Book review: China’s Great Wall of Debt, by Dinny McMahon

Dinny McMahon
Dinny McMahon
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There is apparently a Chinese proverb stating that “neither fortunes nor flowers last forever”. This seems to accurately mirror the view laid out in this study of how the world’s most populous country, which has been considered a powerhouse of economic growth in recent years, may now be heading rapidly towards a shockwave-inducing meltdown that could make Brexit or Greece’s economic collapse seem like mere molehills in comparison. “China is interwoven into the fabric of the global economy to such a degree that the fallout from its current economic problems will ripple across the globe,” he warns.

McMahon was awarded a fellowship at the Woodrow Wilson International Centre for Scholars to write this book. A former writer for the Wall Street Journal in Beijing and the Dow Jones Newswires in Shanghai, his interest in China was prompted when he took up Chinese language lessons as a child. Thanks to the amount of time he has spent in the country, he is able to give an authoritative peek behind the curtain of what he admits can be an opaque financial system to outsiders, as well as to the Chinese themselves.

Accessible, Malcolm Gladwell-style storytelling, covering everything from displaced farmers and entrepreneurs to the makers of China’s alcoholic rocket fuel tipple, baijiu, creates micro illustrations of the macro forces at play, and these case studies are used in combination with data and quotes from a high-profile cast of politicians and economists.

These include Bank of England governor Mark Carney, financier George Soros and Chinese President Xi Jinping – who earlier this year issued an urgent call for reform that gives the country until 2020 to transform its economy.

McMahon notes that since the global financial crisis, China’s economy has ballooned in size, complexity and risk, with an increase in urbanisation, shadow banking entities, zombie companies, and – crucially – a level of state debt (at a local government level compared with the US subprime burden) that has snowballed at a staggering rate of knots.

“China’s financial system is increasingly looking like that of the United States prior to the Lehman Brothers bankruptcy,” he writes.

There are tales of data manipulation, industrial overcapacity, scores of vast ghost cities that he says are not a glitch in the matrix but rather “part of the code” – a symptom of the overzealous pursuit of growth.

Reform faces many challenges, and he fears attempts may in fact harm rather than heal, being too superficial and failing to drive the painful but necessary deep-rooted change.

McMahon does acknowledge that the Chinese have faith in the omnipresent state to maintain stability, and that

vastly successful and innovative tech giants, are causes for optimism. But from his perspective the outlook is bleak. “There are no magic bullets left,” he writes. “One thing is for certain: the miracle is over.”

Book review: China’s Great Wall of Debt: Shadow Banks, Ghost Cities, Massive Loans and the End of the Chinese Miracle, by Dinny McMahon, Little, Brown, £14.99