Anyone who has followed Logan Wright’s work in recent years won’t be surprised to learn that he believes China’s sclerotic financial arteries make likely a long period of low growth. Essentially, China’s investment-driven strategy, built on the savings of Chinese households, has been so poorly directed it is now a hazard for the whole system.
Observing China’s slower growth in recent years, Wright argues the country’s financial system and fiscal arrangements can only be repaired at a significant risk to the Chinese leadership. President Xi Jinping’s headline efforts to rejuvenate the economy with technological advancement might achieve its aims, but the fundamental economic imbalance would remain. Wright says why in his new book, Broken China.
China’s well-known over-investment in property and construction are the exemplars of a financial system that pursued politically motivated objectives rather than sustainable investment. Provincial governments chased growth targets by drawing on a magic pudding — sales of public land — and large-scale construction was backed by banks that often had strong local political links.
Revenue from land sales helped fund infrastructure projects, further boosting growth targets, a top-line metric for advancement within the Communist Party. Citizens, who typically only had access to low-yielding bank deposits, favoured property for its rapid capital gains, thereby fuelling a speculative bubble. (After the bubble burst in 2020, Wright notes, housing starts collapsed 69 per cent by 2024.)
On the fiscal side, Beijing initially loosened controls on local government to allow special-purpose financing vehicles for strategic projects. This fuelled a rash of local government initiatives, many of which ultimately relied on the logic of the bubble. Those pools of debt have increasingly weighed on the national economy, forcing Beijing to juggle, prop up and consolidate debt. Banks are caught in the middle, with dubious financing putting serious pressure on both their earnings and their ability to finance new activity.
As the complexity of China’s economic renovation and export-weighted trade has grown, analysts have focused on trends in finance. The April 2026 central bank data was another red flag, signalling severe economic contraction. An outright fall in bank lending was the headline, with new loans contracting by RMB 10 billion (A$2.1 billion). That is, more money was repaid to banks than was lent to the real economy. Year on year, credit growth fell by almost half.
The latest budgets released by thirty-one provinces showed a marginal gain in revenues but a steep, continuing decline in land sales income, which was down by roughly two-thirds on five years ago. Provinces are filling the gaps by “monetising” state assets: bundling them up to create an income stream to be sold to investors. In principle, this might a sensible way of cutting excessive debt. In practice, reports of individual cases — loss-making bus fleets and bundles of rental property — suggest the debt is simply being shifted to banks or other public financial institutions.
Optimists believe this is a period of transition for the Chinese economy. Credit growth is slowing because local government debt is being refinanced, consumers have become more conservative, more business growth is financed by equity, and large companies are using bond markets — rather than banks — to finance their activities. That view assumes the restructuring will absorb the financial baggage of past indiscipline and growth will be delivered by technology and manufacturing. Optimists think the system is working.
For Wright, the problem is systemic. Any solution — like who gets loans and how they are priced — will challenge system fundamentals. Repairing public finances requires higher and different taxes as well as larger government transfers to households. The problem is intensely political because effective changes would lower economic growth even more. “The key questions facing Beijing at present,” Wright says, “concern which types of political costs China’s leaders are willing to bear.”
Just ahead of Xi Jinping’s elevation in 2012, China’s leadership flagged what Wright identifies as a fundamental course correction. The 2013 Third Plenum of the Communist Party, a forum often associated with significant economic policy shifts, adopted a range of steps designed to fix the systemic flaws that had built up into substantial risk. China would allow markets, enforced with better regulation, to have a decisive role in resource allocation; excessive government intervention would be rolled back.
The extent of the challenges and the powerful vested interests meant it was no surprise Xi was given a degree of power unthinkable since Mao’s demise. But while he flexed his muscles on a range of issues, notably endemic corruption, the critical economic problems went untackled.
Contrary to widely held perceptions, Wright believes China’s economy is being driven by its financial system rather than central planning. The failure to follow through on vital financial reforms has allowed its decay to reach debilitating proportions.
“The rise and the eventual stagnation of China’s financial system,” he writes, “is a story of multiple rounds of unintended economic consequences of Beijing’s policy choices, with little evidence of long-term design or strategy. Policymakers were slow to correct obvious policy excesses within the financial system, forcing them to use increasingly blunt and costly measures when they finally responded. Those excesses in credit expansion and the policies used to correct them produced the economic slowdown China is facing today.”
The critical period started in 2008 and culminated in 2018, Wright argues. The massive Chinese credit expansion (which incidentally buffered the global economy) in response to the 2008 US sub-prime crisis initiated financial ill-discipline and a blowout in debt. Beijing’s response — its “deleveraging” campaign from 2016 to 2018 — crystallised a debt burden that now weighs heavily. Official provincial government debt rose from less than RMB 20 trillion in 2018 to RMB 54.8 trillion by December 2025, and “unofficial” local government debt also remains a problem.
One important factor that went missing was the growth of “shadow” banking and peer-to-peer lending, which had been allowed to fill the gaps left by staid official banks. (According to business journal Caixin, another RMB 15 trillion of operational debt owed by local financing vehicles derives from expensive unofficial loans with a limited likelihood of being repaid.) While unofficial financiers were inevitably risky in what was already an excessively risk-prone market, sometimes playing a role that allowed official lenders to get around regulations, they did reflect a reforming shift toward market-based lending.
In any case, the “deleveraging” brakes sharply curtailed activity. And, as Wright says, investors who were used to very little risk were suddenly confronted with collapsing asset values and failed investment vehicles. Then, in the 2020s, came the crash of the property market, a massive driver of economic activity and household investment. With the tide of credit receding, more and more of China’s borrowers were revealed to have been (in Warren Buffet’s colourful phrase) swimming naked.
Wright explains that while regulators tried to tighten credit growth as early as 2011, the political culture of the period meant nothing effective occurred until a huge amount of damage had been done. The “shadow” financial system allowed regional banks to grow outside their borders with transactions that were at best opaque. Depositors, assuming any bank offering was state guaranteed, poured money into “wealth management products” that fuelled rampant speculation in everything from property to commodities and provided the illusion of liquidity in otherwise moribund investments. (Not a very different formulation, as Wright notes, to that which in 2008 brought the US sub-prime market to its explosive end.)
Households were bound to the game by their unusually large savings, which financed the lending, and by their exposure to a property market that became, over time, almost Ponzi-like, with home buyers paying upfront and the cash fuelling ever-greater rates of dubious construction. Businesses were tied in by demands for ever-greater investment.
At the core were provincial governments, pushing both housing and infrastructure construction — and later, new technology industries like photovoltaics and electric vehicles — to levels that could only be sustained by dubious borrowing. All of which is relatively familiar to anyone who has observed the bubbles typical of overheated investment markets everywhere.
Inexplicably, China’s leaders added an extra dimension. Just as the “deleveraging” strictures were biting, Beijing decided to sharply rein in some of the country’s booming commercial sectors. Alibaba’s Jack Ma, shortly after giving a provocative speech about China’s moribund financial services sector, was told that the New York IPO of Ali Pay, his digital payments platform, was canned. Ma disappeared from view for some time and a range of other high-profile digital ventures were similarly handicapped.
Even more shocking was the announcement on 24 July 2021 that private tutoring businesses — which Wright says had attracted about US$120 billion of foreign investment — could no longer operate on a for-profit basis or attract foreign capital.
As Wright highlights, e-commerce, education and digital services businesses had been growth sectors for young, educated workers. Their sudden curbing by administrative fiat had so dramatic an effect that the national statistical bureau suspended publication of youth unemployment figures. Having curtailed debt funding, Xi Jinping piled on a sharp reversal of fortunes for growth areas that were both productivity enhancing and large employers of university graduates.
Then came Covid. While China’s initial response was ostensibly effective, Beijing saw the emergence of the Omicron variant in 2022 as such a threat that it imposed notoriously harsh limitations on movement. The economy effectively stalled. The economic costs were “astronomical,” says Wright, and they continue to affect consumer and business sentiment today.
“Overall,” Wright concludes, “China’s leadership appears highly reactive and reluctant to confront China’s most pressing economic problems, including slowing productivity growth, persistently weak domestic demand, deflationary pressures, weaker household consumption, and ongoing capital outflows… The question that now confronts analysts of China’s economy is to what extent Xi Jinping acknowledges the problems in the economy, or whether he is no longer concerned with the rate of China’s economic growth.”
China’s leadership obviously knows more than Wright knows, which he acknowledges. So why have they not changed course? Why doesn’t Beijing use its financial power and command of the economy to clean out the rotting stock of debt? Because, he says, “Beijing has now lost control over its primary policy tools for directing China’s economy: the financial system and fiscal policy.”
Like most observers of China’s economic outlook, Wright believes fundamental change is required to lift consumption — partly by shifting the basis of taxation and partly by providing direct transfers to households. His notable focus, however, is on the accumulated weight of ill-advised or plainly indulgent investment and its associated debt.
“The most important policy choice China’s leaders will be forced to consider concerns the difficult question of whose debts should be repaid, and whose will face default, with all of the associated implications for China’s future economic development” Wright says. “These are intensely political questions, and they help to explain why fundamental reforms are so difficult. While China’s fiscal and financial systems are decaying, the process of decay generates no immediate pressures or crises for Beijing.”
Ironically, he adds, “China’s system is most vulnerable to systemic crisis when reform becomes a realistic possibility, because government guarantees are then reconsidered quickly among lenders and investors. This dilemma — ongoing decay is debilitating but reform is acutely dangerous — highlights the limited but stark economic policy choices currently available to Beijing.”
Wright’s point about the politics of realising losses is not idle. Back in the 1990s the economic agency in one large province, Guangzhou, was unable to meet its debts. Regulators called the banks — many from Hong Kong — to a meeting in which they casually announced that the agency had no government guarantee. Losses were massive for those lenders who had assumed, not unreasonably, that China would not allow a key development agency to fail.
More recently, the tightening of bank regulations after 2018 curtailed unofficial “wealth management products.” When a bank in Henan defaulted on these products, depositors rioted. They believed, not unreasonably, that a publicly owned bank would back its products.
This all leaves China with a dilemma. Excess investment by the provinces in everything from cement and steel plants to shiny new photovoltaic and electric vehicle plants is depressing prices and piling more debt on local government. Closing uneconomic production would hit local economies hardest, and the cumulative impact would be widespread. Local governments, which account for almost 90 per cent of the activity that drives China’s economy, are meanwhile under increasing pressure to reduce the burden of debt while continuing to drive investment for growth.
Any serious effort to rebalance the economy would involve significant disruption, since a large share of employment is in activities that wouldn’t survive the withdrawal of political financing. Forcing banks — or Beijing — to absorb massive losses isn’t a simple matter of issuing an edict either. Someone has to pay, and either option would still require funding that would burden households — or worse, cause bank failures.
And perhaps the consistent pursuit of investment — and the failure to reach a consumption-led economic maturity — is integral to the China’s political system. As manifested in Xi’s Made in China 2025 policy, Beijing’s ambition is essentially hegemonic. China should dominate in a technological and industrial sense and the way to do that is via strong, state-directed investment. The financing of that agenda demands that household savings are essentially conscripted rather than allowed to fuel domestic consumption.
On balance, Beijing’s dilemma has been in sustaining the primacy of its political system while delivering on its core promise of ever-rising levels of what Xi calls “common prosperity.” Right now, the young graduates flooding onto China’s job market are encountering diminishing opportunities. China’s dynamic private sector is suppressed and the economy is over-reliant on exports running up against rising international resistance.
Wright makes a compelling case that something has to give. How Beijing finds its way through this period seems likely to have serious consequences, not least for an economy like Australia’s that has been an enormous beneficiary of China’s growth. •
Broken China: How the Economic Miracle Shattered and What It Means for the World
By Logan Wright | Polity Press | $51.95 | 272 pages
