How China Fooled the World - with Robert Peston This World

China has been booming for more than 30 years,

consistently the world's fastest-growing major economy.

This is urban renewal Chinese-style.

The sheer scale of what they're attempting here is unbelievable.

While we've been trapped in a global recession,

China has been expanding massively.

While the Western world was going to go through economic purgatory,

at least China could continue growing

at 10% per annum, which it did.

But the Chinese were pursuing a risky strategy

to achieve such impressive growth.

I had no doubt what their strategy would be.

I did not imagine one on the scale and scope that they pursued.

They essentially gave instructions to their banks to...

The phrase was, "Open your wallets wide and get lending."

Now China's economy has become dangerously hooked

on debt-fuelled growth.

China will have replicated the entire US commercial banking sector

within the span of half a decade.

And suddenly, China doesn't look quite so economically invincible.

Nothing can surely stop China becoming evermore powerful,

ever richer...or can it?

Weighed down by its vast debts,

China's economical miracle may be ending.

Its boom shaped the world and so, too, would a crash.

There's no example in history

of that kind of debt explosion not leading to tears before bedtime.

Hubei Province, in the heart of China.

TRANSLATED TANNOY ANNOUNCEMENT:

You've probably never heard of Hubei's capital city, Wuhan,

but it's one of hundreds of giant cities across China undergoing

an almost unbelievable transformation.

While we've been forced to tighten our belts,

cities like Wuhan have been building and expanding

as if there's no tomorrow.

Blooming heck! This is amazing!

Since 1980, China has grown faster and more consistently

than any big economy the world has seen.

It became an exporting powerhouse, feeding our shopping addiction

by making all that lovely cheap stuff we crave,

to become the second-largest economy in the world.

Today, Wuhan is a city turbocharged for urban renewal.

A city being remade before our eyes.

Flattening, excavating, pile-driving, hoisting, building.

Wuhan's ten million citizens want it all -

new homes, skyscrapers,

a gleaming new transport system, the good life -

and there's one man promising to deliver it.

So I've come to the Wuhan Citizens' Home,

a vast palace whose aim primarily is to show off

the ambitions of this giant city.

And I've come to meet the man who's spending ?60 billion a year

modernising Wuhan, Mayor Tang.

Mayor Tang has power and financial muscle

that London's Mayor, Boris Johnson, cannot even dream of.

In Wuhan's enormous town hall,

there's a big hello from Mayor Tang's army of an entourage.

Well, hello, Mayor Tang. Thank you so much for welcoming us here today.

'Tang has the grandest of all grand designs -

'to transform Wuhan into an ultramodern mega-city,

'challenging mighty Shanghai as China's second city.'

So, what do we have here? Oh, my goodness!

I'm not sure I've ever seen a model

quite as extraordinarily detailed as this one.

TRANSLATION: It's the plan approved by the State Council.

It shows the comprehensive layout of the city in 2020.

Hundreds of apartment blocks, industrial zones, ring roads,

bridges, railways and a second international airport, all new.

TRANSLATION: This 1,200 square metre model shows an actual area

of more than 200 square kilometres.

We'll build all this by 2020.

'The rate of development spending here, ?200 billion over five years,

'is more than double what we'll spend for the entire UK.'

TRANSLATION: We believe that within the next 10 to 20 years,

Wuhan will become a very important city

for China's economic development.

A very significant landmark city.

So we should seize the chance to prepare ourselves

for the opportunities ahead.

If we miss this historic chance,

we won't have another opportunity to do it.

Mayor Tang believes the day will come when Wuhan is as familiar

to the world as Paris, Tokyo or London.

I've been to China many times and witnessed its explosive growth,

but what's going on here in Wuhan is beyond anything I've ever seen.

Great blocks being erected, roads being dug up,

cranes literally everywhere you look.

The kind of radical surgery that's being undertaken on this vast city

is beyond anything I've ever experienced.

But can such spending and building be sustained?

Are the foundations of Wuhan's and China's economic transformation

as robust as they seem?

To understand what's really going on here,

we need to revisit the devastation in our own backyard

just over five years ago.

Is your money safe?

Something of a financial hurricane.

One of the ugliest days I have ever seen.

September 2008.

A shattering financial crisis

triggered by the demise of Lehman Brothers

led to the worst slump in the West for more than 70 years.

Those with their hands on the levers feared the worst.

In the US, we really were on the brink.

We were, I think, quite close to having a...

a collapse of the financial system that was catastrophic

and the economic consequences could have been very comparable

to that of the Great Depression.

It's been another tumultuous morning on the markets.

Nightmare on Wall Street. Very, very bad.

SHOUTING

The tsunami may have started in America and Britain,

but it was felt thousands of miles away on the shores of China.

This was a time of great uncertainty for people in China

because they were very dependent on exports.

And as our economies turned down,

it really exposed this weakness to them.

When we went broke in the West,

we stopped buying all those wonderfully cheap goods from China.

They were confronted with this massive global crisis

that resulted in a collapse in demand

for all the stuff they were making.

So you had massive stockpiles of goods building up,

you had companies closing down, you had people getting laid off.

Chinese factories hit the off switch.

Millions of Chinese workers were put onto the streets,

wondering if they would ever work again.

I was in China at the time

and witnessed the extraordinary spectacle of laid-off workers

trooping back to their dirt-poor farms in the country.

Mass unemployment sparked protests.

China's unelected Communist Party began to fear

that they might escalate and shake its undemocratic grip on power.

They were very worried that what had gone wrong

within the advanced economies' financial systems

was going to have a big knock-on effect to China

and therefore to Chinese employment

and therefore to the whole sustainability

of the social peace and the political system.

The Chinese are extremely sensitive

to the social implications of weakening growth

because, obviously, high growth is really what gives

the Communist Party its legitimacy in the eyes of its citizens.

The world's two economic superpowers,

the US and China, were in deep trouble.

America's Treasury Secretary, Hank Paulson, was desperate

to persuade his Chinese government counterparts

that they were in it together.

My counterpart at the time, a very senior Chinese minister,

Wang Qishan, said to me,

"You know, you used to be my teacher when it came to financial markets.

"Now my teacher doesn't seem to be so smart."

The hotline between Beijing and Washington,

between Hank Paulson and senior Chinese,

very senior Chinese government officials,

were running on a daily basis.

The Chinese were very concerned about the health of the US economy,

and Hank Paulson painted a picture of truly dire consequences

to flow from the collapse of the system.

There was just a kind of an automatic reaction,

which is that we cannot afford to allow growth

to drop from what had been double-digit rates,

9 or 10% per annum,

to the kind of maybe 4 or 5%

that was then on the radar screen at that time.

So, under pressure from America

for China to save not only itself, but the world,

the Chinese government took emergency measures

to stimulate the economy to get growth going again.

Less than two months after Lehman's collapse,

China unveiled its rescue plan, vowing to be fast and forceful.

They just hit the accelerator on investment.

Investment is one of those things

which at least in a state-dominated economy you can just switch on.

I had no doubt what their strategy would be,

the kind of stimulus programme they did.

I did not imagine one on the scale

and scope that they pursued.

Even before the crash, China was investing and building

at a rate that was off the scale in terms of magnitude.

But rather than cut back, as many had expected,

China now went on the kind of construction binge

that would have daunted even Egypt's pharaohs.

If you cast your mind back to 2007/2008,

pretty much economists all over the world were saying

Chinese investment was unsustainably large.

The investment rate, far from falling

in the way that people had suggested was necessary,

went up from about the low 40% of GDP to 50%.

A ?400 billion stimulus

drove the biggest building programme in history.

A new skyscraper every five days.

More than 30 new airports.

Metro systems underway in 25 cities.

Over 6,000 miles of high-speed railway track AND all the stations.

The three longest bridges in the world.

26,000 miles of motorways.

All in five years.

This is urban renewal Chinese-style.

A bit more ambitious than what we typically get up to in the West.

The sheer scale of what they're attempting here is unbelievable!

An ambitious city like Wuhan

needs a modern, comprehensive transport system.

These are the foundations of its new metro.

TRANSLATION: There are 500 workers here, if you include the managers.

We work day and night in four teams over three shifts.

When did you start building here

and when will the station be finished?

Our project started on July 13th 2011.

The completion date will be September 2014.

This huge station, if completed on time,

will have taken three years to build -

half the time it's taking to finish

one of London's new Crossrail stations -

and by 2017, Wuhan will have five new subway lines

and 133 miles of new track.

It's just one of 10,000 construction sites here.

But how can so much spending and building happen so fast?

Well, one reason is because the Chinese government

still owns so much of the economy.

Despite our image of a new China driven by raw capitalism,

some of the old communist ways live on.

Giant state-owned companies

bossed by the super-powerful Communist Party

are still at the heart of China's economy.

After the great crash of 2008

is a time to put on the hard hats.

The global economy, the Chinese economy were melting down,

and the Chinese government took evasive action.

It pulled the levers at its disposal.

This is Wuhan Iron Steel,

one of the world's biggest steel companies.

Sprawling mill shops more than half a mile long.

36 million tonnes of iron and steel spewed out every year,

equivalent to an Eiffel Tower every two hours.

Nationalised by Chairman Mao, it's a paternalistic throwback

in today's China that Mao himself might find familiar.

Over 100,000 workers on its books who can't be sacked.

TRANSLATION: My parents and grandparents

all worked at Wuhan Iron Steel.

I'm a genuine third-generation employee.

I know the company well and feel very attached to it.

They're looked after from cradle to grave.

Everything is provided for them.

And their loyalty? Well, it's total.

TRANSLATION: A state-owned enterprise is like the head of a family.

They care about their employees in every way.

Food, clothes, accommodation, transport,

marriage, children, everything.

You don't get that in a private company.

For all the growth in China's private sector,

state-owned enterprises are still the major players

in everything from steel to oil,

shipping, electricity and banking.

When the government unleashed all that spending after the crash,

it instructed those state-owned companies

to rapidly expand and build new factories.

This created employment and it also meant that the building boom

would be fuelled by a glut of cheap materials.

State-owned companies like Wuhan Iron Steel

re-energised China's flagging economy.

The economic slow-down in China was rapidly forgotten.

The boom times returned faster than seemed humanly possible.

The reaction to China's stimulus programme

was one of widespread relief,

and that China would be the world's salvation.

That while the Western world was going to go through

a kind of a form of economic purgatory,

that, at least, you know, China could continue

growing at 10% per annum,

which it did in the rebound in 2010.

All we could do was watch and marvel.

Without Chinese expansion,

the entire world economy would have been flat as a pancake.

Now, we may think it's been tough for us over the past few years,

but if the Chinese economy had been in recession as well,

well, life for us in Britain

and in much of the West would have been even tougher.

But the revival wasn't all that it seemed,

because only a fraction of the money

needed for the investment splurge

came from taxpayers and state funds.

Most of it was borrowed from banks.

The only lever they had which could make a difference

within months rather than years

is to hit the investment and hit the credit button,

and they essentially gave instructions to their banks to...

The phrase was, "Open your wallets wide and get lending."

It was really just pushing on an open door.

They just said, "We want you to lend a lot of money."

And the banks were very obliging.

But that was really the beginning

of what subsequently became a credit orgy, really.

A gushing torrent of money flowed from banks to developers

and state-owned companies.

In just the first year of the stimulus programme,

Chinese banks lent almost ?1 trillion,

double the target they'd been set by the government.

And that's equivalent to all the debt on the books

of Britain's biggest retail bank, Lloyds.

And that was just what the unreliable official figures

were saying.

Now, by 2010, Beijing did begin to worry

that the lending binge was getting out of hand

and the government ordered banks to slow down,

but it turned out that the Communist Party's top officials

weren't quite as powerful as they thought.

There's an old dictum from Chinese history

about the emperor is far away and the mountains are high,

which kind of speaks to the topic of the central government in Beijing

having difficulty getting its ideas and its views implemented

by local and provincial governments,

and that's certainly proven to be the case into modern times.

When investment can no longer be financed directly by the banks,

local governments and developers found other sources of money.

New lending institutions called shadow banks

were created and enlarged.

Lending by the formal banking system

and, in particular, the state-owned banks which dominate the system,

whereas that began to slow down at least somewhat,

what is called a shadow banking system

emerged to, as it were, supplement it.

So these off-balance-sheet entities

were able to go to the banks, borrow copious amounts of money

so that they built themselves up into enormous borrowing entities.

There were a whole series of developments

which, for people who have gone through the financial crisis,

are eerily reminiscent of some of the off-balance-sheet vehicles,

the SIVs and the conduits, as we used to call them,

which proliferated in the pre-crisis shadow banking system.

So that raging torrent of credit wasn't stemmed,

but because it was now growing outside of the official banks,

it was even harder for Beijing to see and control.

The point is that hundreds of billions of pounds of lending

is not going through the big banks.

It's being provided by other institutions, known as shadow banks,

some of them set up by local authorities

to finance huge developments.

And the point about that lending via the shadow banks is,

it's very hard to see. So, to that extent,

a huge proportion of China's big debts are hidden.

That picture was quite disturbing to us

because it means that more and more of this credit

is shifting into these hidden channels

in essentially a shadow financial system.

And we don't have data on that,

we don't really know who's doing the lending,

who the borrowers are, what the quality of assets is,

what sectors of the economy the money is going to.

China had become dangerously addicted to debt.

A lot of that lending was for modernising China.

And let's be in no doubt,

much of the development is badly needed.

In transport, for example.

OK. So I think I want Line 1...

'A decent metro isn't a luxury

'in a city of more than 10 million people like Wuhan,

'but it's not cheap, at more than ?30 billion.'

Why is nothing coming out? This doesn't make any sense to me.

'There'll be another two million people here in Wuhan

'within ten years, maybe more.'

I've got it. OK.

HE LAUGHS

It's the great demographic story of our time.

400 million people relocating from Chinese farms to cities

over the last 30 years, and they need to get around.

I can watch the football on a screen in the metro.

Not bad, is it?

And they need somewhere to live.

Nearly ten million homes each year are being built in China,

often huge apartment blocks in the suburbs, like this one.

Cheap credit, a rapidly expanding urban population

and a growing middle class have created a potent mix,

which has led to soaring property prices.

It's reminiscent of the housing market booms

that preceded the busts we've seen recently

in Ireland, Spain and America.

In some Chinese cities,

house prices are still rising by up to 20% a year.

This is what China is all about.

Remaking the landscape, modernising the country,

generating wealth at breakneck speed.

Just here will rise

the third or second-tallest building in the world -

the developers are being a bit coy about quite how high it'll climb -

surrounded by almost a million square metres of

new offices and new homes.

It'll be a ?3 billion urban status symbol,

whose point is to shout Wuhan's importance to the rest of the world.

Extremely kind of you.

TRANSLATION:

It's quite phenomenal.

Lovely. Thank you.

This development is directed at the top of the market.

TRANSLATION: This is the show home living room.

It has a balcony. The view is lovely.

You can see the Yangtze and Hankou district on the other side.

It's a very good view.

This room is the master bedroom.

Behind you is the bathroom and next to that is a wardrobe.

It's a very comfortable room.

It's good to have the wine glasses on the bed all ready.

Fantastic.

So is this a typical apartment for the buildings

or is this one of the more luxurious, top-of-the-range ones?

Normally, our show homes are pretty typical.

At 188 square metres, this is a typical apartment -

three bedrooms and two living rooms.

Its best feature is the lovely view.

You can see directly to the Yangtze.

So, what would be the price of this apartment?

The total price for this flat is three million RMB.

So three million RMB is approximately ?300,000.

What sort of person, what sort of people would buy this flat?

Our customers have one thing in common

and that is they are looking for a better life.

How are you doing with selling these properties?

Is there much demand?

Yes, I should say.

There is quite a big demand and sales are very good.

In a city where the average wage is not much more than ?4,000 a year,

there aren't many who can raise 70 times that salary

to buy an apartment like this one.

Here's the shocking paradox of China's house-building frenzy -

it's the rich minority who are buying most of the new properties

and often keeping those homes empty,

treating them as investments, rather than living in them.

Wuhan is the norm, it's not the exception,

because if you go to other cities, many of those cities

are doing exactly the same thing as Wuhan is doing.

So, in my view, the over-supply situation

is quite widespread in China in the housing market.

So our estimate, which obviously may not be 100% accurate,

but our best estimate is around 15%.

So, 15% of properties in a country as enormous as China

you think are empty?

Yes. Grand houses have a higher vacancy rate.

So the more expensive the property, the bigger the vacancy rate?

Yes. They're owned, but people don't live in them. Yes.

One of the things that's been feeding into this problem is

the political structure here that encourage local governments

to just undertake project after project after project

to show something, even though the economic returns on that

may not justify the credit to begin with.

The problem isn't just homes and apartments

too expensive for people to live in.

The white elephants from a boom that's gone too far

are everywhere to be seen.

In Huainan, where average annual income is ?1,800 a year,

they're spending ?180 million on a new Olympic-themed sports complex...

..a fitting sister for an exhibition hall

built with a bold musical flourish.

In the largely rural district of Mentougou,

they've splashed out on government offices modelled on the Kremlin.

In Ganzhou, there's no danger of not knowing what time it is.

But the prize for ambition probably goes to Kangbashi in Inner Mongolia.

It's home to just 100,000 people

but it's built the kind of municipal palaces, a sports centre,

museum, a concert hall that would make London or New York proud.

And the bill?

Just ?24 billion in debts to repay.

So, why can't Beijing just force the provinces to stop the excesses?

Well, the building boom has made

thousands and thousands of local party officials very rich.

There used to be a little village here.

Now it's a playground for China's new rich, who live in the swanky

mansions and new apartments that have recently been built.

Now, when these sorts of developments take place,

there are big profits for the local authorities,

who expropriate the land and then sell it on to the developers and,

allegedly, there are big backhanders for well-placed officials.

We don't know if that's what happened in this case

but it is what local people believe.

Fan Yang is an environmentalist and local campaigner

who grew up near here.

When the development was happening, what did people feel about it?

Were there protests or did it go through smoothly?

As I know, there are many people not really happy about it.

Even till now, there are still people trying to do something

to stop this kind of thing to happen again.

If you look around East Lake,

are there other developments like this one going on now?

Yeah, actually all around East Lake

there are many similar construction sites happening.

As somebody who grew up here,

do you like what's happened to your back yard?

Not really, because I still prefer the more natural part of East Lake.

This is becoming the rich man's paradise,

so it's really kind of exclusive now.

The whole system of development by local authorities

has enriched the people who run those local authorities,

not in a way that's easy to see

but, nonetheless, everybody knows it happens.

Can the central government really reform a system

that is enriching so many local party members?

They're already beginning to do this.

How many local officials have gone to jail

or have been given sentences by the courts in the last six months?

It's been incredible.

And the process has actually just begun and

the Chinese expression is...

"To kill the chicken to scare the monkey," in other words.

So that is, in fact, what is happening on the disciplinary side.

On the other side, in terms of enrichment or local officials,

I think it's a generational issue

because China has been poor for a long, long time

and when people have opportunities to make some money,

they go out and make money.

And this is where also the entrepreneurial spirit comes in.

I think what is really important in this particular context

is the educational, cultural,

social and moral standards of local officials.

The senior level are very sophisticated

but not necessarily will their policies be implemented

properly at the local levels because you simply don't have,

out of the 1.3 billion, enough people who are sophisticated

and educated and moral enough to cover all the county level.

But that's not something that can be addressed very quickly.

It's generational. But things are getting better.

FANS CHANT

So just tell me, what have the rather passionate fans on our right

been shouting?

Actually, they were just shouting, "The referee is a moron." OK.

That's a very traditional English chant, the referee's a moron.

What else have they been shouting? You know, many F-words.

Oh, really? There's quite a lot of swearing in Mandarin, is there?

Yeah, many swearings, yeah.

OK, I feel very much at home here. Yeah. Yeah.

Now, the government says it's cracking down on corruption

and dampening the construction and housing market booms.

But in this Chinese premier league football stadium,

that's not even a tenth full, it's easy to fear the worst.

House prices have been going up and up and up.

Do you think they'll continue to go up?

I really don't know when this is going to stop,

when it's going to fall, because

there are many times people... expecting the price will drop

but it never happens till now, so it's really a mystery.

Because one of the things I've noticed going around the city

is all the buildings with no lights on,

which suggests that they've been built but nobody lives there.

What do you think is going on?

I think the problem is that most of the people,

they cannot afford to buy those houses,

but a few people, they own too much, too many houses.

What about young people like yourself?

How easy is it to buy a house?

I can say it's not easy.

With our salary, you can afford a house

if you can work for, like, 50 years.

Almost five years after the beginning of the great stimulus,

in the summer of 2013, everything looked brilliant in China.

Growing faster than any other big competitor

and already the world's number two economy, its gleaming modern cities

were full of magnificent skyscrapers and swanky shopping malls.

No people in history have been enriched on the scale

and at the speed of China's.

But then, in the middle of 2013, alarms started to sound

in the important markets used by banks to raise money.

We've got breaking news coming out of China...

Could it be 2008 all over again...for China?

China's biggest squeeze on credit in at least a decade.

Overnight, interest rates and interbank lending rates shot up to

extraordinary high levels which are most unusual in the case of China.

So, at the time, there was a real scare

that this was the beginning of China's credit crunch.

A full-blown credit crunch, an inability to borrow

would have been fatal for some Chinese banks

and very expensive for the Chinese government,

which would have felt the need to bail out the bigger banks.

China's economy would have juddered to a halt

as the flow of loans froze.

The financial markets in China and outside

were expecting the People's Bank of China, the central bank,

to continue to add liquidity and the People's Bank of China didn't do it.

In fact, the credit squeeze had initially been engineered

by the government as a temporary thing to warn banks

that the days of cheap credit were over.

The central bank was keen to, you know, place

some limits on the growth of credit.

Sitting behind that, there was undoubtedly some desire

to say let's start pulling back the growth of credit,

both in the formal banking system and the shadow banking system.

But markets went haywire,

taking on a dangerous life of their own.

The all-powerful government was losing its grip.

Fearing the worst, China's central bank, the People's Bank of China,

pumped new money, liquidity, back into the banks.

Conditions returned to near normal,

but the world had been put on notice

of the frail financial heart of China's economy.

Give me an idea of the scale of the lending that we've seen since 2008.

It's off the charts, really.

Most people are aware we've had a credit boom in China

but they don't know the scale.

At the beginning of all of this, in 2008, the Chinese banking sector

was roughly ten trillion US dollars in size.

Right now, it's on the order of 24 to 25 trillion US dollars.

That incremental increase of 14 to 15 trillion US dollars

is equivalent to the size of the entire US commercial banking sector,

which took more than a century to build.

So that means China will have replicated the entire US system

in the span of half a decade.

China's total indebtedness is now equivalent to twice the value

of everything it produces, twice its GDP,

up from 125% just five years ago.

Now, there's no example in history of that kind of debt explosion

not leading to tears before bedtime.

Too much debt, too much investment?

The solution, if there is one,

requires an abandonment of an important Chinese tradition.

Oh, my goodness! Oh, my goodness.

Wow!

So...beautiful.

The way it picks up all the eddies and the currents of the air.

Just astonishing.

The old China still lives on,

not just in its colourful traditions

but in the principles on which the economy is based.

Unlike businesses and local governments,

Chinese people squirrel away their money,

saving almost like no-one else.

The recent memory of grinding poverty

and the lack of a comprehensive welfare state or pensions

encourage the Chinese not to spend.

Instead, Chinese households save

almost a third of everything they earn,

whereas we in the UK save something like a 20th.

Oh, almost!

The big and simple point is this -

China's economy is dangerously unbalanced, too dependent

on debt-fuelled investment with not enough spending or shopping.

So, the Chinese economy has to become more balanced

and I can tell you, from my own experience, it's not easy.

Whoa, my goodness!

Whoa!

The way to make the economy more balanced

is for the Chinese to become a bit more like us decadent,

spendthrift Westerners.

They'd be sensible not to become AS hooked on consumption as we are,

but they do need to consume a great deal more

if they don't want the good economic times to disappear.

My goodness, look at this wonderful stuff.

This is definitely my kind of China -

teeming commerce, deals on every side.

My blood is up, I've got to buy something.

Garish underpants?

Hmm, not sure. I might have to come back.

What do you think? Feels like my size. Is there a mirror?

Certainly suits the Harry Worth look.

OK, I quite like it.

Yeah, I think probably that one.

So we've got... Perfect, thank you very much. Thank you.

And I'm rather pleased with that.

I've got a bit of a bargain and a rather stylish one to boot.

China's government has for years recognised that a more

sustainable economy requires more shopping and consumer spending

but, although consumption has been growing,

it still only accounts for a third of China's economy,

compared with two-thirds in much of the West.

As for that investment binge,

well, it represents a half of China's economy.

Or, to put it another way,

there simply aren't enough hours in the day for Chinese people

to shop and replace investment with consumption

as the engine of growth any time soon.

That's why the investment in white elephants goes on

and the dangerous credit bubble continues to grow.

Banks are still expanding.

This year, credit growth is still twice as fast as GDP growth

and the stock of credit is twice as large as the entire economy.

So there is no way... People who are more positive on China

think that they'll find a way to grow out of this problem.

Mathematically, there is no way to grow out of this problem

when credit is twice the size of the economy and growing twice as fast.

By allowing and encouraging the mother of all lending sprees

to keep the economy growing,

the Chinese government is placing an enormous bet.

The longer it goes on, the bigger the interest bill,

the greater the risk that borrowers -

households, local government, developers -

won't be able to pay their bills,

and the bigger the danger that when the bill arrives,

China won't be able to afford it.

Here in Wuhan, one of China's most indebted cities,

they don't seem desperately concerned about

the impending arrival of the bill. Mayor Tang is an optimist.

I've seen quite a few different numbers for the debt of Wuhan

and I'm privileged now to be with a man who knows.

What is the real figure for the debt of Wuhan?

TRANSLATION: We are currently carrying out an audit

as required by the central government.

I can't disclose the figure at the moment

until that audit is complete.

Then we'll be able to report the total amount

and the structure, in detail, to the public.

And you can't give me an estimate, a ball-park figure?

If I give you a figure today, it'll be based on my perspective.

But the audit departments of the central government,

the provincial government, even the local government,

all have their own audit rules.

When the audit is finished, there'll be a uniform answer.

So I can't give you a figure today. It might cause confusion.

But the debt is safe and controllable

and we believe we're able to pay it back. It's not a problem.

Back at Wuhan Iron Steel, management is perhaps more realistic

about the price they're paying for being part of the great stimulus.

And WISCO, as it's called, is at least in profit, just,

unlike many of its competitors.

TRANSLATION: Many iron and steel companies in China

are in difficulties.

Some are running at a loss.

The ones who are able to bear it and make a minor profit are very few.

In 2008, the huge state-owned enterprises like WISCO

were seen as part of the solution.

Now suffering from huge overcapacity,

they're not profitable enough to make money for the government

and are not efficient enough to be truly competitive in world markets.

The government wants to shake them up

to make them more properly commercial.

But that would mean making millions and millions of people unemployed,

and that would dilute the glue holding together a Communist Party

which rewards officials with cushy jobs in state-controlled companies.

Everywhere you look, there are symptoms of the unbalanced nature

of this economy, made worse by the lending and investment splurge

that was supposed to rescue China in 2008.

An overheated property market looks like another

big accident waiting to happen.

Right now, everybody who bought houses are happy

because the housing prices have been going up.

They felt they've been, you know, doing the right decision.

I think one scary moment would be,

you know, a trigger point where someone panicked

and saying, "Now look, you know,

"I don't know whether this is going to go on for too long.

"I'm going to have to, you know, sell my units

"and lock in my profits."

And if enough numbers of people are thinking that way,

this, I think, will become a trigger point for

a major correction in the market.

So when you use the phrase "a major correction",

what do you mean by that? If China does not act on it quickly

and change the course of direction,

then a major drop, a significant drop in housing price

is very likely, you know, down the road.

If house prices were to collapse, some owners wouldn't be able to

repay their debts, causing more pain for the banks,

and millions of Chinese who invested in property

as a substitute for a pension

could direct their anger at the government.

What I found perhaps most compelling on this latest visit to China

was a widespread sense of trepidation

that something dark might be round the corner.

And there was also, among the younger generation,

a more questioning and arguably more cynical attitude

than I've seen before.

Of course, conspicuous dissidents are still routinely harassed

and imprisoned, but protest comes in many guises.

Meet Wuhan's first and original punk rocker, Wu Wei.

Are you positive about the huge changes

there have been here in Wuhan in recent years?

It's good, the development?

I don't think so.

It's good for the government, for the officers and for some rich men.

Some people get power. So, that's not good for normal Chinese.

The poor still poor, the rich get more rich.

A lot of people in the West, and indeed some people here,

say that part of the problem is there is a lot of corruption

in the Communist Party,

people taking money from these deals

and getting richer within the system.

Do you think there is a lot of corruption?

Yes. Corruption is so...seriously in China.

You know? Everywhere.

And is there any prospect for change?

It's a big question.

For me, I don't think there's any...any...ways to change.

If...if still one party here,

the Gong Chan Dang,

they still get the power, no, they'll never change.

No. So, if they want to change, they have to change themselves.

This is the most dangerous economic moment for China

since it embarked on its unprecedented experiment

of introducing capitalism into a communist state

more than 30 years ago.

In the best case, the miracle ends with a sharp deceleration

of the sustainable rate of growth.

What level of growth should China be looking forward to

over the next few years, that is a sustainable level of growth?

A sustainable level of growth means, I suspect,

a quality different in the content of the growth.

But 7, 8% is not realistic, is it? No, it's not.

I think China could do very well

if the quality of the growth is transformed to higher value add.

You're really looking at 4% is fine.

At worst, if property prices plunge,

if local governments and developers renege on debts and banks collapse,

there could be a serious crash.

I don't think anybody really knows how long

this credit genie can stay outside the bottle.

I mean, my own view is that

China in 2014 is maybe

where the West was in 2005/2006.

So it's not an imminent danger of a financial implosion

but it's drawing nearer all the time.

It's a brave man who, after the experience of the last 35 years,

bets against the ability of the Chinese to manage problems.

But this is a major imbalance, it's a very major imbalance.

We have never seen such an increase of credit

anywhere in the world before without that producing

some sort of financial crisis or crunch at the end.

The problem is what we're seeing happening in China

is beyond anything we've ever seen,

and at some point, it does start to call into question

what is the ability of the government here

to really support something this big.

It's not like it happened for five years and now it's stopped.

It happened for five years and we're still going on.

So this debt burden is just growing.

Just before Christmas, the threat of a credit crunch returned,

when the important price banks pay to borrow from each other

soared again.

So what's the big plan of China's relatively new leadership?

Well, to shine a light on the scale of the debt problem

and introduce more capitalism,

more private sector ownership, more competition.

But it's not clear how or whether this will curb

the dangerous lending and frenetic building,

especially when so many officials and apparatchiks

are being enriched by the status quo.

That's the hardest thing there is in any economy, any country,

any political system and particularly where you have a system

that's been as successful as theirs has for a period of time,

you get strong vested interests who don't want change.

The good news is, we've got very strong leaders in China.

The bad news is,

they've got some really difficult challenges ahead of them.

I believe they will surprise

with their ability to get things done.

As China becomes richer and more complex

and more sophisticated,

and as people become more connected

through their own social networking systems and so on,

it becomes more difficult for China to conduct economic reform

without major political change as well.

I have a strong feeling that the Chinese leadership today is

very enthusiastic about economic reform,

very adamant that there will be no political reform.

I don't think you can have one without the other.

Fast-growing, hungry China has shaped the world,

not always to our benefit.

Its exporters crushed our manufacturers.

Its desperate need for resources led to huge rises in the price

we all pay for food, for energy, for commodities.

Its influence in Asia and Africa has shifted the global balance of power.

So would an economically weakened China

actually be good for us in the West?

Well, maybe, but a China suddenly incapable of providing

the rising living standards its people now see as their right

and destiny would be less confident, less stable

and perhaps, for the world, more dangerous.

There are those who say that

the normal rules of economics don't apply to China. After all,

there is no real precedent for an economy as big as China's

growing for as long as China has grown

and growing as fast as China has grown.

It's what economists would call Chinese exceptionalism -

the idea that China is an exception to the normal rules.

So perhaps the explosion of lending here in China

won't be as dangerous as it would be in other, more normal economies.

But serious people have been making those arguments about booms

and bubbles for centuries -

from the tulip mania of hundreds of years ago

to the internet bubble of the late '90s, through to

the explosion of bank lending in the West just a few years ago.

Normally, the rules of gravity apply -

what goes up must eventually come down.