On Shadow-Banking, the Infectious Belt, and the China Dream


What happened?

Back in 2013, Riad Ajami argued that China found itself in the midst of the ‘Middle-Income Trap’.

To Ajam, the key challenges awaiting the People’s Republic were:

  1. A sustained slow-down in state-directed infrastructure investment
  2. Growing industrial over-capacities
  3. The cheap labour pool running out
  4. Systemic risks due to unhealthy debt levels (‘shadow banking’)

Fast forward five years, what happened?

  • The CCP largely diverted state-directed investment towards high-tech – especially A.I.

  • Xi’s grand ‘One Belt, One Road’ initiative can be comprehended as an endeavour for opening up new markets for the domestic industrial over-capacities – besides vying for geopolitical influence.

  • As China attempts to avoid the ‘Middle Income Trap’, being the world’s manufacturing hub would no longer be an option anyhow. Chinese factory wages increased by 70% since 2011. More so, (industrial) pollution is one of the few issues that could threaten the CCP’s legitimacy.

  • It is estimated that China’s shadow-banking system grew close to $10 Trillion over the past decade (coming close to 90% of China’s GDP). All outside of the realm of government regulation.

Why does it matter?

Last year, Xi said that debt was one of the greatest threats to financial stability. The CCP has had the issue on its radar for a while now. However, each intended government crackdown led to new innovative debt instruments.

The Chinese proverb that ‘heaven is high and the emperor far away’ continues to hold true for many local governments. Yet it complicates the central government’s efforts in tracking down debt.

More so, vested interests further blur the picture. Xi’s recent centralisation of power can also be interpreted in that light. He needs to centralise power in order to take on the challenge.

What’s next?

While Xi’s geopolitical vision, as part of the ‘One Belt, One Road’ initiative, has been much applauded, one big risk associated with the undertaking remains largely overseen. The Belt is highly infected with institutional grievances.

While China might benefit from the (often) corrupt and autocratic governments in the short-term, it should be wary of associated risks with these types of governments in the long-term.

Last but not least, China is unlikely to back down in the Sino-American trade dispute for two reasons:

  1. For China it’s about more than trade. Ever since Obama announced his ‘pivot to Asia’, China has been suspicious about US’ intentions. The Trump administration’s hostile stance towards China further confirmed this perception. For China, it’s about Thucydides’ troika of themes:

i. Honour

ii. Fear

iii. Interest

And even more so about realising the ‘China Dream’. Backing down against the US would cast doubts about the CCP’s ability to realise Xi’s visions.

  1. Xi doesn’t have to worry about re-election, stakeholder costs, and parliamentarian majorities – unlike Trump with the midterms coming up. Thus, Xi is relatively immune to short-term economic blows with a strong set of centralised state-tools at his disposal.


© Photo: https://www.ft.com/content/b5441a6a-b7d1-11e7-8c12-5661783e5589



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