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China Navigates the Latest Threat to Its Debt-Fueled Boom

Beijing’s balancing act collides with coronavirus and the trade war.

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Illustration: Joel Plosz for Bloomberg Businessweek

For a decade, hedge fund managers and short sellers have unfurled dire and bold warnings about potentially catastrophic losses in China’s financial system. Jim Chanos, famous for predicting the 2001 collapse of Enron Corp., memorably said in 2010 that China’s reliance on real estate for growth was a “treadmill to hell.” Since then, prominent institutions and investors, including the International Monetary Fund and George Soros, have pointed to a long list of problems in China’s financial system, from indebtedness and banking stress to shadow loans and housing bubbles. Now there are concerns about how the outbreak of a new coronavirus in China might hurt banks. Not to mention the risks of a trade war lumbering into another year and social unrest in Hong Kong.

Yet for the past four years, China has maintained its growth, outpacing other major economies, as its financial system rumbles on. Its central government, regulators, and local authorities have come up with creative and arcane ways to prop up everything and keep the world’s second-largest economy on track. But with signs of stress flashing across the board, the debate among investors over whether stopgap measures can contain systemic risks is as fierce as ever. The stakes are enormous: Years of breakneck growth in an economy heavily reliant on financing has created a gargantuan banking system, which, with $41 trillion in assets, is the world’s largest.