The Danger to China’s Economy
Image Credit: Flickr / Trix are for Kids

The Danger to China’s Economy


While the United States, Europe and Japan remain mired in sluggish recovery, China's economy has continued to boom. But serious questions are now surfacing about China’s own state-led economic management. Massive overcapacity in infrastructure, stubbornly high inflation and a pile of potentially bad bank loans are undermining historic economic reforms only half completed.

Chinese planners face a serious dilemma – should they continue with investment-led growth, or finally focus on building a robust middle class, a policy nearly a decade overdue. Either choice will have global implications.

Staying the course with investment focusing heavily on construction has starved other parts of the economy, costing the average Chinese citizen dearly. Forced relocation, runaway environmental degradation, and cash-strapped social programmes like education, healthcare, and social security systems have been tolerated for questionable projects, many with little practical use.

Entrepreneurial and middle-income business development, meanwhile, remains starved of resources, limiting domestic consumption. The public at large heavily finances the state-centric investment model with their interest losing bank deposits (yields below inflation) which are then lent out to state-owned enterprises at preferential rates. The net effect: a wealth gap widening into a chasm – and increasing government concerns over social stability.

Construction continues to play an oversized role in China’s economic expansion largely because it worked so well in the past. Twenty-five years ago Shenzhen was largely empty land. Now, the southern industrial powerhouse has a population of ten million. Massive building projects also offer a short-term fix by buffering against the loss of exports. Low-skilled workers remain employed in building projects, while favoured industries continue churning out cement, glass and steel.

The result, intended or otherwise, has been overcapacity on a scale never seen before, including vacant apartment towers, office buildings and shopping centres. The Mall of China, one of the world's largest, remains empty along with many other commercial projects from Inner Mongolia to purpose-built port cities outside of Shanghai. Despite trends in rural to urban migration, most in the struggling middle still can’t afford luxury apartments, villas, or high-end goods now widely available in first and second tier cities.

The lift that keeps the ‘build-it-and-they-will-come’ model going – largely policy inertia tied to a massive stimulus plan and tight relationships between banks, state-owned companies, and local governments – can’t defy economic gravity forever.

Warning signs have been evident for some time. Back in late 2009, Wang Shi, Chairman of one of China's largest development companies, China Vanke, warned that a significant bubble was forming. In August 2010, officials in Beijing's largest commercial district, Chaoyang, released figures showing half of vacant real estate had been empty for at least 3 years.

Domestic investor sentiment in the sector has dimmed as well. Along with the sideways drift of the Shanghai and Shenzhen markets over the past year, many of China's largest real estate development companies and banks have seen share values lose momentum or fall.

smiley g
December 8, 2011 at 18:01

For all that is said, Brian Klein’s observation are still valid. Sometimes I wonder whether the Chinese government’s claim that i is a market economy is correct. As far as I can see, it is a mixed economy but lacking in knowledge in many areas since it is a developing country. Nevertheless, it will muddle through. The question is only – is the price worth it for the ordinary Chinese? You need an experienced “Lee Kuan Yew” and his team to steer China into development status with little heartache and growing pains. Pity there is none as such in China proper today.

Dominic Shum
September 2, 2011 at 11:58

This article has to be taken with a pinch of salt. In terms of building a robust middle class…May I ask which standard is your middle claass based on? Is there not a big army of Chinese shoppers buying everything in sight in Singapore, Paris, Hong Kong, Tokyo? Please take purchasing power into consideration when defining the middle class. In an economy that individuals can happily survive on US$3 a day..I think middle class China or for that matter India is quite big.

August 13, 2011 at 17:52

@Jim Em

Very good point!!!

However, keep in mind this is also an economic prediction:

“There is no doubt that China has economic problems, yet they will manage, like they have always done and get through it.”

No one has a clue what will happen in the long run – however, whether it takes 10 years or 100 a collapse is likely at some point.

Kane Luo
August 13, 2011 at 04:12

the redistribution of wealth on this kind of grand scale which the author suggested would require a readjustment of not just the economic policies, but it require the restructure of the political system and a new kind of cultural revolution, which neither would happen instantly.

Darrin Wright
August 13, 2011 at 02:20

You’re missing the point. The rail infrastructure in rural areas was plotted to usher in population increases in said area. One need not study demographic data too long to determine that that just hasn’t happened. Matter of fact, it has actually made it far easier and more convenient for the youth to “flee” the farms for the cities.

Milo Jones
August 12, 2011 at 22:06

Great piece. Beijing land prices have risen over 800% in the last seven years! that’s can’t be sustainable. For a similar line of thinking, see “China’s Present, the World’s Future, and the Pretense of Knowledge” at

Jim Em
August 12, 2011 at 10:25

Every negative China economic prediction I have seen over the last ten years has turned out to be wrong. In many instances 180 degrees wrong.

There is no doubt that China has economic problems, yet they will manage, like they have always done and get through it. Like our economic collapse in 2008, they still managed 6% growth by turning to the one thing economists seem to ignore, their 1.3 billion people.

August 11, 2011 at 11:55

Klein writes: “The excesses of Japan’s high-speed rail network and its limited impact on rural communities serves as a potent reminder.”
Maybe this is true in Upside-Down world. In the real, actual Japan, one only has to look at the number of profitable private rail companies in business to know that Klein is simply making stuff up. Again.
Here’s a heads-up: before the disastrous rise of the supply-side zealots, governments everywhere understood that large public projects didn’t need to make an outright profit, but rather that (like the US Interstate system which has never made a dime) they “prime the pump” for hundreds of thousands of small businesses to be able to make money and return tax revenue.
Japan’s fast rail “unlocks” most of the country’s population to be able to work in the industrial zones, while still having a high standard of living (and high consumption) physically far from the actual work site. That is a *massive* success.

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