China’s Great Wall of Debt

In his latest book review for JCA, Kosmas Tsokhas looks at Dinny McMahon’s China’s Great Wall of Debt: Shadow Banks, Ghost Cities, Massive Loans and the End of the Chinese Miracle, published by Little, Brown in 2018.

In looking at the centrality of debt in the Chinese economy involving, the state, banks, state enterprises, provincial governments, shadow banks and more. Real estate plays a particularly important role. Citing Tsokhas:

[F]or McMahon, real estate has become “the bedrock of the Chinese economy” (88). His argument runs as follows. Real estate has accounted for about 20% of GDP and 16% of urban employment, which have been underwritten by bank credit, whereby property has provided the collateral for almost 60% of bank loans (94).

But, the demand for housing is no longer sufficient to power the economy as fast as it has in the past, there’s a structural problem for the state. This also reflects the fact that:

the money supply has expanded on a scale out of all proportion to the growth of the real economy, whereby the amount in deposits and cash in circulation has outpaced GDP, which points to the persistence of the over-accumulation of unproductive capital.

What is the likely outcome? Tsokhas notes that “McMahon concedes that the government and the regulators have handled the topsy-turvy nature of uneven capitalist development quite well.” However,

with an over-extended financial system, the stakes are getting ever higher should something occur at a speed and to an extent that the central government fails to recognise or manage, such as the insolvency of one of the big banks, which, entwined as it is with the world of shadow banking, drags others down with it before it can be taken over or rescued in some other way by the central government.

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