[Blog] The OECD’s China Credit Critique Gets the Question Wrong - Contours of a socialist financial system

By Dr Warwick Powell

Dr Warwick Powell, Adjunct Professor at Queensland University of Technology and author of China, Trust and Digital Supply Chains, published the following article on 17 July on warwickpowell.substack.com. In it, he argues that the OECD’s criticism of Chinese firms’ access to low-cost credit is based on what he considers a flawed assumption: that there is a neutral “market” interest rate against which China’s financial system should be judged. He contends that interest rates are shaped by political and institutional choices, and that China’s state-led financial system has helped channel credit towards infrastructure, industrial development and technological upgrading. While acknowledging challenges such as bad loans and excess capacity, he argues that finance should primarily support long-term productive development rather than maximise returns for financial asset holders.

We reproduce Dr Powell’s article in full below:

Preface: there’s been something of a concerted campaign of late (again) to argue that “global imbalances” are due to particular policy “quirks” of China’s systems. Whether it’s been arguments about suppressed household incomes, mercantilist trade policies and currency undervaluation, excess industrial capacity or what-have-you, they all anchor on some fundamental proposition that China’s policy settings are unfairly grounded in state-sanctioned favour for industrial development. A recent salvo in this overarching western assault on China’s economic performance comes from the OECD, which has claimed — among other things — that Chinese firms have benefited from “soft money” by way of “subsidised finance.” This essay addresses this particular claim. Other claims noted above have been dealt with on-and-off in various previous essays so I won’t go over the issues again here.

The Organisation for Economic Co-operation and Development (OECD) has once again expressed concern about Chinese firms’ access to credit at what it characterises as “below market rates.” Such criticisms have become a familiar feature of Western commentary on China’s economic model. They are usually presented as objective economic analysis, grounded in concerns about efficiency, market distortions and fair competition.

Yet beneath the seemingly technical language lies a set of assumptions that deserve closer scrutiny.

The OECD’s critique presupposes that there exists a “market” interest rate that can serve as a neutral benchmark against which China’s financial system can be judged. Once that assumption is accepted, any deviation appears as a distortion. Chinese firms receive cheaper credit than they otherwise would; investment decisions become skewed; resources are misallocated; excess capacity emerges.

The problem is that the benchmark itself is far less objective than the OECD implies.

Interest rates are not natural phenomena. They are institutional and political constructs. In times of antiquity, as Michael Hudson and David Graeber have shown, interest rates were based on a “calendrical birth.” Rates were uniformly fixed by palatial and temple bureaucracies to align with mathematical fractions (based on the formalisation of seasonal time into standardised, fractional calendar systems) and simplify long-term administrative and agricultural planning.

As for ancient China’s own experience, Graeber shows that the state actively intervened to regulate and cap interest rates to prevent rich merchants from destroying the peasantry. By the Han Dynasty, official legal caps were placed on interest (often around 20% to 30% annually), and compound interest was frequently restricted or outlawed. He notes that Chinese statecraft was deeply concerned with social stability. When predatory lending led to peasants losing their land and selling their children into debt peonage, the Chinese state stepped in. They attempted to abolish debt peonage entirely because a peasant who owed allegiance (and taxes) to a private landlord was a peasant who could not pay taxes or provide military service to the Emperor. In a fascinating deep-dive into Medieval China, Graeber details how Buddhist monasteries ironically became the main pawnshops and credit institutions. They offered loans at fixed, low interest rates, framing the generation of interest not as predatory usury, but as a way to grow the “Inexhaustible Wealth” of the monastery to fund charity.

In every modern monetary economy, the price of money is ultimately shaped by policy decisions, regulatory structures and the organisation of the financial system. This is especially true in a country such as China, where the major banks remain under state ownership and where credit allocation has long been viewed as an instrument of national development strategy.

The question therefore is not whether Chinese firms receive credit below some abstract market rate. The question is: below which market rate?

The OECD’s criticism only makes sense if one assumes an alternative institutional arrangement in which private financial institutions, capital markets and profit-maximising lenders exercise substantially greater influence over the allocation of credit. In other words, the benchmark against which China is being judged is not an objective economic law but a different political-economic model.

This distinction matters because it shifts the debate from economics to political economy.

The issue is not whether China is violating a universal principle of finance. It is whether China’s institutional arrangements produce outcomes that differ from those preferred by Western policy institutions.

Viewed through this lens, the OECD’s argument becomes less persuasive.

In the classical political economy tradition, prices and income distribution are not determined by timeless market laws. Rather, they emerge from institutional arrangements, social structures and the balance of power among different groups within society.

Most importantly, interest is not a neutral market signal. It is a claim upon the economic surplus generated by society. When a business borrows money, future income must be divided between productive activity and financial claims. The higher the interest rate, the larger the share of that future income that accrues to lenders and holders of financial assets. Conversely, lower borrowing costs allow a greater proportion of income to remain within productive enterprises and investment projects.

From this perspective, the debate over Chinese credit policy is fundamentally a debate about distribution: it is a question of who should receive the surplus generated by economic activity? Should a larger share accrue to financial institutions and investors through higher interest payments? Or should a larger share remain available to firms engaged in production, infrastructure development, technological upgrading and industrial expansion?

The OECD frames the issue as one of efficiency. Yet a classical analysis reveals that distribution is at least as important as efficiency, and perhaps more so. Hudson and Graeber’s work showed that distributional consequences were high on the agendas of political rulers in ancient times, understanding that the distributional effects of private debt and interest could contribute to social unrest.

When the OECD argues that Chinese firms enjoy artificially cheap credit, it is implicitly advocating a different distributional settlement in which financial claims command a larger share of economic output. Indeed, one could restate the OECD’s criticism in more direct language: China directs a greater proportion of the economic surplus toward productive investment and a smaller proportion toward financial asset holders than would occur under a more liberalised financial system.

Whether this is desirable is precisely the question under dispute. The OECD’s answer is clear. It favours a system in which capital allocation is governed more heavily by private financial markets and where interest rates play a stronger disciplinary role in investment decisions.

China has historically taken a different view. This is one of the key distinctive features of Chinese socialism, and even dynastic statecraft well before, and continues to mark out socialist finance (a topic that I will return to in a future essay). Since the beginning of reform and opening-up, China’s financial system has functioned as an integral component of a broader development strategy. State-owned banks have not simply sought to maximise financial returns. They have been tasked with supporting infrastructure construction, industrial upgrading, technological development, urbanisation and regional integration.

The result has been one of the most remarkable episodes of productive capacity expansion in human history, as I have explained elsewhere.

Over four decades, China transformed itself from a relatively poor agrarian economy into the world’s largest manufacturing nation. It built extensive transport networks, modern logistics systems, advanced telecommunications infrastructure and increasingly sophisticated industrial ecosystems. More recently, it has emerged as a global leader in electric vehicles, renewable energy technologies, advanced manufacturing equipment and digital infrastructure.

None of this occurred because Chinese policymakers deferred to the judgement of private financial markets. A certain commentator who continue to deride China’s development model once claimed (back in 2011) that China’s commitment to the development of electric vehicles was a clear sign of wasteful investment. Rather, it occurred because credit was channeled to mobilise resources in the service of long-term development objectives. Here, finance works to support the development of the real economy, not the other way around.

This does not mean every investment decision has been successful. Nor does it imply that China’s financial system is free from inefficiencies, bad loans or excess capacity. No serious observer would make such a claim.

The relevant comparison is not between China’s actual system and an imaginary world of perfect markets that the OECD frame presumes. The relevant comparison is between alternative institutional arrangements and their respective outcomes. Here the historical record raises uncomfortable questions for the OECD position. Over the past several decades, many advanced economies have experienced increasing financialisation. A growing share of profits has accrued to financial institutions and asset owners. Corporate strategies have often prioritised shareholder returns over productive investment. Asset prices have risen far more rapidly than productive capacity. Infrastructure investment has frequently lagged behind requirements. Manufacturing capabilities have eroded in many regions.

These developments did not emerge despite market-oriented finance. In many respects they emerged because of it. When financial returns on finance itself become the dominant organising principle of economic activity, investment naturally gravitates toward activities that maximise financial yields rather than long-term productive capabilities.

China’s policymakers have long recognised this danger. Their response has been to subordinate finance to development rather than development to finance. That principle does not imply hostility toward markets. China is a highly marketised economy in many respects. Rather, it reflects a judgement that financial institutions should serve broader developmental objectives rather than operate as autonomous centres of economic power.

The OECD appears uncomfortable with this arrangement because it challenges assumptions deeply embedded within contemporary neoclassical and mainstream western economics. Within that framework, market outcomes are generally presumed superior to administrative decisions. Financial prices are treated as information-rich signals that guide efficient resource allocation. State intervention is viewed with suspicion because it allegedly distorts these signals.

Yet these propositions are not universal truths. They are theoretical assumptions.

The global financial crisis of 2008 demonstrated the limitations of treating financial markets as inherently efficient allocators of capital. Subsequent years of ultra-low interest rates across the developed world further revealed that so-called market rates are themselves profoundly influenced by central bank decisions and public institutions.

In reality, every modern financial system is shaped by legislative and institutional policy choices. The difference is that China makes those choices more explicitly than most. This is why OECD criticisms of Chinese credit allocation should be approached with caution. The organisation is not necessarily acting in bad faith. Its economists are applying analytical frameworks that are widely accepted within the policy establishments of advanced Western economies.

The problem is that those frameworks contain strong ideological priors regarding the role of finance, the nature of markets and the appropriate distribution of economic power. Those priors lead the OECD to interpret lower-cost credit primarily as a distortion rather than as a developmental instrument. Western economists who claim that China’s industrial competitive is due to “low cost finance” being available to “all and sundry” are trapped within these ideological-conceptual a prioris.

China should resist the temptation to internalise such criticisms. Its policymakers should certainly remain vigilant regarding private debt sustainability, investment quality and financial stability. These are genuine concerns that warrant careful management. But they should not accept the proposition that private financial returns constitute the ultimate measure of economic rationality.

The central question for any development strategy is not whether it conforms to a particular theory of market efficiency. It is whether it expands productive capacity, raises living standards, strengthens technological capabilities and supports long-term economic resilience.

On those criteria, China’s development record speaks for itself.

The OECD’s preferred financial architecture may suit the interests and institutional traditions of the advanced Western economies it represents; or more to the point, the financial sector interests that have become increasingly dominant within contemporary western capitalism.

It is not, however, a universal standard. Nor should China treat it as one.