China’s inevitable crisis

last updated 8 January 2015

Michael Schuman

Time.com

I’m convinced that China’s “economic system is unsustainable,” said Michael Schuman. The country has achieved stupendous growth in much the same way Japan and South Korea did years ago, by using government funds and state-directed finance to steer the economy. But all those subsidies have hugely distorted the market, setting China up for a major meltdown like the ones that hit Japan in 1990 and South Korea in 1997. China is a wonderland of “excessive, misguided investment”: shoddy office buildings, malls without shoppers, a glut of solar panel factories, and high-speed railways that few Chinese can afford. Yet subsidized companies keep building “unnecessary and unprofitable” factories, and government-directed banks keep pumping out money that will be wasted. What’s worse, it’s all financed with debt, and government bureaucrats won’t change course for fear of dampening the country’s impressive growth figures. Both Japan and Korea suffered economic meltdowns “roughly 35 years” after embarking on their versions of this development model, putting China’s possible crisis around 2014–15. That’s not a firm prediction, but it is a warning that the clock is ticking.