CHINA’S GREAT WALL OF DEBT: Shadow Banks, Ghost Cities, Massive Loans and the End of the Chinese Miracle
by Dinny McMahon
Little Brown Book Group, London
Paperback: 352 pages
Reviewed by David James
It is all getting quite exhausting. Just as we were getting used to hating Russia, despite zero proof of Vladimir Putin’s limitlessly evil genius – not to mention the evidence now emerging that the whole thing was invented by American dirty politicians, dirty media and dirty judges – we now have to turn our attention to the endlessly wicked Middle Kingdom.
For those bravely attending to this new task, it might help if, I dunno, we actually knew something about China. Which is why it is worth reading Dinny McMahon’s insightful book, China’s Great Wall of Debt. It fills in many of the gaps about the mess that China has got itself into, much of which has been skillfully hidden from the rest of the world.
The two largest economies in the world are in deep trouble. The American economy, which was already collapsing because of massive debt, will be toast for a few years because of the economic aftershocks of the covid19 pandemic: already there is 25 per cent unemployment and two-fifths of small businesses closed.
China is also a mess, with unsustainable debt, a gigantic property bubble and deep financial fissures. All of a sudden moribund Europe looks like the place to be.
Two statistics have stuck out with China. One is that Hong Kong’s debt is 850 per cent of gross domestic product (GDP), with loans mainly made to the Chinese mainland. That makes the Iceland debt bubble look comparatively sane (and we all know where that led: total collapse). It is not whether Hong Kong will collapse, but when.
The other startling statistic is that China’s M2, or internal money supply (the renminbi, the country’s domestic currency) is about 2½ times China’s GDP. GDP is a measure of the transactions that occur in an economy. M2 is a measure of the money printed to enable those transactions. So, how can the money printed for the economy’s transactions be more than twice the actual transactions?
McMahon explains that the extra money is necessary for banks and other financial institutions to hide their bad loans. “[It] certainly doesn’t make the bad loans go away, but it does allow the financial system to remain solvent by ensuring that it has money to pay its debts as they come due … what was once a Band-Aid solution has long since become a crutch that’s indispensable to the stability of the financial system.” A Ponzi scheme, in other words.
As McMahon points out, Beijing has insulated its financial system from the rest of the world, so the international impact will be mainly felt in demand for traded products. China consumes about half the world’s iron ore, for example, so a financial collapse would certainly have an effect on Australia’s traded sector and tax revenue.
The effect on global supply chains, now being heavily scrutinised amid the covid19 pandemic, will probably be more limited. McMahon shows that the lure of cheap wages has evaporated and, in any case, most of what is considered “Made in China” is only assembled there. For example, only 3.6 per cent of the value of an iPhone comes from China (34 per cent comes from Japan and 17 per cent from Germany).
The shortages experienced in Australian supermarkets during the pandemic were because China was responsible for a lot of the packaging, but most of what was inside the packages came from Australia.
In any case, cheap labour costs were not the main reason that Western corporations located in China. They were lured by the prospect of a billion new customers. But it is reported that China has for at least three years not allowed even working capital, let alone profits, to be repatriated out of the country.
Small wonder that droves of Western corporations, especially the Germans, are leaving.
This is one area that McMahon does not address. China has to maintain sizeable foreign exchange reserves to support its external, “hard” currency: the yuan. Only 15 per cent of China’s landmass is arable land, of which about a fifth is too polluted to use, for example. That means there has to be sufficient foreign exchange underpinning the yuan to buy food, raw materials and energy.
China may manage to solve its internal money-printing problems, possibly by forgiving the debt. But, in the coming battle between America and China, America holds the cards that matter.