For years, anyone arguing that China’s spectacular economic rise was less impressive than it appeared was liable to be dismissed. There were always doubters, however, and I found myself among their ranks. In 2021, for example, in an article published by the Mises Institute, I argued that China faced a collection of demographic, economic, and strategic problems that could ultimately prove far more consequential than its impressive headline growth rates suggested.
While still the minority today, Logan Wright’s Broken China: How the Economic Miracle Shattered and What It Means for the World provides considerable, up-to-date evidence for the minority view. Wright—a longtime analyst of China’s financial system at Rhodium Group—goes into great detail, explaining why the economic model that produced China’s extraordinary growth can no longer produce the same results. His central argument is devastatingly simple: China consumed its most powerful economic growth engine.
The story begins with credit. Following the 2008 financial crisis, Beijing responded with an enormous expansion of lending and investment (which you may recall was praised among Western analysts, who grumbled at their own governments’ alleged parsimony). The stimulus worked in the narrow sense that it prevented a sharp downturn and generated years of continued, spectacular headline growth. But credit cannot create prosperity indefinitely. When investment ceases to be governed by underlying consumer demand and profitability, additional borrowing increasingly serves to conceal rather than resolve earlier malinvestment.
China eventually reached precisely this point. Credit flowed into property, infrastructure, state-owned enterprises, and local-government financing vehicles. The financial system became increasingly detached from the productive economy, while shadow banking allowed increasingly risky borrowers to obtain funds. Wright notes that China experienced one of the largest single-country credit expansions in modern history. The financial system grew dramatically faster than the economy it was supposed to finance.
Cue the insights of the Austrian School: that artificially-cheap credit distorts the structure of production by encouraging entrepreneurs to undertake investments that cannot ultimately be sustained; and that prices and interest rates coordinate dispersed knowledge that no central authority possesses.
China has demonstrated the problem in unusually stark form. A Communist Party capable of directing enormous quantities of capital can build bridges, factories, apartment towers, and high-speed rail lines with extraordinary speed. What it cannot do is abolish scarcity or reliably determine which of those investments consumers actually value.
Financial repression compounded the problem. Chinese households historically had relatively few attractive investment alternatives, with an untrustworthy domestic equity market and artificially-low returns on bank deposits. Property consequently became the preferred store of wealth for millions of households. At the same time, of course, local governments had fueled the process, being dependent, as they were, on land sales and borrowing to finance their activities. The result was a mutually-reinforcing cycle: households poured savings into real estate, developers borrowed against expected future sales, and local governments depended on the resulting property boom for revenue. When the property market finally cracked, the apparent wealth supporting much of this system proved considerably less substantial than it had appeared.
The consequences are now difficult to disguise. Wright emphasizes that property was an enormous component of China’s economy and that the collapse in construction and sales removed the principal domestic engine of growth. Yet the debts did not disappear with the construction projects. They remain embedded throughout banks, developers, local-government financing vehicles, and state-owned enterprises. Rather than recognize enormous losses, Beijing has generally preferred to roll debts over and keep inefficient borrowers alive—forcing shotgun marriages between larger, healthier lenders, and dying smaller ones. That may prevent a dramatic financial collapse, but it also prevents capital from being redeployed toward more productive uses.
And then there is the rest of the world. China’s export-oriented model has always contained a fundamental problem: somebody has to buy the exports. A country can increase its share of global manufacturing indefinitely only if the rest of the world is willing and able to absorb the resulting surpluses. But China’s domestic demand is too weak to replace the foreign demand on which its producers have become dependent. As property and domestic investment have faltered, excess industrial capacity has increasingly been directed toward foreign markets. The result is a familiar pattern of enormous trade surpluses, falling prices, and mounting political resistance abroad. Wright is particularly good on the fact that China’s export problem and its domestic-demand problem are really two sides of the same coin.
Beijing’s response has been to double down on industrial policy and technological self-sufficiency. There is no denying the accomplishments. China has become extraordinarily competitive in electric vehicles, batteries, solar panels, robotics, telecommunications, and numerous other sectors. But there is an important distinction between producing more sophisticated goods and producing them economically. State-directed investment can rapidly create productive capacity, it cannot guarantee that such capacity will earn an adequate return.
Indeed, the pursuit of self-sufficiency has itself required enormous additional expenditures. Rather than accepting the economic costs of dependence on foreign suppliers, Beijing has repeatedly chosen to subsidize domestic alternatives. Some of these investments will undoubtedly pay off. Others will become another generation of white elephants financed by a financial system already carrying enormous quantities of bad debt.
The same problem extends beyond China’s borders. The Belt and Road Initiative (BRI) exported Chinese capital into infrastructure projects throughout the developing world. Some projects have undoubtedly been useful. Others have produced disappointing returns, leaving Chinese banks and state institutions exposed to borrowers with limited capacity to repay. The geographical distribution of the debt does not change its fundamental character: lending that cannot generate sufficient returns eventually becomes a claim on somebody else—indeed, as I have argued elsewhere, the BRI is fundamentally a way to finance part of the continued export boom.
None of this means that China is about to collapse. As Wright rightly points out, the problem is that the Chinese government has fewer and fewer good options. It can continue subsidizing unproductive firms, local governments, and strategic industries. It can maintain financial repression and suppress recognition of losses. It can increase fiscal spending. It can push still more exports onto world markets. It can attempt to stimulate household consumption. But each solution collides with another constraint.
The question, then, is not whether Beijing can build things, it plainly can. The question is whether the political institutions that allocated China’s enormous pool of savings can continue allocating capital productively once the easy gains from urbanization, industrialization, and credit expansion have been exhausted.
Wright’s answer, as well as my own, is essentially no. Profound reform—more than just rebalancing—is needed. And profound reform is precisely what the Chinese Communist Party has the greatest difficulty undertaking, because reform would require acknowledging losses, allowing inefficient enterprises to fail, transferring resources toward households, reducing the privileged position of state-owned enterprises, and giving markets a much greater role in determining the allocation of capital—difficult in the best of times, but potentially dangerous at a time when youth unemployment is already close to 30 percent, whatever the government says to the contrary.
Murray Rothbard often emphasized that economic calculation is ultimately a problem of ownership, prices, and genuine market exchange. China’s experience offers a remarkable real-world illustration. The Party could command resources on a scale that few governments in history have matched. What it could not command was economic rationality.
The Chinese economic miracle was real. But so were the distortions beneath it. Broken China makes a compelling case that the latter have finally become too large to ignore.
