CLM Insights Interview with Logan Wright

Logan Wright, Broken China: How the Economic Miracle Shattered and What it Means for the World. Cambridge, UK: Polity, September 2026. 272 pages. ISBN-10: 1509570675; ISBN-13: ‎978-1509570676

Logan Wright CLM Issue 88 June 2026.pdf

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Insights Interview

The central argument of your book is that China’s economic model is “broken.”  As there are many different versions of the so-called “China model,” can you explain what you mean by the “China model” and why it is now broken?

Indeed, the book argues that China’s financial system can no longer generate the same rates of economic growth because that financial system has already expanded much faster than the real economy for nearly a decade after the global financial crisis. A financial system can only outpace the underlying economy it finances by either “deepening” access to financial services—expanding new forms of lending to new borrowers—or by taking on new credit risks, by lending to riskier borrowers. Often these go hand in hand.

In China’s case, banks added one-third of global GDP in new lending in a single country in only eight years, from 2008 to 2016. Many of those loans were unprofitable and did not generate financial returns from the underlying projects necessary to pay off the loans—and in fact, they were never designed to do so, as most of these loans funded quasi-fiscal spending for infrastructure projects.

Now, the bill for all of that lending is coming due. These local government projects do not generate sufficient financial returns to repay the loans. Local governments say they will eventually support these assets, but they are not making fiscal resources available to the banks. And the localities’ own fiscal revenues are declining because overall investment and output is also slowing. So, either the banks need to write off the loans, reducing their profits and therefore their capacity to issue more loans, or they must continue to lend money to the same borrowers just to roll over their previous loans.

Banks have generally chosen the latter option, but that means rising volumes of new credit are being channeled into unproductive lending to local governments and state-owned enterprises and to borrowers that are already defaulting. Good money is being thrown after bad. There is far less to finance households or the private sector, including the new industries central to China’s growth strategy.

This is what I mean when I say the financial system is broken. The problems in China’s investment-led growth model are also weakening the fiscal system because China’s tax revenues depend upon ongoing investment and industrial output rather than household consumption and incomes. Lending is less productive of economic activity, and the entire system continues to decay.

The term the “China model” has been used in several different contexts, usually implying forms of state capitalism or authoritarian control. The book does not really discuss these—it is about the particular pattern in which China’s economic growth has taken place during the past two decades, featuring an unprecedented expansion of a banking system that is funding unsustainable levels of investment growth.

At the heart of your diagnosis of the unraveling of China’s growth model is the rapid expansion of its financial sector since the early 2000s. Can you explain the drivers of this expansion and its economic consequences?

The book argues it is impossible to understand China’s economic growth during the past two decades without incorporating the growth of China’s financial system, and it is similarly impossible to forecast the future of China’s economy without taking into account the problems within the financial system.

During the past two decades, China has controlled its economy through the direction of credit via state banks and via fiscal spending directed by local governments. State-owned banks are usually willing to lend to state-owned borrowers as they see no real default risks. Before the global financial crisis, Beijing limited the overall volume of lending through quotas to keep inflation in check. After 2008, the restraints on banks and local governments were lifted, and there was a massive post-crisis credit expansion, producing trillions of yuan of non-performing loans. Another round of inflation in 2011 led Beijing to raise interest rates and to try to limit overall credit.

The story becomes more interesting from 2012 to 2016, as the book discusses at length. Even though Beijing tried to reduce overall credit growth, local governments had to continue borrowing to maintain their same rates of investment growth, and banks cooperated by shifting credit away from loans and toward different forms of “shadow” or informal lending. As a result, overall credit growth remained strong despite Beijing’s efforts to rein it in. But the financial system became more difficult to track and regulate, leading to the fueling of speculative bubbles in property, stocks, and commodities trading.

Within a very short timeframe, the fundamentals of China’s financial system completely changed. Rather than financial repression and the channeling of household deposits to loans to state-owned enterprises, there is widespread moral hazard in the system—huge speculative investments in “wealth management products” at high interest rates funding even riskier lending to local governments and the property sector, which are also presumed to be risk-free. Beijing can no longer direct credit where it wants, even when the economy is slowing, as it was in 2014 and 2015.

Xi Jinping and his economic advisers, especially former vice premier Liu He, were aware of the risks of an overextended financial sector, and a decade ago they started a deleveraging campaign. Why is the Chinese government unable to rein in the financial sector? What policy mistakes did it make?

The deleveraging campaign was an important turning point in China’s economy, and it was Beijing’s response to the explosion of shadow-banking activity from 2012 to 2016. But essentially it swapped one form of financial risk for another—it reduced the risk of a funding shortfall from wealth management products, but it significantly also slowed credit growth. As a result, many borrowers defaulted as credit dried up. Credit risks started to spread from peer-to-peer lending networks in 2018 to smaller banks like Baoshang in 2019 to trust companies in 2020 and property developers in 2021, and eventually to local governments themselves.

The challenge Beijing now faces to tighten control over the financial sector lies in determining who will bear the costs, and where the losses can be absorbed. After years in which a rising tide of new credit lifted all boats, as overall credit growth now slows Beijing has to choose which industries and local governments will be offered the few lifeboats that are available. As a practical matter, this involves telling local governments and state-owned enterprises that they will be cut off from new credit, which will risk falling output and GDP, layoffs, and declining tax revenues. It is easy to see why Chinese leaders would want to delay these choices as long as possible since these are intensely political decisions.

The primary policy mistake that Xi Jinping and his economic advisers have made (and continue to make) is to prioritize unsustainable rates of growth over reforms that would make China’s economy more sustainable over the long term. At several points during the past decade reforms were tried but then quickly reversed because they would slow economic growth and risk financial instability. One of the central arguments of the book is that China has chosen to accept decay and to delay short-term economic pain because reform and writedowns of loans now risk a crisis. China made this choice largely for political reasons, allowing financial risks to accumulate in order to offset political risks.

Most observers attribute China’s post-Covid economic stagnation to the effects of the implosion of the real-estate sector. Your analysis reveals deeper problems. What is holding back the Chinese economy now? What are the options available to the Chinese government?

The real-estate sector’s collapse was an important inflection point in China’s growth. The book starts with Evergrande’s liquidity crisis as the point when China’s economy started its rapid decline, because property was such an important industry, comprising around 20–25 percent of GDP at its peak. So when China’s largest firm within its most important industry was facing a liquidity problem, as Evergrande did in September 2021, it naturally raised questions about what might replace the property sector in the future. But the property sector’s collapse was driven by tighter credit conditions as well—and this was just one aspect of the overall slowdown in credit growth that started in 2018.

GDP is the sum of investment, consumption, government spending, and net exports. Investment in China has been funded by state-directed credit from the banking system, but it cannot continue given the problems in the financial system. Household consumption is limited by weakening income growth, slower borrowing growth, a declining population, and declining property values. Government spending has been increasing, but tax revenues are stagnant and fiscal deficits are already over 9 percent of GDP, so there are limits to how fast government spending can expand. As a result, net exports are now the primary driver of China’s economic growth, and those depend largely upon trends in global demand and the continued openness of global markets to Chinese goods, neither of which is guaranteed.

In my view, there is a tendency among China political analysts to ascribe more agency to Beijing over economic events than is warranted. From a financial analyst’s perspective, countries that see huge credit booms and busts in the aftermath typically struggle to generate growth and credit demand. Weaker GDP growth and deflation are common problems. This is not unique to China, but China has had the largest single-country credit expansion and slowdown in recent history. The book argues we should not be surprised with the economic consequences that have resulted from this boom and bust. Beijing does not have easy options, or else they would have already been tried several years ago. All fundamental changes will involve slower economic growth in the short term.

As you argue that Beijing does not have easy options, can “muddling through”—doing just enough to stave off a financial sector meltdown without adopting painful but necessary reforms—help China get through the current period of economic difficulties and eventually regain its growth momentum?

This is an important takeaway from the book. This process of Beijing “muddling through” is not really treading water but slowly sinking. China’s economic problems are best characterized not as a crisis or a collapse but as ongoing decay—achieving less with less, year after year.

One of the implications of the book is that Beijing can maintain domestic stability even while its policy levers decay, but it cannot continue strategic competition with the United States in any meaningful way other than by channeling more and more fiscal resources to the military. China has no realistic path to becoming the world’s largest economy outside of a collapse of growth in the United States.

Right now, Beijing’s focus is on maintaining export growth, which requires keeping global markets for China’s manufactures open. As the attraction of trading with China fades, given China’s stagnant import growth, Beijing is using a larger proportion of threats—retaliatory tariffs, export controls on rare earths—relative to positive inducements in the service of limiting trade defense measures in other countries. There are probably limits to how long that approach will be effective. If domestic demand in China remains weak and there are reduced prospects of China’s imports growing in the long term, trade defenses against Chinese exports will be inevitable.

The issue Beijing now faces is that the current growth model is not working, and its proposed alternatives are not going to maintain the same rates of economic growth. Goals need to be redefined. China’s new strategic industries, or the “new quality productive forces” that Xi Jinping touts, only represented a bit more than 6 percent of GDP in 2025, based on Rhodium’s calculations. They would need to triple or to quadruple in size just to approach the pace of investment growth seen during the past decade. And the decline in the legacy industries is still ongoing, in property, in infrastructure, and in traditional autos.

Even if China’s AI push and industrial robotics development are wildly successful, these industries are capital-intensive rather than labor-intensive. Demand for the products produced in these industries will probably still be concentrated outside of China rather than within China. Demographic headwinds will prevent a rebalancing of the economy toward household consumption at higher growth rates than China is seeing today. As investment slows, this rebalancing toward consumption will occur to some extent but at lower growth rates. It is quite possible that China’s population could drop by 50–60 million people in just the next decade, and that assumes that birth rates do not fall further. Maintaining past rates of economic growth is an impossible task under these conditions and the government’s 4.5–5 percent targets are completely unrealistic.