For the past two decades China’s turbocharged growth has been the envy of the rich world as well as an aspiration for other emerging markets. Surging exports and intensive state-driven investment have lifted millions out of poverty and propelled Beijing into the exclusive club of global economic superpowers.
More recently, however, doubts have emerged over the sustainability of this development model. In particular, critics point to China’s increasing addiction to cheap credit, which began when Beijing unleashed its large-scale monetary stimulus at the height of the financial crisis. Between 2008 and 2012, China’s total debt as a proportion of gross domestic product nearly doubled, jumping from 125 per cent to 215 per cent.
This rise would not have been so problematic if the cash had been used to fund profitable investment. However, the opposite is often true. The more vibrant segments of the private sector, including many small and medium-sized enterprises, are typically starved of cash. Meanwhile, the larger state-owned enterprises, as well as local governments, enjoy easy access to loans, which they then squander in redundant projects offering low rates of return.