Dinny McMahon | Debt, Dysfunction, and the End of the Chinese Miracle

In Episode 65 of Hidden Forces, Demetri Kofinas speaks with China expert Dinny McMahon, who spent ten years as a financial journalist in China, including six years in Beijing at The Wall Street Journal and four years with Dow Jones Newswires in Shanghai. Demetri and Dinny discuss how Chinese malinvestment, massive debt burdens, and a population that is aging faster than anywhere else in the world has created the conditions for the worst economic and political crisis in modern history.

It has often been argued that the Chinese economic model may offer the best prototype for how humans should organize politically, in the 21st century. For Westerners, it's difficult to appreciate the scope of China's development, and this is because of the way in which the country allocates capital and generates credit.

Unlike western economies, which are built around liberal, democratic norms of free-market capitalism, China's economy operates more like a one-billion person, multinational conglomerate. This model has allowed the Chinese economy to grow rapidly; it has done this by leveraging massive amounts of capital that it reinvests into real estate projects and spare industrial capacity, with the expectation of ever-increasing economic growth. This leverage can be witnessed, most clearly, in the rapid growth of the country's private and public debt.

Bank liabilities in China have grown at an astonishing rate over the last twenty-five years. From 2009 to 2011 alone, assets in China's banking system have expanded by 77 percent - a total of 7.6 trillion dollars over just a three-year period. The impact of China's loan growth can be seen in the sky rocking prices of Chinese real estate, the overcapacity of Chinese factories, and the pollution of China's once pristine environment. Cognizant of these excesses, Chinese officials have been trying to reform the country, by reigning in investment and stemming corruption. But even the best efforts of Chinese authorities cannot fix the country's broken demographics. China's population is aging faster than anywhere else in the world. In 2015, the country had seven and a half working-age adults to support every senior citizen. In fifteen years, that ratio will drop to 4:1 and by 2050, there will be only two adults to support every man and woman in retirement.

It is the fear of Chinese officials that the country will grow old before it grows rich, falling victim to the so-called middle-income trap, mired in debt and saddled with decades of malinvestment, air pollution, idle factories, and broken promises.

Producer & Host: Demetri Kofinas

Editor & Engineer: Stylianos Nicolaou

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