China's Toxic Debts

By Minxin Pei
Pundits agree: China was the winner of the Great Recession. While the U.S., Europe, and Japan stagnate, China's economy will expand by 9 percent in 2010 and is expected to soon become the world's second largest. Yet before declaring this the Chinese century, take another look at what's happened in the past year.

To power its supposedly miraculous economic recovery, China's banks shelled out $1.2 trillion in new loans in the first half of 2009. That makes for a potential tidal wave of toxic debts weighing down bank balance sheets, especially because much of the money went to stock-market and real-estate speculation. At the same time, the government's investment-focused stimulus policies created more factories--but did little to boost anemic household spending. So while there are more TVs and toys than ever, Chinese aren't buying them. (Nor are debt-ridden Westerners.) And China's failures of omission are just as telling: despite holding trillions in foreign reserves, China has failed to make any major foreign acquisitions. It suffered a major embarrassment when Australians blocked a bid for mining giant Rio Tinto. The world may see China as the recession's big winner. The truth is it's the least-bad loser.

Pei is a professor at Claremont McKenna.