The flaws in the Chinese growth model

Cover of China’s Great Wall of DebtChina’s Great Wall of Debt: Shadow Banks, Ghost Cities, Massive Loans and the End of the Chinese Miracle
by Dinny McMahon
Published by Little, Brown, £20
(Buy at Amazon)

For the past two decades pundits have predicted that China’s economy will collapse. Instead, it continues to confound expectations. This book by journalist Dinny McMahon is the last in a long line of attempts to pinpoint flaws in the country’s growth model that could doom it.

McMahon focuses on two main areas: the large amount of debt in the Chinese economy and the resistance to further economic reform. In particular, he looks at how the huge shadow-banking system has funded the construction of a large number of ghost towns where estates and tower blocks lie empty. At some point these loans will have to be written off, McMahon argues, causing financial chaos. Meanwhile, economic reform and anti-corruption efforts have met with tough resistance from vested interests.

Although McMahon provides evidence that both corruption and bad loans are a problem, he fails to make the case that they are significant enough to cause an economic collapse. Instead, his alternative scenario of a gradual slowdown in growth as China falls into the middle-income trap – in which it is too rich to keep relying on cheap labour but not sophisticated enough to develop new industries – looks the more plausible outcome.