The cause and effects of China’s slow-motion crash

**Peter Thal Larsen** (0:04)
If you've been following the headlines for the past year or so, you might be under the impression that China is doing fairly well. People's Republic forced Donald Trump to climb down from his trade war is flooding the world with its products. Its trade surplus last year was a record $1.2 trillion, fueled by a surge in overseas sales of new products like electric cars, batteries, solar panels and other things. Governments in Europe, Asia and elsewhere are struggling to come up with policies to deal with China's growing economic clout. Compared with the policy chaos and dysfunction of the second Trump administration, Chinese President Xi Jinping's government looks sober, stable and far-sighted.
Yet this rosy narrative obscures a gloomier economic picture. The world's second largest economy is grappling with the fallout from an epic real estate slump, itself the result of a massive debt-fuelled construction binge following the global financial crisis of 2008 China's biz-in-time financial system creaks with bad loans, while local governments are struggling to finance day-to-day spending. Many sectors of the economy are burdened with overcapacity. Even official GDP statistics, which most economists believe are exaggerated, show Chinese growth slow to just 4.3% in the second quarter of the year.
How will China deal with its economic problems? And what does that mean for the world? That's the question we're tackling on The Big View this week. It's what we do at Reuters Breakingviews. We tap our best sources around the world for fresh insights into the biggest stories in economics, business, and finance. I'm your host, Peter Thal Larsen.
To talk all this over, I'm thrilled to welcome Logan Wright onto the show. Logan is a partner at Rhodium Group, where he leads the independent research firm's work on the Chinese economy and its impact on the world. He spent many years analyzing China's economy and financial system from Beijing and Hong Kong, which is where I first got to know him. He's compiled his thesis in a provocative new book, Broken China, How the Economic Miracle Shattered, and What It Means for the World. He joins me from Washington DC, where he now lives and works. Logan Wright, welcome to The Big View.

**Logan Wright** (2:16)
Peter, great to be with you.

**Peter Thal Larsen** (2:19)
Yeah, nice to see you. Let's just start with the big picture.
You write the title of your book is How the Economic Miracle Shattered. Yeah, I suspect that most people outside China are only dimly aware of this. So how has this event passed the rest of the world by?

**Logan Wright** (2:42)
Well, I think it's not really passing the rest of the world by, but people don't really understand the magnitude of it. So in other words, if we had this enormous reconsideration or rethinking of where China's growth prospects were after the pandemic and after the collapse of China's property sector. But China has continued to publish very stable growth rates. Everyone knows there's something wrong with them, but people don't know how much lower growth is. More importantly, and the reason I wrote the book is, no one really understands the story, no one really understands why the economy hit the wall and where the prospects are in the future. Most people tend to look at China, and this is not a fault of analysis, it's just the way that people understand it through a political lens. They tend to look at the Chinese economy and say, this is a one-party state with a technocratic elite, and that therefore, this technocratic planning-oriented elite can make long-term plans that benefit the state, and therefore, the way we need to understand the economy is through those long-term plans, made in China 2025, for example, and we need to therefore evaluate, okay, incoming data, how does it fit within these long-term plans?
As you know, Peter and those of us who studied the financial markets and studied economics, we look at things very differently in looking at the Chinese economy, and that is that if you will take a financial system view of China, this is a country that has had a massive credit boom and bust. In fact, the largest credit boom and bust in at least the last century.
And we simply do not, we should not think that a country that's undergone this kind of credit bust has the same state capacity as when they started.
The famous quote about the financial crisis from Steve Iseman or someone else that, you know, they mistook leverage for genius, right? I mean, people have mistaken credit for planning acumen and competence in the Chinese system. Everyone looks really smart in credit expansions. Everyone looks a bit more on the back foot during credit contractions. And what we saw in China was an expansion of a third of global GDP in new credit in just eight years after the global financial crisis. Since that time and starting in 2018, credit has been cut in half. Credit growth has been cut in half. Now credit growth is about a third of its previous pace. The way the Chinese leadership controls the economy is through the allocation of state-directed credit and through local fiscal spending. Both of those levers are now highly impaired. China simply has far less control over its economic future than everyone realizes. And that's the story of how that happened is what I talked through in the book.