The Chinese economic model was the darling of the western press in the aftermath of the 2008 Financial Crisis. Major publications in the United States and Britain published peans praising Chinese policymakers for their wisdom and the Chinese political model for allowing leaders the freedom to save its economy from the ravages of the Great Recession. Commentators were also quick to praise the average Chinese citizen for his frugality while chiding Americans for their spendthrift ways and to argue that this cultural difference was to blame for the two countries diverging economic performance.
In the ten years since, neither the United States nor China has engaged in fundamental reform of their economic models, but there has been a sea change in thinking about the health of each. The United States has once again become the darling of the investing class, powered by the healing effects of time and a massive, debt-financed corporate tax cut. But even as Chinese policymakers continue to follow the script of leaning on cheap credit and infrastructure investment to maintain high growth rates, there are far fewer cheerleaders of the China model in the west today.
It has now become mainstream to worry about the sustainability of the Chinese model that was so thoroughly praised a decade ago. As the Financial Times Martin Wolf warned in the first of an ongoing series the dangers of China’s debt-fueled investment binge, “The salient characteristics of a system liable to a crisis are high leverage, maturity mismatches, credit risk, and opacity. China’s financial system has all these features.”
Subsequent entries in the series investigate the Chinese mountain of debt, which has fueled such projects as China Railway’s network of high-speed rail lines. Such infrastructure projects have kept the Chinese people employed and GDP growth high, but their economic viability remains in question. The high-speed system is the world’s largest by far, due to the state-owned transportation company’s ability and willingness to take on a level of debt that would be impossible for a company not backed by a government as powerful as China’s. The FT cites estimates that the high-speed rail project will bring China Railway’s total debt to more than $1 trillion by 2020, and points out that the company’s interest payments alone have exceeded its operating profit every quarter since at least 2015.
Another troubling trend is the growth of Chinese banks. As Bloomberg’s Yalman Onaran points out, in 1988, 9 of the top 10 banks in the world were Japanese, and in 2007, that list was dominated by American and European firms. Given that debt brings with it instability, it’s no surprise that the rapid growth of a country’s banking institutions can portend a crisis. So the fact that China is now home to the world’s four largest banks by assets is just one more signal of the country’s susceptibility to a crisis of some sort.
The Western media may just be waking up to the unsustainability of the Chinese model, but it's been well understood by the Chinese for years now. Way back in 2007, Chinese premier Wen Jaibaowarned that the country’s growth model was “unstable, unbalanced, uncoordinated and unsustainable,” pointing to the economy’s over-reliance on state-directed lending and infrastructure spending as the economy’s largest long-term threat. The problem is not recognizing the unsustainable nature of China’s rise—many more in the west should have done so far earlier. It was perhaps this ability to understand the problems of the Chinese economy that led Western observers to believe in these Chinese policymakers who so ably guided the country from impoverished isolation to a place of central importance in the global economy. But these policymakers were simply following an investment-led script that had been written in decades past by other economies, like the Soviet Union, Japan, Brazil, and Korea, all of which had transitioned from backwardness to leading industrial powers. It’s obvious today in both the United States and China that transitioning from a model of state-directed investment to an economy powered by innovation and a strong middle class is nowhere near as easy
It’s ironic that just as China’s economic troubles are becoming obvious to all, the United States government has decided to focus on the unfair trade practices that were the source of Chinese economic strength fifteen years ago. While it's important that U.S. policymakers understand the folly of abetting China’s accession to the WTO, the damage of that decision was dealt long ago. Surely President Trump takes solace in the effect of new tariffs and the Chinese response to them are having on Chinese policymakers as they attempt to rebalance the economy away from investment toward consumer spending. But the experience of the U.S. economy following China’s slowdown in 2015 should be cause for concern for anyone hoping to take pleasure in a weakening Chinese economy. An economic crisis in China may give President Trump the leverage he needs to win whatever concessions he requires to declare victory, but it could be a pyrrhic one if a Chinese crisis brings down the global economy with it.
Christopher Matthews is a writer who splits his time between New York City and Accra, Ghana, with an interest in the intersection of markets, the economy, and public policy. He previously held staff positions at Axios, Fortune Magazine, and Time Magazine, and has been published in Forbes and Debtwire.