China’s Great Wall of Debt, Dinny McMahon, Houghton Mifflin Harcourt, 288 pp.

by Edward Chancellor*

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 fifty 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 of 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, 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.


*Edward Chancellor is a financial historian, journalist and investment strategist. His book “Devil Takes the Hindmost: A History of Financial Speculation” was named “A New York Times Notable Book of the Year”.

The review was first published on



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