How China resolved its bad debt in the 2000s

CHINA FINANCIAL - Report 17 Sep 2026 by Michael Pettis

Special points to highlight in this report:

* To no one’s surprise, domestic demand continued to weaken in August even as manufacturing and exports remained strong.

* China plans to solve excess capacity by shifting investment into high-tech industries, but this is unlikely to work. Investment is already far too high relative to domestic demand, while the new industries are highly capital-intensive and cannot absorb China’s growing employment needs.

* China’s debt cleanup in the 2000s did not eliminate the losses. It redistributed them. By using financial repression to shift much of the burden onto households, Beijing actually exacerbated the low-consumption, investment-heavy economy that is now making the next debt adjustment much more difficult.

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