Arvind Subramanian and Josh Felman quote Herb Stein, Nixon’s adviser on economics in the 1970s, saying that China’s economy has deviated from Stein’s law, which holds that “if something can not go on forever, it will stop”. No doubt the double-digit growth since Deng Xiaoping’s economic reform had been impressive. But over the past decade, China’s credit boom has been the largest factor driving domestic growth, and Beijing’s “debt keeps on rising.”

The authors doubt China’s economic “resiliency”, especially when dwindling export revenues could “derail its debt-defying trajectory.” As the renminbi is “weakening,” it also represents a risk for other Asian currencies. A financial turbulence engulfing the emerging markets can trigger the widespread fear that China could be the “biggest and potentially most problematic of them all.”

What is alarming is the level of its domestic debt, which has increased by “about $23 trillion in the last decade alone, and its debt-to-GDP ratio has risen by around 100 percentage points, to more than 250%.” Since the 2008 financial crisis, China shifted its policy away from exports toward a consumption-driven growth model. “But such a rebalancing requires ever more debt and investment, thus creating greater risks of collapse.”

In the US, gross federal debt stands at a massive $21.2 trillion, which is equivalent to around 105% of its GDP in 2017. This prompts economists and policymakers to urge the government to address the debt now while the economy is on solid footing and before the next crisis hits. China has the problem that it is still a middle-income country, with a purchasing-power barely a quarter of the US level. Critics say, maxing out on debt at such a relatively low income level will make it more difficult for China to pay for its climb toward a developed economy.

Despite its growing debt-dependency, the authors say China can still weather the storm due to its “large pools of domestic savings and enormous foreign-exchange reserves (over $3 trillion), which can be spent down to head off financial panics.” Another advantage is the strong government’s balance sheet that could “bail out unviable financial firms” and “address any emerging sources of stress in that crucial sector.”

Nevertheless the IMF found last year that in China “credit was high by international levels, that personal debt had increased in the past five years, and that the pressure to maintain the country’s rapid growth had bred an unwillingness to let struggling firms fail.” The report said China should put less emphasis on growth, which led to excessive credit expansion and higher levels of debt at local level; that it should beef up financial supervision and increase emphasis on spotting risks ahead; and that it should gradually increase the amount of capital targeted banks should hold.

As fears grow over China being a source of a possible new global financial crisis, its “economic exceptionalism is now being threatened by a perfect storm of existing stresses.” In order to master the challenges, China needs to wean itself off a debt-fuelled economy, which helps create only bigger bubbles. The “new complications” of Trump’s tariff wars could force Beijing to forge economic reforms. The Federal Reserve’s tightening of monetary policy by raising interest rate had also raised the borrowing costs in China. This would dampen consumption, encouraging people to save more, although the country already has high domestic savings rate.

No doubt Xi Jinping sees “the geopolitical pushback against China’s Belt and Road Initiative (BRI)” as a personal setback. Little did he expect that his “Marshall Plan” would meet resistence from recipients of China’s infrastructure loans. But Southeast Asian nations are wary of Beijing’s creeping influence and their unmanageable debts. Japan and India are seeking to capitalise on this setback and bolster their presence in the region. Due to historical grievances with both China and Pakistan, Indians resent the controversial $50 billion that China has pledged to invest in the Pakistan Economic Corridor.

The authors say, “China’s leaders will thus be faced with the classic emerging-market dilemma. If they allow the renminbi to weaken, they could aggravate capital flight in the short term and invite accusations of currency manipulation from the US. But if they want to prop up the currency, they may have to spend down another trillion dollars in reserves, as happened in 2015.”

Despite a centralised governance that allows leaders to make a “swift” decision and take concerted action, the authors also quote Rüdiger Dornbusch’s Law, which holds that, “the crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.” They say “Chinese exceptionalism will give way to the laws of economics,” which basically means that state capitalism could fail badly, if it does not let the market handle a country’s economy.