We consider China an economic juggernaut, but much of its growth has been debt-fuelled. The Chinese economy now faces a number of threats, says financial journalist Dinny McMahon.
China's opaque financial system is a mystery to most outsiders, says McMahon, who worked in China for ten years at The Wall Street Journal and the Dow Jones Newswires.
While living there, McMahon focused on deciphering the inner workings of China's financial system and the political economy which underpins it, and now his investigations have become the book China's Great Wall of Debt.
Despite China's growing middle class, massive volume of exports and monumental infrastructure projects, the country faces a number of economic threats, he tells Kathryn Ryan, and it's unclear how it can be transformed by 2020 as President Xi Jinping has urgently requested.
Access to debt has kept the Chinese economy powering along on all cylinders and allowed for the massive levels of construction, says McMahon, who now works for a China-focused thinktank in Chicago.
That construction boom has taken up the slack after exports ceased to be the key driver of Gross Domestic Product.
Since the Global Financial Crisis, China's economic performance has been underpinned by a debt-fuelled building frenzy – some of it good, some of it bad – McMahon argues.
"A lot of what has been built has been incredibly useful. Second-tier and third-tier cities have been transformed by the construction work that's gone on in the last decade."
Large cities in China – many of which are little known outside the country – now have multiple subway lines, sewerage works, eight-lane highways and decent housing, he says.
"At the same time, a huge amount of stuff has been built that isn't needed, isn't being used or the government-owned companies that built it will struggle to sell.
"Chinese ghost cities were built from scratch and never managed to attract a fraction of the population they were built for."
These "ghost cities" sprang up because local officials were under pressure to keep economic growth bubbling away, he says.
"What the ghost cities were really about was local officials doing what they could to stimulate economic growth the best way they could – borrow and build quickly."
China's debt-to-GDP ratio – about 280 percent – is bigger than the USA, Japan and many other developed countries, McMahon says.
But that's not the country's biggest worry.
"The real significance here isn't the overall debt size, it is the pace at which it has accumulated.
"Back in 2007, it was 160 percent, so it has increased incredibly rapidly over the last 10 years."
When this has happened in other countries, the consequences have not been pretty, he says.
"Other economies that have experienced a comparable aggressive increase in debt in a comparably short period of time have invariably experienced financial crises; like the US prior to [the subprime mortgage crisis] or Spain prior to the Eurozone crisis."
But China differs somewhat from these earlier cases, McMahon says.
"Most of the borrowing has been done by companies, but most of those companies are state-owned."
So who owns the debt?
"The government has shown no inclination of taking over that debt on large scale, and debt has been taken on at the discretion of local managers under pressure from local government officials because they're all striving hard to generate growth."
Some of that debt is undoubtedly bad, he says.
"There is unquestionably a large volume of bad loans accumulating in the financial system. The government says only 2 percent of loans have gone bad, now nobody believes that!"
No-one really knows the true level, he says, and the Chinese government keeps on printing money like never before.
"When you have a lot of bad loans in the banking system the government needs to keep printing more money and that's what the Chinese central bank has been doing – printing more and more money every year. The size of the Chinese money supply is absolutely off the charts."
Since 2008 – when quantitative easing has been the monetary norm in Europe and the States – China's money supply has expanded more than the EU, the US and Japan combined, McMahon says.
But does this matter when China, unlike most other large economies, has control over its own currency and capital flows?
Although that's true, McMahon says the Chinese government has been caught on its heels before.
"Perhaps the greater threat to China at the moment is if you have capital flight. So, sure, the government is printing more and more money, but ordinary people and companies start trying to get more and more of that money out of the country and it ends up in property in Vancouver or the Hong Kong Stock Exchange.
"In 2016, an incredible amount of money flowed out of China overseas. Over the course of 2016, it's calculated that somewhere near a trillion dollars worth of money effectively left the country."
Eventually, China's central bank stepped in to stop the outward flow of money and stabilised the situation, but we shouldn't assume Chinese authorities can fix every problem, McMahon says.
"Sometimes we attribute to Chinese authorities almost this superhuman ability to control the economy, but there are limits to that ability."
Economic growth is now "baked into" Chinese society both socially and politically, no matter what, he says.
"Anyone under 40 hasn't experienced an economic slowdown and has come to expect certain things as being normal – growing wages, capital growth on property.
"Baked into the experience of a vast number of the Chinese population is the idea that fast economic growth is normal."