Michael Pettis's Contributions

Five or six years ago, a few skeptics first started pointing out that the credit dynamics underlying Chinese growth was creating an unsustainable increase in debt. This, they warned, would ultimately undermine the banking system and cause growth to collapse if it were not addressed in time.

Since the beginning of the global crisis in 2007-08 I have argued that the crisis was a consequence primarily of global trade imbalances generated by structural features that led to significant saving imbalances in China...

As analysts and official entities like the World Bank continue to downgrade their forecasts for medium-term growth in China, I have been asked increasingly often for the reasons I believe that 3-4% average annual growth rates is likely to be the upper limit for China during the adjustment period.

The latest default bull argument supporting higher levels of growth in China than I believe possible is the urbanization argument.

Once again I apologize for taking so long to repair my blog, but it hasn’t been easy. We are slowly fixing up the mess on my website. There will be a link on the site directing interested readers to the old site if anyone wants to read older blog entries.

The world is struggling to rebalance its great savings imbalances and is not advancing much. In Europe, and as I discussed in my very long May 11 blog entry, it seems that Germany is still unable to force though the adjustments needed in internal demand and is hoping to foist its imbalances onto the rest of the world now that the rest of Europe is too sick to absorb them.

I believe that in the past two to three years there has been a significant and welcome shift in Beijing’s attitude towards maintaining growth, and that this shift implicitly represents a shift from the capital frontier model of optimal investment levels to the social capital model.

One of the reasons that it is been so hard for a lot of analysts, even trained economists, to understand the imbalances that were at the root of the current crisis is that we too easily confuse national savings with household savings.

I have been arguing for several years that once China begins the adjustment process, which I expect to characterize the ten-year period of the current administration, growth rates must slow significantly. My expectation for long-term growth is that it shouldn’t average much above 3-4% annually.

Early this month Martin Wolf had another of his very interesting articles, this time on China, which I think suggests some of the concerns we must have about the upcoming adjustment.

The 2013 NPC and CPPCC Annual Sessions have ended with the formal selection of China’s new leaders. Not surprisingly there were few surprises. My quick take is that the leadership is saying all the right things, but they have been saying these things for quite a while – nearly two years in the case of Li Keqiang, the new premier.

A sovereign solvency crisis always begins with many years of assurances from policymakers in both the creditor and the debtor nations that the problem can be resolved with time, confidence, and a just few more debt rollovers.

As regular readers know I have often argued that the Chinese development model is an old one, and can trace its roots at least as far back as the “American System” of the 1820s and 1830s.

One way or the other, in other words, the world will rebalance. But there are worse ways and better ways it can do so. Large trade surpluses can decline, for example, because exports fall, or they can decline because imports rise.

In China, I have argued many times, high growth is no longer compatible with a strengthening balance sheet. If China is growing at a rate that approaches or exceeds five or six percent, it is probably a safe bet that debt is rising faster than debt servicing capacity.

I think over the next few years China will indeed undergo a sharp contraction in investment growth, but my point here is simply to suggest that even under the most optimistic of scenarios it will be very hard to keep investment growth high.

The big news in the past two weeks has been the slew of economic data suggesting that China has firmly turned the corner on its economic closedown. Growth is up, investment is up, and inflation is down.

In the past two weeks we have been treated with a mostly positive but nonetheless mixed bag of economic data from China. There has been good news, bad news, good news with worrying underlying trends, and bad news with silver linings.

Chiwoong Lee at Goldman Sachs has a new report out (“China vs. 1970s Japan”, September 25, 2012) in which he predicts that China’s long-term growth rate will drop to 7.5-8.5%. I disagree very strongly with his forecast, of course, and expect China’s growth rate over the next decade to average less than half that number, but the point of bringing up his report is not to disagree with the details of his analysis.

I recently “debated” twice with senior Chinese officials on the future prospects for China. In both cases they made the argument that Chinese growth rates were going to rise in the next few years and that the current deep pessimism is unwarranted. I argued, of course, that growth would slow even more.