China's economy sailed through the financial crisis unscathed — at least in the short run.
When the global crisis hit, the country's government-owned banks started lending out lots more money. The money came largely from the savings accounts of ordinary Chinese people. It went largely to finance big construction projects, which helped keep China's economy growing.
"It sort of explains why China recovered so quickly," Hu Angang, an economist at Tsinghua University, told us. Indeed, China's strong showing through the crisis was seen by some as a vindication of the large role Chinese government plays in steering the country's economy.
But if it turns out China doesn't need all that new stuff it's building, the country will face an economic reckoning, says Michael Pettis, who teaches finance at Peking University in Beijing.
For Pettis, China's economic miracle is just the latest, largest version of a familiar story. A government in a developing country funnels tons of money into construction. This increases economic activity for a while, but the country ultimately overbuilds — and the loans start going bad.
"In every single case it ended up with excessive debt," Pettis says. "In some cases a debt crisis, in other cases a lost decade of very, very slow growth and rapidly rising debt. And no one has taken it to the extremes China has."
The counterpoint to Pettis's argument: China is extreme. It's a country of a billion people, growing at an incredible rate. The country needs to build lots of new stuff — new roads, new power plants, new buildings.
It's been this way for decades, says Arthur Kroeber, who runs the Chinese research firm Dragonomics. When he first arrived in Beijing in 1985, the city had just finished building a new ring road — a highway that runs in a loop circle around the city center. It was so empty that he and his wife rode their bikes down the middle of the highway.
"At that time I thought, 'This is crazy,'" he says. "Why enormous roads with nothing on it?"
Since then, Beijing has built three more ring roads, each one farther out than the last. Today, the ring roads are all jammed with traffic.
"It's kind of an emblem of the way things get done here," Kroeber says. "At any point in the last 25 years you could walk around and say, 'They're building all this stuff, and who will ever possible use it?' You come back five years later and its not nearly enough. That logic will, I think, eventually come to an end. But it has worked for them pretty well up to now."
Kroeber and Michael Pettis — and even the Chinese government itself, to judge from its latest five-year plan — agree that the Chinese economy needs to change. The government needs to spend less money building stuff, and ordinary people need to spend more money buying stuff.
What they disagree on is how much time China has to make this change. Kroeber figures China's got another 10 or 15 years before it has to make the shift. Pettis, thinks it may already be too late.