Posts by Arthur

Arthur R. Kroeber is founding partner and head of research at Gavekal Dragonomics, an economic consultancy with offices in Beijing and Hong Kong, and editor of its flagship publication China Economic Quarterly. He is a non-resident fellow of the Brookings-Tsinghua Center, and author of China's Economy: What Everyone Needs To Know (Oxford University Press, 2016).

A couple of interviews

If you want a full exposition of my views on where China’s economy is headed, and you can’t find your way to any of my book talks (shame!) then the next best thing is to listen to this podcast interview on the Sinica podcast, an excellent weekly all-China interview show hosted by the inimitable Kaiser Kuo and Jeremy Goldkorn, two of the most interesting and idiosyncratic China watchers out there. Kaiser was a rock musician in Beijing in the 1990s, then morphed into a guru on China’s growing internet economy before landing at internet search engine Baidu as the head of its international corporate communications. Jeremy worked on a series of Chinese magazines before setting up his own China media-watching website,, which he ultimately sold to the Financial Times. Kaiser and Jeremy started their podcast as a hobby in 2010 and are now working on it full time, with distribution via the China information website SupChina.

They kindly offered me an hour-long slot to expound my numerous opinions, which I did in an ad-hoc and highly hipsterish recording studio in the shadow of the Barclays Center in downtown Brooklyn. Because Kaiser and Jeremy are very well-informed, and because we had plenty of time, we were able to dig into the full range of China issues in much greater depth than is normally possible in a TV or radio interview. Please have a listen and give Kaiser and Jeremy your ongoing support by subscribing to Sinica.

I also recently did a podcast interview at the Mercator Institute of China Studies in Berlin, which is easily Europe’s best China-oriented think tank. This one is more concise but covers much of the same ground as my Sinica interview.


Q&A with the New York Times

I have a Q&A, focusing on innovation and economic reform, in the New York Times Sinosphere blog today. The interviewer is Ian Johnson, probably the best foreign reporter now working in China. I was very honored to have the chance to discuss these ideas in print with him.

If you haven’t read Ian’s book Wild Grass, you should. Another must-read is his most recent article for the New York Review of Books, about how a recently discovered trove of ancient writings is reshaping the understanding of China’s philosophical past, and its political possibilities today.

Review in The Economist

The current issue of The Economist gives me a nice review, paired with the excellent book by NPR’s estimable Rob Schmitz. Very pleased to be in his company.

“Arthur Kroeber’s book….launches an assault, albeit courteously worded, on conventional wisdom….What emerges is a nuanced take on an economy facing serious challenges, ones that do not spell its collapse but could prove intractable all the same.”

Read the full review (metered paywall)

Yet more on the Japan trap

Here’s the piece I recently wrote for Bloomberg View on the risk that China falls into a Japan style, high-debt / low growth trap:

The debate over how China’s economy might evolve over the next decade generally breaks down into two opposing cases. Bulls are confident that Chinese leaders will make the hard reforms needed to clean up local government debt, reform state companies, open more markets to private-sector competition and liberalize the financial sector. This should enable China to achieve another 10-15 years of rapid growth. Bears are equally convinced that the government will fail to enact any real reforms, provoking either a drastic plunge in economic growth or an outright financial crisis.

In fact, the likeliest scenario is far less dramatic. Rather than curing its economic woes and cementing its position as an economic superpower, or suffering a devastating collapse, China looks set to spend the next decade in genteel decline, much as Japan has since the 1990s.

Read the full piece

Avoiding the Japan trap

China’s economy isn’t anywhere near collapse. But it does run a real risk of repeating many of the mistakes Japan made in the early 1990s.

The basic issue is that corporate debt is rising very fast, and the ability of companies to repay that debt is deteriorating, because much of this debt is going to finance projects that don’t deliver much of a return. At the moment, and for the next couple of years, China’s banks have enough funds at their disposal to keep rolling over the debts companies can’t repay. But at a certain point, banks will have to call time, and that point companies will have to stop accumulating debt and start paying it down, or deleveraging.

When companies start to pay down debt en masse, it’s bad for economic growth, because they cut back their investments. The government can keep economic growth afloat by borrowing more to finance investments in infrastructure: in other words, the decline in corporate debt can be offset (at least to some extent) by an increase in public debt.

This solution works best when the long-run return on public infrastructure investment is very high. Examples include the Great Depression in the United States and the late 1990s and early 2000s in China. In both cases, national infrastructure was very incomplete. So public investments in better roads and power grids, for instance, paid big dividends by enabling a lot more private business activity to spring up.

This solution does not work so well when the national infrastructure is already is good shape, meaning that building the next mile of road or the next power plant doesn’t do that much to improve the business environment for private companies.

This is the situation Japan got into in the early 1990s. Its companies had built up huge debt to finance investment in stock-market and property assets that proved astronomically over-valued. (Famously, the land under the Imperial Palace in Tokyo was said to be worth more than the state of California by 1990.)  When land and stock prices collapsed by three-quarters after 1990, companies frantically started paying down debt. The government responded by borrowing more to finance infrastructure spending, but because Japan was already so well-endowed, the new infrastructure spending did little to generate new long-term growth. As a result, economic growth ground to a halt, and the country’s debt burden just grew higher. Japan got stuck in a low-growth, high-debt trap.

China isn’t quite at the point that Japan reached in 1990, but it is getting close. Its gross corporate debt level, at 160% of GDP, is among the highest in the world, and growing fast. China has invested so much in infrastructure over the past 15 years that new public investments there will yield little return. The low-growth, high-debt trap beckons.

The solution, in China today as in Japan of the 1990s, is to undertake structural and market reforms to boost productivity. Japan could have deregulated its service sectors and opened its doors to more private investment. China can dismantle some of its enormous and inefficient state owned enterprises, and deregulate service markets to promote more private-sector competition.

Japan did not make the necessary reforms, because to do so would have upset the cozy relationships between government and big business, and reduced bureaucrats’ ability to guide the economy, has they had done so actively (and successfully) in the four decades after World War II. China seems reluctant to make the necessary reforms, because this would involve greatly reducing the role of the state enterprises, and curtailing  the ability of Beijing’s bureaucrats to manage the markets.

This is a complicated issue, because for every striking similarity between today’s China and 1990s Japan, you can easily find an equally striking difference. I’ll explore the details in future posts. But the risk is definitely worth pondering.


How fragile is China?

One of most questions I have been asked most persistently over the past 15 years is whether China’s economy is on the edge of crisis or collapse. This may seem a strange question to ask about an economy that grew at an average rate of 10% for more than three decades, and in 2015 posted GDP growth of 6.9% — one of the fastest rates in the world, and about three times the US economy’s average rate of growth since the 2008 financial crisis.

It seems strange because it is strange. No economy with anything close to China’s success record has attracted anything close to the amount of doomsaying that China does. Japan in the 1980s, for instance, was growing at about 5% a year and attracted varying degrees of admiration and fear. But almost no one seriously suggested that it would crumble. Gloomy views of Japan only began to gain traction after its epic stock-market collapse of 1990, and well into its “lost decade” during which growth stagnated at barely above zero. By contrast, speculation about impending financial, economic and/or political crisis has long been a staple of Western conversations about China, even as its economy barreled ahead. Why?

There are plenty of good reasons to worry about the Chinese economy’s future: debt is rising fast, the efficiency of the financial system is doubtful, too much of the economy is in the hands of lumbering state-owned firms that earn a low return on investment, etc. These concerns make it reasonable to project that China’s growth rate in future will be quite a bit slower than in the past. More debatable is the conclusion that these problems pose an existential threat to the Chinese system as a whole. A system, after all, can suffer a severe growth slowdown and still survive: again, look at Japan.

The underlying reason why people are so prone to jump from “China’s economy has serious problems” to “China’s system is at risk of collapse” lies in a political judgment, not an economic one. The simple form of this judgment is that China’s Communist Party-run state is illegitimate. If you think a system is illegitimate, you will naturally tend to look for reasons why it might fall apart.

The more nuanced version, avoiding the philosophical quagmire of how exactly you define “legitimacy,” is that China’s one-party authoritarian political system lives in contradiction to its dynamic quasi-capitalist economy. Rich countries are in general democratic. China therefore ultimately faces the choice of getting rich, or keeping its present political system: in the long run, it cannot do both. Economic weakness therefore might not simply be economic weakness. It might be a sign that this conflict between incompatible systems is becoming more acute, in which case one or the other (or both) will likely break down.

This view can claim empirical support. As I note in Chapter 12 of my book:

of the 56 countries whose per-capita GDP exceeded the global average in 2013, all but four were at least nominally democracies….The exceptions — Qatar, Equatorial Guinea, Saudi Arabia, and Kazakhstan — are all countries with small populations whose economies depend mainly on exports of oil and gas, a natural formula for authoritarian oligarchy. Among major economies, the only one other than China that is not really democratic in any meaningful sense is Russia. It seems likely that the Communist Party’s twin desires to turn China into a great economic power and to retain its own political monopoly are incompatible, and sooner or later one of those goals must give way.

The problem arises with that weasel phrase, “sooner or later,” or its ferretty cousin “in the long run,” which I used in the previous paragraph. How soon is soon? How much later is later? How many of us will be dead in that long run when China’s present arrangement breaks down?

The honest answer is that we just can’t know.  The latest World Bank estimates of per-capita national income put China at $7,400, still well below the world average of $10,800. This suggests that China could have quite a few more years yet before the clash between rising wealth and ossified politics becomes really critical. We also can’t know whether this clash will be resolved by a crisis or by a peaceful transition. Neighboring South Korea and Taiwan both managed to move from authoritarian to democratic rule without much economic disruption. I wouldn’t bet on this outcome for China, since it’s a far larger and more fractious society, but we can’t rule it out either. Finally, history is not physics: there are no immutable universal laws. China might just wind up being an exception to the general pattern, for any number of reasons.

One thing we do know for sure is that people have been predicting the imminent demise of China’s hybrid system since the 1980s, and so far these predictions have been wrong (though 1989 was indeed a very close call). So the next time someone suggests to you that China’s system is near collapse, ask them a) why all such predictions for the past 35 years have failed to pan out, and b) why their prediction is more credible than the previous false alarms. Only those that can give cogent responses to those two questions have arguments worth listening to.