I recently appeared on the Brookings Institution podcast “The Beijing Brief” alongside Logan Wright, the author of a new book on China’s economic challenges. “Broken China: How the Economic Miracle Shattered” is a great explainer for how China’s economy became so distressed, even as its export juggernaut continues to both impress and threaten. Wright’s book also underscores why China’s leaders place such a premium on boosting confidence among consumers and investors, and why controlling the narrative about the economy, both domestically and globally, is central.
Wright’s account of how China arrived at this point begins with the Global Financial Crisis and focuses on the country’s financial system. It helps explain two sides of the same coin: why China’s economy expanded so rapidly while other countries were mired in the aftermath of the crisis, and why China’s financial system is now too exhausted and overstretched to furnish a solution to its domestic malaise, which includes high youth unemployment, weak consumption and cash-strapped local governments.
The Global Financial Crisis, despite its name, was not truly a financial crisis everywhere in the world. For China, it was an export crisis. Beijing worried that its economy would suffer greatly as its major trading partners in North America and Europe fell into recession. In order to keep growth robust, China dramatically expanded credit in the domestic economy: Local governments were encouraged to further invest in infrastructure and industry while households were encouraged to invest in real estate.