Over the past month, global financial markets have become terrified by the prospect of a Chinese economic slowdown. Last week, the interbank lending rate in China jumped precipitously, suggesting that Chinese banks, which for years have been piling up debt lending to state-owned enterprises and building infrastructure, may now be facing a severe credit crunch. China’s money markets slowed to a near halt, China’s stock markets suffered whiplash, and many Western fund managers began lightening their China exposure.
To some, Chinese banks’ debt loads signal the arrival of an event doomsayers have been predicting for decades—not just a slowdown but a meltdown of China’s economy. That, of course, would be catastrophic for the international economy, since nearly every other country in Asia is dependent on trade with China—as are most Western multinationals.
But although international markets, the original kind of crowdsourcing, often deliver the right verdict, there’s good reason to bet they’ll be proven wrong this time. The Chinese economy, the second-largest on earth, is not going to melt down soon; in fact, it might still grow more strongly this year than most others in the world.
Almost since it began reforming in the 1970s, China’s economy has attracted skeptics. By only partially privatizing massive state companies over the past 20 years, the government has been criticized for creating enormous inefficiencies, building up more than 100 “national champion” companies in such industries as energy, telecommunications infrastructure, and automaking and using cheap credit from state banks to help these indigenous companies grow.
These national champion enterprises received the majority of the roughly $600 billion of the 2008-9 Chinese government stimulus package, leading to a new expression in Chinese business circles: Guo Jin min tui (“the state advances, the private sector retreats”).
By also continuing to focus on export-driven growth, naysayers argue, China has remained too dependent on foreign consumer markets. And China’s opaque banking sector has made it hard for outsiders to estimate the total amount of nonperforming loans in China’s four biggest banks.
Since at least the Asian financial crisis of the late 1990s, these critics have regularly predicted that China’s problems would lead to a collapse. In part, these predictions seem almost wishful—perhaps if the Chinese economy collapsed, its authoritarian political system might come undone as well. Over a decade ago, Gordon Chang crystallized these hopes in his book The Coming Collapse of China.
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