A compelling look at the flaws in the Chinese economy

China’s Great Wall of Debt. By Dinny McMahon. Houghton Mifflin Harcourt; 256 pages; $28. Little, Brown; £14.99.

THE zombies that appear in Chinese legends are not quite the same as their Western counterparts. They feast on blood, not brains, and hop about rather than staggering forwards. The differences extend to economics. Chinese officials, like their Western peers, openly fret about zombie companies—insolvent firms kept alive by banks—but are far less willing to kill them off. This small excursion into the world of the undead is one of many gems in Dinny McMahon’s new book, a vivid account of China’s economic problems, from debt to falsified data.

Mr McMahon, a veteran financial correspondent in China, most recently with the Wall Street Journal, wears his knowledge lightly, whether discussing ghost stories or balance sheets. His book, “China’s Great Wall of Debt”, is notable for two reasons. It is one of the clearest and most thorough statements of an argument often made about the country: that its government has relied on constant stimulus to keep growth strong, an addiction that is bound to backfire. Second, he comes closer than any previous writer to covering the Chinese economy as Michael Lewis, the hugely popular author of “The Big Short”, might do. His analysis is informed but accessible, animated by anecdotes and characters, some colourful, some verging on tragic.

In a chapter on government meddling, he introduces a hedge-fund analyst who accused a publicly listed Chinese silver-mining company of fraud. Police arrested him, kept him awake for three days and jailed him for two years; he was ultimately found guilty of “impairing business credibility”. In a chapter on the deadweight of state-owned companies, Mr McMahon visits a factory owned by Erzhong, a machinery-maker that built the world’s biggest hydraulic press forge, used for pounding out metal. But the forge, based on Russian designs from the 1980s, is outdated and the country oversupplied. These days retired workers harvest vegetables planted on unused land along the factory’s walls. In a chapter on financial bubbles, Mr McMahon tracks the boom and bust in Moutai, China’s most prized brand of baijiu, a grain-based spirit, through the story of an auctioneer.

As with any financial mess, there is plenty of blame to go around for these excesses. Reckless investors, greedy lenders and lax regulation have all played a part. But Mr McMahon shows that China’s political system is at the heart of the dysfunction. Short of tax revenues, local governments treat land as free money, expropriating it cheaply and then selling it at inflated prices. Since the promotions of officials are traditionally based on economic growth, they are encouraged to spend public money first and ask questions later. Implicit guarantees make for financial distortions. Few think big state-owned banks will ever be allowed to fail or that large state-owned firms will ever be pushed into bankruptcy.

Yet for all the undeniable weaknesses in China’s economy, the central argument of the book is debatable. In his introduction Mr McMahon explains that he will neither delve into the government’s efforts to clean up bad loans nor examine bright spots such as the tech sector. That makes sense as a way to keep the narrative sharp. Nevertheless, the clean-up and the bright spots matter. Over the past year the government’s economic priority has been to defuse debt risks. It has made some headway, not least by thinning the ranks of zombie factories. Meanwhile the blossoming of the tech sector is one example of how China retains the ability to transcend its past mistakes.

Mr McMahon is among the most compelling of the many analysts who conclude that China’s economic miracle will end painfully. But until now such forecasts have served as inadvertent testaments to the country’s resilience. Despite so much in its economy that looks so deeply rotten, China may yet emerge from its boom stronger than the doomsayers predict.