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WORK TITLE: China’s Great Wall of Debt
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WEBSITE: https://www.dinnymcmahon.com/
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NATIONALITY: Australian
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PERSONAL
Male.
EDUCATION:University of New South Wales, Sydney, Australia, B.A., 2003; Johns Hopkins School of Advanced International Studies program in Nanjing (international relations), 2005.
ADDRESS
CAREER
Financial journalist. Australian China Business Council, executive assistant, 2002-04; Dow Jones Newswires, correspondent, 2005-09; Wall Street Journal, banking and finance correspondent, 2009-15; Kissinger Institute Fellow, 2015-16; Wilson Center, fellow, 2015-17; MacroPolo, fellow, 2017–.
WRITINGS
Contributor to news outlets, including Far Eastern Economic Review.
SIDELIGHTS
Australian Dinny McMahan is a financial journalist who is fluent in Mandarin and has spent more than a decade in China covering finance, economy, and business. He has written for Wall Street Journal, Dow Jones Newswires in the Shanghai office, and Far Eastern Economic Review. In 2015, he served a fellowship at the Woodrow Wilson International Center for Scholars, a think tank in Washington DC. He also works for the MacroPolo think tank for Chinese economic issues.
In 2018, McMahon published China’s Great Wall of Debt: Shadow Banks, Ghost Cities, Massive Loans, and the End of the Chinese Miracle, an in-depth examination of how and why the widely held belief in China’s extraordinary economic boom is wrong. He contends that behind the illusion of prosperity, China’s economic growth is built on enormous debt. Empty cities, state projects, monopolies on staple items, and a shadow banking system have contributed to unprecedented waste and mountains of debt. In an interview online at China Economic Review, McMahon explained: “China has reached a point where continued borrowing of this nature runs the risk of destabilising the financial system and the economy. China doesn’t, therefore, only face the question of reining in the level of debt, but also changing how the economy works, since in China’s case the two things are intrinsically linked.”
McMahon draws on stories of everyday Chinese people, like farmers and entrepreneurs, to show how the economy is based on speculation and will one day have a reckoning. “Colorful characters and solid writing enliven what could have been an arcane discussion of the precariousness of China’s economic miracle,” according to a Publishers Weekly reviewer. “McMahon is among the most compelling of the many analysts who conclude that China’s economic miracle will end painfully. But until now such forecasts have served as inadvertent testaments to the country’s resilience,” noted a writer in the Economist.
A Kirkus Reviews contributor reported: “The specter of Chinese dominance, McMahon writes, is less daunting than the likelihood of the Chinese economy’s failure. Of considerable interest, especially to investors in the Chinese market.” On the Reuters website, Edward Chancellor commented: “McMahon writes well, has a fine eye for detail and finds original stories to illustrate his argument.” Chancellor added: “McMahon does not fall into the trap of trying to predict when China’s reckoning will finally arrive or what shape it will take… Who knows, McMahon’s wise words of warning may even turn out to be well-timed.”
BIOCRIT
PERIODICALS
Economist, March 24, 2018, review of China’s Great Wall of Debt: Shadow Banks, Ghost Cities, Massive Loans, and the End of the Chinese Miracle, p. 77.
Kirkus Reviews, February 1, 2018, review of China’s Great Wall of Debt.
Publishers Weekly, January 15, 2018, review of China’s Great Wall of Debt, p. 52.
ONLINE
China Economic Review, https://chinaeconomicreview.com/ (April 12, 2018), author interview.
Reuters, https://www.reuters.com/ (March 9, 2018), Edward Chancellor, review of China’s Great Wall of Debt.
FORMER FELLOW KISSINGER INSTITUTE ON CHINA AND THE UNITED STATES
Dinny McMahon
CONTACT
@DinnyMcMahon
EXPERTISE
Economics and Globalization Trade and Development Asia China Mainland
AFFILIATION
Fellow, MacroPolo, The Paulson Institute
WILSON CENTER PROJECTS
"Cracks in the Façade: The Mounting Risk and Complexity of China’s Financial System"
TERM
Sep 01, 2015 — May 26, 2017
Bio
Dinny McMahon is a Fellow at MacroPolo, a program of the Paulson Institute. He was a Kissinger Institute Fellow from 2015-2016. Prior to his Wilson Center residency, he was a journalist with the Wall Street Journal in Beijing where he wrote about China’s banking and financial sector, focusing on rising debt levels, urbanization and the role of the state sector in the economy. Previously Dinny wrote about the yuan and China's foreign exchange market in Shanghai for Dow Jones Newswires, and contributed to the Far Eastern Economic Review.
Dinny has a double degree from the University of New South Wales in Sydney, Australia, majoring in economics and Chinese. He also attended the Johns Hopkins School of Advanced International Studies program in Nanjing. Dinny speaks Chinese and has lived 13 years in China.
Project Summary
Since the global financial crisis, China's financial system has ballooned in size, complexity and risk. Once dominated by four banks, the system has become a tangle of shadow banking, informal financial institutions and complex corporate funding arrangements that threaten growth, economic stability and reform efforts. This project looks to explain the on-the-ground workings of the country's financial system, how it has contributed to China's rapid growth, and the challenges the country now faces as it tries to harness urbanization and SOE reform as alternative drivers of the economy.
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Books
China's Great Wall of Debt: Shadow Banks, Ghost Cities, Massive Loans, and the End of the Chinese Miracle
Dinny 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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My book, 'China's Great Wall of Debt: Shadow Banks, Ghost Cities, Massive Loans, and the End of the Chinese Miracle,' is being published by Houghton Mifflin Harcourt in March, 2018.
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I spent time this week at the Umer Group’s textile and footwear factories outside Lahore, Pakistan. A leading industrial conglomerate, the group manufactures for a range of American and European brands. Umer Group’s business is illustrative of Pakistan’s often overlooked opportunities as a sourcing location. My four key thoughts: 1. Leading Chinese manufacturers are sourcing from the Umer Group, a decision that demonstrates growing supply-chain ties between China and Pakistan. 2. The company’s highly automated factories demonstrates that Pakistan is not just a low-labor cost opportunity; speed and quality are also key. 3. Bangladesh and Vietnam have captured a large share of garments & footwear production that has left China. But Pakistan is a growing opportunity. 4. Tyres, glass, and batteries, among a range of products will all present opportunities for Chinese companies in Pakistan, not just clothing & footwear.
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Experience
MacroPolo
Fellow
Company NameMacroPolo
Dates EmployedJul 2017 – Present Employment Duration1 yr
LocationChicago
The Wilson Center
Fellow
Company NameThe Wilson Center
Dates EmployedSep 2015 – May 2017 Employment Duration1 yr 9 mos
LocationWashington D.C. Metro Area
Wall Street Journal
Banking & Finance Correspondent
Company NameWall Street Journal
Dates EmployedDec 2009 – Jun 2015 Employment Duration5 yrs 7 mos
LocationBeijing
Covering China's banking and finance sectors for the Wall Street Journal based in Beijing.
Far Eastern Economic Review
Reviewer
Company NameFar Eastern Economic Review
Dates EmployedJan 2008 – Dec 2009 Employment Duration2 yrs
Writing ad hoc book reviews on China and monetary policy.
Dow Jones Newswires
Correspondent
Company NameDow Jones Newswires
Dates EmployedJul 2005 – Nov 2009 Employment Duration4 yrs 5 mos
Mainly reported on China's currency and foreign exchange regime based in Shanghai
Australia China Business Council
Executive Assistant
Company NameAustralia China Business Council
Dates EmployedApr 2002 – Jan 2004 Employment Duration1 yr 10 mos
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Education
Hopkins Nanjing Centre for Chinese & American Studies (HNC)
Hopkins Nanjing Centre for Chinese & American Studies (HNC)
Field Of StudyInternational Relations
Dates attended or expected graduation 2004 – 2005
Graduate level economics and international relations course conducted in Chinese
UNSW
UNSW
Field Of StudyBachelor of Commerce/Bachelor of Arts
Dates attended or expected graduation 1998 – 2003
Majored in Economics & Chinese language
Beijing Second Foreign Language Institute
Beijing Second Foreign Language Institute
Field Of StudyChinese
Dates attended or expected graduation 1997
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The undead; China's economy
The Economist. 426.9084 (Mar. 24, 2018): p77(US).
Copyright: COPYRIGHT 2018 Economist Intelligence Unit N.A. Incorporated
http://store.eiu.com/
Full Text:
THE zombies that appear in Chinese legends are not quite the same as their Western counterparts. They feast on blood, not brains, and hop about rather than staggering forwards. The differences extend to economics. Chinese officials, like their Western peers, openly fret about zombie companies--insolvent firms kept alive by banks--but are far less willing to kill them off. This small excursion into the world of the undead is one of many gems in Dinny McMahon's new book, a vivid account of China's economic problems, from debt to falsified data.
Mr McMahon, a veteran financial correspondent in China, most recently with the Wall Street Journal, wears his knowledge lightly, whether discussing ghost stories or balance sheets. His book, "China's Great Wall of Debt", is notable for two reasons. It is one of the clearest and most thorough statements of an argument often made about the country: that its government has relied on constant stimulus to keep growth strong, an addiction that is bound to backfire. Second, he comes closer than any previous writer to covering the Chinese economy as Michael Lewis, the hugely popular author of "The Big Short", might do. His analysis is informed but accessible, animated by anecdotes and characters, some colourful, some verging on tragic.
In a chapter on government meddling, he introduces a hedge-fund analyst who accused a publicly listed Chinese silver-mining company of fraud. Police arrested him, kept him awake for three days and jailed him for two years; he was ultimately found guilty of "impairing business credibility". In a chapter on the deadweight of state-owned companies, Mr McMahon visits a factory owned by Erzhong, a machinery-maker that built the world's biggest hydraulic press forge, used for pounding out metal. But the forge, based on Russian designs from the 1980s, is outdated and the country oversupplied. These days retired workers harvest vegetables planted on unused land along the factory's walls. In a chapter on financial bubbles, Mr McMahon tracks the boom and bust in Moutai, China's most prized brand of baijiu, a grain-based spirit, through the story of an auctioneer.
As with any financial mess, there is plenty of blame to go around for these excesses. Reckless investors, greedy lenders and lax regulation have all played a part. But Mr McMahon shows that China's political system is at the heart of the dysfunction. Short of tax revenues, local governments treat land as free money, expropriating it cheaply and then selling it at inflated prices. Since the promotions of officials are traditionally based on economic growth, they are encouraged to spend public money first and ask questions later. Implicit guarantees make for financial distortions. Few think big state-owned banks will ever be allowed to fail or that large state-owned firms will ever be pushed into bankruptcy.
Yet for all the undeniable weaknesses in China's economy, the central argument of the book is debatable. In his introduction Mr McMahon explains that he will neither delve into the government's efforts to clean up bad loans nor examine bright spots such as the tech sector. That makes sense as a way to keep the narrative sharp. Nevertheless, the clean-up and the bright spots matter. Over the past year the government's economic priority has been to defuse debt risks. It has made some headway, not least by thinning the ranks of zombie factories. Meanwhile the blossoming of the tech sector is one example of how China retains the ability to transcend its past mistakes.
Mr McMahon is among the most compelling of the many analysts who conclude that China's economic miracle will end painfully. But until now such forecasts have served as inadvertent testaments to the country's resilience. Despite so much in its economy that looks so deeply rotten, China may yet emerge from its boom stronger than the doomsayers predict.
China's Great Wall of Debt
. By Dinny McMahon.
Source Citation (MLA 8th Edition)
"The undead; China's economy." The Economist, 24 Mar. 2018, p. 77(US). General OneFile, http://link.galegroup.com/apps/doc/A531887035/ITOF?u=schlager&sid=ITOF&xid=371e49b6. Accessed 3 June 2018.
Gale Document Number: GALE|A531887035
6/3/2018 General OneFile - Saved Articles
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Print Marked Items
McMahon, Dinny: CHINA'S GREAT
WALL OF DEBT
Kirkus Reviews.
(Feb. 1, 2018):
COPYRIGHT 2018 Kirkus Media LLC
http://www.kirkusreviews.com/
Full Text:
McMahon, Dinny CHINA'S GREAT WALL OF DEBT Houghton Mifflin Harcourt (Adult Nonfiction)
$28.00 3, 13 ISBN: 978-1-328-84601-3
China is poised to overtake the United States, and the rest of the developed world, economically by the year
2030. Or is it? To gauge by this account, Western capitalists can breathe a little easier.
Business journalist McMahon, a longtime China reporter for the Wall Street Journal and current fellow at
the Paulson Institute, contends that for all the anti-corruption rhetoric of the Xi Jinping government,
corruption is still rampant, adding burdens to an economy already bound by strains of command-economy
socialism, free-market capitalism, crony capitalism, and state capitalism, all designations that fail "to
sufficiently describe the nature of the Chinese economy." Suffice it to say that nothing is as it seems: the
data are fudged, the numbers untrustworthy and incomplete, and while the government presence is
inescapable, there is evidently little coordination among the sectors. One thing that all seem to agree on is
that growth is of paramount importance, even if demand does not always approach considerations of supply.
For that reason, China has too many industrial facilities, for instance, and too many "shadow cities" and
empty housing developments. Even so, McMahon writes, the Chinese government is planning to grow its
way out of current problems, including massive, underreported debt, whether through supply-side reforms
and expansion into new areas of economic activity or falling by old standbys. The old ones certainly seem
not to be working. By the author's account, consumer dissatisfaction is high, and all the more so the
dissatisfaction of investors in failed sectors. If China fails to build its economy and become truly wealthy,
he notes, then demographic pressures caused by an aging population will mean that the "nation's ambitions
of national rejuvenation will be postponed for at least another generation."
The specter of Chinese dominance, McMahon writes, is less daunting than the likelihood of the Chinese
economy's failure. Of considerable interest, especially to investors in the Chinese market.
Source Citation (MLA 8th
Edition)
"McMahon, Dinny: CHINA'S GREAT WALL OF DEBT." Kirkus Reviews, 1 Feb. 2018. General OneFile,
http://link.galegroup.com/apps/doc/A525461348/ITOF?u=schlager&sid=ITOF&xid=f0488e61.
Accessed 3 June 2018.
Gale Document Number: GALE|A525461348
6/3/2018 General OneFile - Saved Articles
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China's Great Wall of Debt: Shadow
Banks, Ghost Cities, Massive Loans and
the End of the Chinese Miracle
Publishers Weekly.
265.3 (Jan. 15, 2018): p52.
COPYRIGHT 2018 PWxyz, LLC
http://www.publishersweekly.com/
Full Text:
China's Great Wall of Debt: Shadow Banks, Ghost Cities, Massive Loans and the End of the Chinese
Miracle
Dinny McMahon. Houghton Mifflin, $28 (288p) ISBN 978-1-32884-601-3
Colorful characters and solid writing enliven what could have been an arcane discussion of the
precariousness of China's economic miracle in journalist McMahon's debut. Though most outsiders believe
Chinese economic growth is solidly founded on exports, McMahon reveals the truth: since the 2008
financial crisis, an increase of $ 12 trillion in bank debt is what has really fueled the Chinese economy.
Moreover, many of those loans went to risky enterprises that may never be able to repay their debts,
endangering not only China's but the world's economy. "For years," the author writes, "China's unimpeded
ascent ... seemed inevitable, but it's increasingly clear that that version of the future is unlikely." To back up
his thesis, McMahon visits a factory housing the world's largest--but largely idle-- closed-die hydraulic
press forge; walks past empty shop fronts in one of China's "ghost cities"; and dines with a Chinese
entrepreneur who's chosen to build his business in South Carolina because necessities such as power are
cheaper there than in China. The book offers no verdict on this situation's likely resolution, leaving the
reader only with the message that fixing it will require a level of "reform, pain and political leadership" of
which China's government may not be capable. Agent: DavidMcCormick, McCormick Literary. (Mar.)
Source Citation (MLA 8th
Edition)
"China's Great Wall of Debt: Shadow Banks, Ghost Cities, Massive Loans and the End of the Chinese
Miracle." Publishers Weekly, 15 Jan. 2018, p. 52. General OneFile,
http://link.galegroup.com/apps/doc/A523888929/ITOF?u=schlager&sid=ITOF&xid=f2f23a6e.
Accessed 3 June 2018.
Gale Document Number: GALE|A523888929
6/3/2018 General OneFile - Saved Articles
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BREAKINGVIEWS
MARCH 9, 2018 / 9:14 AM / 4 MONTHS AGO
Breakingviews - Review: The flimsy finances behind China's miracle
Edward Chancellor
LOTS
LONDON (Reuters Breakingviews) - China’s economy has long defied the doom-mongers. In place of their ominous critique, a more constructive view of economic management in the People’s Republic has surfaced. Beijing, we are told, has found the right balance between state and market forces, and is best positioned to exploit exciting new technologies, such as big data and artificial intelligence. Politically fractured and economically sclerotic western nations can only look on in envy.
Dinny McMahon, a former financial journalist and mandarin speaker who spent many years reporting on the Middle Kingdom, doesn’t buy this line. In his view, China’s economy has spent years locked in continuous stimulus mode, accumulating bad debts and generating great economic imbalances along the way. This is not an original thesis. But it’s a welcome reality check on the current China hype. Of the many books that have observed the fragility and contradictions of China’s economic model, “China’s Great Wall of Debt” is the best. McMahon writes well, has a fine eye for detail and finds original stories to illustrate his argument.
Since the financial crisis of 2008, China’s economic growth has depended less on exports than on rising levels of domestic investment. Capital spending is mostly directed at construction, which directly accounts for some 20 percent of China’s gross domestic product and indirectly for much more. The long construction boom has produced dozens of ghost cities – McMahon counts 50 in all – filled with empty apartment blocks. Mighty skyscrapers have sprouted up in unlikely provincial backwaters.
Increasing property supply has been accompanied by rising prices. Sky-high valuations have priced many Chinese workers out of the market, creating a nation of “mortgage slaves” and “ant tribes” - graduates forced to live in cheap properties in urban peripheries. In some super-hot markets like the southern city of Shenzhen, the price of land has exceeded the value of the properties built on it, giving rise to the expression “flour more expensive than bread.”
If China’s economy is fuelled by construction, it’s no secret what keeps the cranes swinging and the bulldozers revving. The country has been on a credit binge ever since Beijing announced the “Great Stimulus” late in 2008. Since that date, debt has grown by around 100 percentage points relative to China’s GDP, more than double the increase in credit that the United States experienced in the decade prior to 2008. A few years back, the amazing pace of China’s credit growth sounded many alarms. But since no crisis appeared most China-watchers became inured to these developments.
Complacency is not justified. It’s not only that the pace of credit growth has been extraordinarily strong and that China’s stock of debt is now high by international standards - especially for corporate borrowing. The financial system itself has become unmoored. In the old days, Chinese savers were pretty much forced to keep their money on deposit at state-controlled banks. In recent years, however, the country has developed its own shadow banking system, comprised of a plethora of wealth management products (WMPs), trust and entrusted loans, off-balance sheet bank credit known as investment receivables, peer-to-peer lending and so forth. The reason China’s financial system has remained upright so far is because the authorities have found ways to conceal defaults. Banks step in to cover losses on WMPs even when they are not legally responsible. Beijing summons up white knights to rescue stricken businesses.
A senior official justifies such practices to McMahon, saying that no good would come of recognizing loan losses as this would cause banks to contract credit, leading to bankruptcies and unemployment. The rule in Beijing is that stability must be maintained at any price. But there is a cost, as McMahon points out. When the state protects people from the consequences of irresponsible lending, then more bad loans will be issued. The result is not just an over-indebted economy, but one strewn with corporate zombies. Many industries suffer from endemic overcapacity – from cement to shipbuilding – and falling output prices. China’s steel industry, which accounts for more than half of global output, produces “steel cheaper than cabbage.”
Local governments have encouraged over-investment in industry to generate tax revenue. They also need to achieve a targeted level of GDP growth. At times, the numbers are simply made up: “villages lie to townships, townships lie to counties, and so on all the way up to the State Council,” McMahon writes. Every province produces a growth number that is higher than China’s national GDP growth rate – a statistic which even Premier Li Keqiang described as “man-made”, according to a leaked diplomatic cable.
Given the “restless hand” of the state’s economic interventions and the unreliability of financial data, profit does not determine the allocation of capital. Nor does the entrepreneur in modern China hold an exalted position. McMahon cites the owner of a small hotel chain writing publicly to Premier Li: “Government officials are natural born sons, state firms are the children of concubines, and private companies are the offspring of whores.” This is the social hierarchy of imperial China, in which merchants traditionally occupied the bottom rung.
Modern China maintains a salt monopoly whose history runs back more than two millennia. According to McMahon, the state-owned enterprise employs more than 400,000 people, including 25,000 “salt police,” spends lavishly on entertainment and encroaches into areas beyond its formal remit. But then the rule of law and the protection of property rights have never counted for much in China. Vested interests rule today as they have always done.
McMahon does not fall into the trap of trying to predict when China’s reckoning will finally arrive or what shape it will take. Still, one can observe some unsettling recent developments. Beijing has just taken control of a large private company, Anbang Insurance Group, which raised short-term funds to make grandiose foreign acquisitions. President Xi Jinping is looking to restrain real estate speculation and rein in the shadow banks. Domestic inflation is picking up. Sooner or later, Beijing will find that it can no longer cover up the cracks in its debt wall. Who knows, McMahon’s wise words of warning may even turn out to be well-timed.
Great Wall of Debt: Dinny McMahon discusses China’s debt addiction
on: April 12, 2018
He is not sure when it will come, or exactly what form it will take when it does, but Dinny McMahon believes that a reckoning is coming for the Chinese economy.
In his new book China’s Great Wall of Debt, which looks like it will become one of the must-read China books of the year, McMahon argues that over the past decade China has become increasingly dependent on a debt-fuelled growth model that is simply unsustainable.
According to the MacroPolo fellow and former Wall Street Journal correspondent, borrowing at a vast scale has allowed the Chinese economy to continue growing fast in the years since the 2008 global financial crisis, but has also increased the risk of a painful correction or a prolonged slowdown akin to that experienced by Japan during the 1990s.
In this interview with China Economic Review, McMahon explains how China reached this point, what Xi Jinping’s government is doing to deleverage the economy, and whether we should be worried about a hard landing for the Chinese economy.
CER: To start off, could you explain how large China’s debt burden is, and how much of a threat it poses to the economy?
McMahon: The most important measure is the size of the debt relative to the size of the economy. As with many issues relating to China’s economy, it can be quite difficult to say exactly how large China’s debt burden is due of the nature of the financial system’s transformation over the last 10 years: it really depends on who you’re talking to. However, if we go by what the Bank of International Settlements says, China’s debt pile relative to the economy is broadly in line with that of the US, probably a little bit bigger. But the issue isn’t really the size of the debt; it’s the pace at which it has been accumulated, starting back from the financial crisis of 2008.
In terms of the threat, the key point is that other economies that have accumulated this level of debt in the past have invariably faced a financial crisis. To give a very short list: the sub-prime crisis in the U.S; Spain prior to the Eurozone crisis; Thailand prior to the Asian financial crisis; Japan prior to the Lost Decade. So the issue is, regardless of whether it experiences a crisis or not, China has reached a point where continued borrowing of this nature runs the risk of destabilising the financial system and the economy.
China doesn’t, therefore, only face the question of reining in the level of debt, but also changing how the economy works, since in China’s case the two things are intrinsically linked.
CER: What are the major sources of debt right now in China?
M: There are three main areas. The first is local governments using debt for “public works,” by which I mean both infrastructure—projects considered to have a generally positive contribution to the economy such as train networks and airports—but also less useful things like ornamental lakes, tourist attractions, or government offices that have more rooms than officials to put into them.
The second area is housing, which is pretty straightforward.
And the third is state-owned enterprises (SOEs) borrowing to build factories, which resulted in massive overcapacity in a couple dozen industries, such as steel, aluminium, cement, ship-building, paper, solar panels and wind turbines, etc.
CER: As you mention in the book, some of the infrastructure being constructed may produce a return in the long term, but other projects are unlikely to pay off in any way. Could you break down how much of the fixed-asset investment falls into each category?
M: It’s difficult to draw the line. I remember when China was building its first high-speed rail network, and there was a lot of scepticism at the time. Many saw it as something of a white elephant, but over time it became not just the crown jewel of China’s transportation system, but also looked on with great envy around the world. China has also been aggressively building airports: there are a number of airports around the country which are loss-making, only having a couple of flights arriving every week. But the potential for an airport to turn around a local economy is huge.
Then there are the things that are just wasteful. Now, we have to keep a couple of things in mind. Firstly, we must consider the quality of what’s being built. The quality of some housing and some of the “public works” are not designed to exactly last the ages, and so if you’re not getting the value out of this infrastructure now, it’s difficult to say that it will pay off in, say, ten years’ time, as arguably its value will degenerate.
The second thing is that, regardless of whether people use the projects to start with, someone, whether it be local governments or someone else, is going to have to pay it off. So, during those first few years before a project starts generating economic benefits, there is a whole period up until then where it is a financial burden on local governments and by extension on the wider financial system.
Even if local governments are optimistic that these projects are going to pay off eventually, in the meantime they are left in a situation where their tax base is insufficient. Maybe they have to sell more land, or lean on the China Development Bank to buy more bonds. So, there is a lot of financial stress in the medium and short term.
CER: Of all the sources of debt, which do you think are the most concerning?
M: I don’t think any of them exist in isolation. Housing, public works and overcapacity are all intrinsically linked. If you look back at the forces that have brought us to this point, it all really started in the 90’s when the government deregulated the housing market, giving people the chance to buy their own house. This created a lot of demand for land, which local governments could sell to developers in order to raise money for infrastructure. More housing and infrastructure being built creates demand for industrial goods.
China really didn’t have significant heavy industry as we understand it until the start of this century. Commodities like steel, aluminium, cement all took off to supply housing construction and infrastructure. All these problems coexist together.
CER: The Chinese government has introduced a number of policies to deal with the debt problem over the past 12 months, but you point out in the book that Beijing has tried unsuccessfully to do this several times before. Do you think this time will be different?
M: That’s the key question. I do think it is different this time round. The single most important reforms taking place are not taking on the zombie firms or the shadow banking system. In fact, they’re not even economic; they’re political.
My point throughout the book is that top-down reform has been prevented until now because governments at every level have enjoyed such discretion and authority to either outright ignore the reforms, or otherwise just implement the letter of the law while flouting the spirit.
So, for me, the more important reforms are Xi Jinping’s efforts to assert greater control over the government apparatus to prevent such behaviour occurring in the future. To start with, he’s reminding people of the responsibilities that come with being a party member. I remember a few years ago, when I was a journalist in Beijing, there was certainly a sense among students that the Party was a good destination post-graduation, but the reason you joined was for networking and your CV: there was little to do with ideology. But I think with Xi, things have changed a lot.
In addition, he’s making sure there is less ambiguity between the role of the party and the government, placing more authority explicitly in the hands of the party. And, of course, there’s also Xi himself, now in a position to lead indefinitely. All this says to me that he is trying to restructure the government in a way that vested interests and lower levels of authority are no longer in a position to selectively implement reform.
CER: Beijing’s strategy appears to be to find as many new growth-drivers as possible, while slowly bringing in financial reforms. Do you think this approach will be effective? Or are quicker reforms needed?
M: If they can pull it off, it’s the best of all worlds. To keep the economy growing fast is the best way to minimise the pain that will inevitably come from cleaning up the system. The question is, then, how do you maintain that growth? That’s where things get a big hairy. The government is being very explicit with what these growth drivers of tomorrow will be, namely, force-marching the economy into more technologically advanced industries, whether it be robotics or semiconductors, etc.
China is basically looking at what characterises rich, developed countries and saying, “Well, that’s what we have to be.” However, the way it goes about getting there, through government subsidies and protecting domestic industries, is being tolerated less and less by the rest of the world, as we are seeing in the US.
CER: You say in the introduction that a ‘reckoning’ is coming for China. Do you have a greater sense now of what kind of reckoning this will be, and when it’s going to come?
M: I don’t necessarily see a financial crisis or outright recession, but I think China is currently facing a perfect storm of economic pressures. It has to clean up this huge pile of debt while making fundamental changes to its economy, and on top of that there is the demographic problem of a rapidly aging population. Taking all these things together, it seems that it’s going to take more than just clever policy from Beijing to fix.