the country's financial system. It sheds light on the potential implications not only for China but also for the global economy.
May 6, 2019
glad I got out when I did, lol.
June 4, 2020
Fascinating window into the inner workings of the Chinese financial system and how it is so deeply intertwined with the policies of the Chinese Communist Party.
July 1, 2020
Page 23 - "Every American boy and girl is brought up to play by the rules as a way to ensure that everyone is treated fairly". Why always the absolute statements?
I started by giving one-star to this book. Then, it got much better.
I must remember not to be a 屌丝 (diao si) which apparently means male pubic hair.
I started by giving one-star to this book. Then, it got much better.
I must remember not to be a 屌丝 (diao si) which apparently means male pubic hair.
November 10, 2018
The best book I've read on the topic: spot-on analyses on the roots of China's economic and financial problems. Unbridled and ever-expanding money supply combined with the financialization of the economy creates huge asset bubbles and poses huge risks for the entire economy.
September 14, 2018
I just finished China’s Great Wall of Debt – Shadow Banks, Ghost Cities, Massive Loans and the end of the Chinese Miracle, by Dinny McMahon (212 pages).
The book isn’t nearly as apocalyptic as its title suggest. It’s written by a Wall Street Journalist who spent 10 years in-country.
As you would expect from a book by a journalist, the book is supported by many anecdotes and examples. It is long on stories and short on data and analysis that you would expect from someone if instead they were an academic. I suspect that this book is what economists take to the beach when they want a guilty read. At 212 pages, I thought that the book was a little longer than it should have been, but not by a huge amount.
One of the interesting insights that I got from the book is that a lot of the growth is driven from the bottom up. Provinces aren’t competing against the US, they are competing against other provinces for jobs and revenue to increase their tax base. As a result of this, moderating these influences is going to be a lot more difficult than it would be if these initiatives were led by the government at the top, and that the central authority doesn’t have as much power as I had assumed prior to reading the book. China’s central government knows that it needs to address these issues, it’s an open question on how quickly or effectively it will be able to.
Another key issue is the need to modernize before China’s workforce ages out and stops working, and when the future requirements to provide care for an aging population will start to increasingly sap growth. The inevitable consequence of the one child policy.
I would have liked to see more data, more statistics and graphs, and more analysis, but maybe that’s out of another book. Where would this data come from? Not the Chinese government. Also the lack to those items kept this book as a quick easy read, I may go through it a second time before I return it to the library.
In the 80’s we were concerned that Japan was poised to take over the world economically, and that has proven to not be the case. We may be seeing a reboot of the same story.
The book isn’t nearly as apocalyptic as its title suggest. It’s written by a Wall Street Journalist who spent 10 years in-country.
As you would expect from a book by a journalist, the book is supported by many anecdotes and examples. It is long on stories and short on data and analysis that you would expect from someone if instead they were an academic. I suspect that this book is what economists take to the beach when they want a guilty read. At 212 pages, I thought that the book was a little longer than it should have been, but not by a huge amount.
One of the interesting insights that I got from the book is that a lot of the growth is driven from the bottom up. Provinces aren’t competing against the US, they are competing against other provinces for jobs and revenue to increase their tax base. As a result of this, moderating these influences is going to be a lot more difficult than it would be if these initiatives were led by the government at the top, and that the central authority doesn’t have as much power as I had assumed prior to reading the book. China’s central government knows that it needs to address these issues, it’s an open question on how quickly or effectively it will be able to.
Another key issue is the need to modernize before China’s workforce ages out and stops working, and when the future requirements to provide care for an aging population will start to increasingly sap growth. The inevitable consequence of the one child policy.
I would have liked to see more data, more statistics and graphs, and more analysis, but maybe that’s out of another book. Where would this data come from? Not the Chinese government. Also the lack to those items kept this book as a quick easy read, I may go through it a second time before I return it to the library.
In the 80’s we were concerned that Japan was poised to take over the world economically, and that has proven to not be the case. We may be seeing a reboot of the same story.
August 4, 2018
I've spent a lot of time lately reading about China. This book is one I'd recommend highly. McMahon gives us good reason not to fear China overtaking the US as the economic superpower of the late 21st century. However, he also gives us good reason to fear what will happen if China fails to address the problems inherent in its economy successfully.
China can't sustain the economic growth rates of the last few decades without incorporating "smoke and mirror" policies which McMahon describes in detail. The problems the PRC government has ignored, co-opted, or papered over to assure continued growth will one day come home to roost. McMahon believes that reckoning is inevitable and will be transformative to China and likely to the greater world.
If unable to surmount the middle income trap, these economic problems will drag China down and leave hundreds of millions of angry and dissatisfied citizens. The scary part is what path the Chinese government might take to address these issues that currently result in gross income inequality, equal to, if not surpassing those in the US.
Given the turmoil and upheaval we've witnessed in the US from the fractured social contract and growing income disparities, imagine what might happen in China when a fully-authoritarian government attempts to address a polity that is losing wealth, status and the opportunity for a better life.
Spoiler alert: if you agree with McMahon's thesis (which, after reading this book I do), the next few decades will result in dramatic changes to the Chinese economic model. Few scenarios predict the PRC government will be able to manage these changes adroitly, i.e., in a way that will be good for China and benign for the remainder of the world, given how large a part China now plays in the greater world economy. Hold on, it's going to be a bumpy ride.
This book certainly qualifies as a good read for anybody with interest in China, the fate of the world economy and the future of China's relationships with other developed countries.
China can't sustain the economic growth rates of the last few decades without incorporating "smoke and mirror" policies which McMahon describes in detail. The problems the PRC government has ignored, co-opted, or papered over to assure continued growth will one day come home to roost. McMahon believes that reckoning is inevitable and will be transformative to China and likely to the greater world.
If unable to surmount the middle income trap, these economic problems will drag China down and leave hundreds of millions of angry and dissatisfied citizens. The scary part is what path the Chinese government might take to address these issues that currently result in gross income inequality, equal to, if not surpassing those in the US.
Given the turmoil and upheaval we've witnessed in the US from the fractured social contract and growing income disparities, imagine what might happen in China when a fully-authoritarian government attempts to address a polity that is losing wealth, status and the opportunity for a better life.
Spoiler alert: if you agree with McMahon's thesis (which, after reading this book I do), the next few decades will result in dramatic changes to the Chinese economic model. Few scenarios predict the PRC government will be able to manage these changes adroitly, i.e., in a way that will be good for China and benign for the remainder of the world, given how large a part China now plays in the greater world economy. Hold on, it's going to be a bumpy ride.
This book certainly qualifies as a good read for anybody with interest in China, the fate of the world economy and the future of China's relationships with other developed countries.
July 16, 2018
In general, books on China are either bullish, or sneering. Not so here. Dinny McMahon details some of the extraordinary challenges facing the world's biggest nation, and questions the inevitability of China's ascendancy. The culture of corruption and entitlement is far in excess of anything I imagined; however, don't count the communist party out yet. Xi -- the chairman of everything -- is consolidating the type of dictatorial power that could possibly produce needed reforms. Or perhaps not. Perhaps reforms will misfire, or dictatorial power will cause its own problems, as so often it does.
If China flounders, and citizens lose faith that they'll take their "natural place" in the world order, then we may see unrest or worse in the coming decades. Alternatively, if China succeeds in crossing the "middle income gap" and becomes a developed nation, then we will see a changing of the world order, much to the consternation of much of the rest of Asia. Either way, the future is partly founded in China's present challenges, and McMahon gives an excellent description of those.
April 9, 2020
Mediocre at best. I understand that there are skeptism about Chinese growth story and fudging the numbers. However, the author has invested lot of time in comparing US economic growth instruments with that of China. Geographical, political, societal and contextual basis has taken a backseat which is not wise. Not sure why the book has earned so much high review but then again seeing China from western POV is not a new thing. Moreover, the tanking of Chinese economy has been predicted everyyear since 1978 and look where we are! The reading felt like a US media account of skeptism about Chinese growth story. I would rather recommend reading analytical account of the same.
April 15, 2018
Well told, carefully researched story about how China's debt powers their economy. Their system of allocating capital to companies is very different than ours, and understanding how money flows and what incentives are attached to that movement helps you understand the rapid growth of China as an economic superpower. The book also illuminates the limits to future growth and warns of a future reckoning when "kicking the can down the road" simply won't work anymore (as with Medicare and Social Security in the US).
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