Beijing’s Banking Balloon: China’s Core Economic Challenge in the New Era

China’s historic 20 Party Congress in 2022 was principally noteworthy because Xi Jinping successfully secured a third term, but Beijing also tellingly postponed releasing GDP and other key economic statistics during the Congress. This deliberate obfuscation could not conceal that the Chinese economy has been in trouble for quite a while now. Media stories in recent years have increasingly reported on Chinese home buyers refusing to pay mortgages, depositors lining up to retrieve savings, central authorities cracking down on large private firms, and local governments becoming constrained by debt and shrinking revenue. The list goes on. What has gone wrong? While worsening ties with Washington have exacerbated the situation, they’re hardly the underlying reason for China’s economic woes. Nor are President Xi’s policies solely to blame. The root cause, at the deep structural level, lies in what I call the “state-owned market” system that the Chinese Communist Party (CCP) has built—or ended up with—in the reform era. In this system, the visible hand of the state seeks to both create and hold the invisible hand of the market, a dynamic that has made China’s rapid growth possible, but also sown the seeds of its current economic troubles. Nowhere is this market system more clearly at work than in the country’s gigantic banking sector, which is now the world’s largest. We know that the banking system remains a key pillar of the CCP’s political power. Little known, however, is how the party-state has profoundly transformed it in the reform era. Yet, understanding this transformation is imperative for grasping