Boombustology, 2nd Edition

CHAPTER 11China's Credit-Fueled Investment Boom

The real estate industry's excessive prosperity has not only kidnapped local governments but also kidnapped financial institutions—restraining and even harming the development of the real economy, inflating asset bubbles and accumulating debt risk.

—Yin Zhongqing, deputy director of the finance and economics committee of the National People's Congress

When the first edition of this book was published, in March 2011, China was extending its run as a booming economy that had been one of the world's fastest growing economies for years. Industrialization, urbanization, modernization, and entrepreneurship all appeared to be on steroids in the world's most populous nation, resulting in a relative consensus among global investors that China would continue growing at 8% for the foreseeable future, providing much-needed support to the global economy.

By almost any metric, economic progress in China over the past several decades has been phenomenal. GDP per capita, literacy rates, health care, infant mortality, life expectancy, and national wealth have all improved remarkably. However, as the famous disclaimer reads on most mutual fund advertisements, “past performance is no guarantee of future performance.” In 2011, this appeared to be the case with respect to China's progress, so we examined China as a potential bubble to be identified through our five-lens approach. Results in the years after proved what our Boombustology approach told ...