China’s debt and corruption are certainly going to be large drags on their economy, but the question both in China and in the China-watching community is if those two forces will eventually sink China’s economic miracle.

Massive ghost cities built at the periphery of China’s 2nd and 3rd tier cities threaten the economic health of China. With untold millions poured into construction and few tenants, the sustainability of China’s growth is in question as exports weaken and debt drives demand for real estate domestically. While millions of Chinese citizens are poised to move into metropolitan areas, there is no guarantee they will move to these ghost towns or that these ghost towns will be in habitable condition when that time comes.

The Chinese government now has the task of both slowing construction of these buildings and unravelling millions, if not billions, of bad debt. It faces numerous obstacles, first being the method used to rank local bureaucrats; GDP growth. Whether through useful infrastructure or useless buildings, construction work is a quick and easy way to boost economic growth and provide quick jobs for the uneducated. Local bureaucrats are loathe to renounce this method of goosing their numbers, and will require strict and frequent oversight if further needless buildout is to be prevented. The other solution would be to change the metrics upon which bureaucrats are judged, but that is unlikely in the short-term.

The second obstacle is related to the debt. Bad debt is often wound through the Chinese banking system in such a way as to make it exceedingly difficult to track. Shadow banking is quite common, and local bank branches are pressured into making bad loans in order to support the local economy. China’s banking system is surprisingly fragmented and would require a great, concerted effort to bring into line. This problem also plagues the Chinese solar energy industry.

While I am not as pessimistic as the author of the piece, I am wary of China’s future. It no doubt has a place amongst the major world powers, but the question is if China’s civil institutions are up to the task of getting China there.

—

The End of China’s Economic Miracle?

But even powerful Chinese leaders have trouble enforcing their will. I reported earlier this year on the government’s plan to handle one straightforward problem: reducing excess steel production in Hebei, the province that surrounds Beijing. Hebei alone produces twice as much crude steel as the U.S., but China no longer needs so much steel, to say nothing of the emissions that darken the skies over Beijing. Mr. Xi weighed in by warning local officials that they would no longer be judged simply on increasing GDP; meeting environmental goals would count too.

In late 2013, Hebei staged an event called “Operation Sunday.” Officials sent demolition squads to destroy blast furnaces, and imploding mills made great TV on the 7 p.m. news. But it turned out that the destroyed mills had long been out of production, so blowing them up didn’t affect output. Indeed, China’s steel industry is on track for record production this year.