Michael Pettis Chimes in China's Growth and Debt

Mish

2021 growth estimates by Morgan Stanley and the IMF are too high says Michael Petts at China Financial Markets. Longer term, Pettis forsees a surge in debt.

Expect a Surge In Debt

  1. The fierce debate continues in Beijing between those who are more worried by rising debt and those more worried by slowing growth. Among the former, two weeks ago Lou Jiwei said it was time to study an orderly exit of loose monetary policies...
  2. while PBoC Vice Governor Liu Guoqiang warned of tighter monetary policy “sooner or later”. Now, among the latter, we have Liu Shangxi saying “As to whether [the PBOC] should exit its monetary stimulus, I think it’s not the right time, not even for a marginal tightening.”
  3. I don’t know how this eventually plays out, but I suspect that given the surge in debt this year and the recent scare in the bond markets, the former will have the upper hand. That is why I disagree with the expectations of most analysts, who seem to be expecting  GDP growth next year between 8% to 9%, or more.
  4. Morgan Stanley, for example, just came out with a 9% projection, while the IMF has lowered its original 9.2% projection to 8.2%. I think those numbers are too high.
  5. Since April I’ve expected next year’s GDP growth to be much lower – probably 6-7% – for the same reason that this year I expected it to be higher than others expected (my 2-3%, versus their close to or well below zero).
  6. As I see it, Beijing implicitly targets the minimum growth rate it can politically accept, with local governments and real estate developers acting as the residual to bridge the gap between whatever the real economy does and the GDP target. 
  7. This year, for example, when the real economy almost certainly contracted, local governments and real estate developers expanded sharply to drive positive growth, and while much of this growth added nothing to the country’s productive capacity, the result was the 25-percentage-point surge in the country’s debt ratio.
  8. Next year, however, I expect the real economy to rebound sharply, driven by consumption and business investment, but because I don’t think Beijing needs much above 6% GDP growth for political reasons, and because of the sharply worsening debt condition 
  9. This year, I expect this will allow Beijing to cut back on local government investment and real estate development. In fact I wouldn’t be surprised if in 2021 China’s debt-to-GDP ratio were flat or even down one or two percentage points.
  10. Unfortunately, however, while the debt to GDP ratio may improve slightly next year, it will resurge soon after. Beijing’s goal of doubling GDP by 2035 requires very rapid growth in debt, so much so that after a few years I am pretty sure they'll quietly abandon that goal.

Pettis was commenting on on the article China must maintain coronavirus stimulus to ensure full economic recovery, says prominent Beijing adviser.

Those points, especially point number 10 of his Tweet Thread are something to consider for those who believe the Renminbi (yaun) is undervalued.

Unnecessary and Artificial Goals

All governments are involved in counterproductive programs to meet unnecessary and artificial goals.

 For discussion, please see Hello Fed, Low Interest Rates Do Not Promote Growth.

Mish

Comments (28)
No. 1-9
Eddie_T
Eddie_T

The way the Chinese manipulate the numbers makes the BLS and the Fed look like rank amateurs.

So much of the “growth” China has been booking for years and years now is nothing but pure malinvestment.

The debt they’re taking on now has very little chance of doing anything other than sucking them right down the drain, and when that happens it’s going to happen so fast that the Morgan Stanleys of the word are gonna be left blinking and asking WTF happened.

Doug78
Doug78

So much of their growth is artificial but the core growth is very real solid and sustainable. The slap-down of the ANT IPO and they way it was done was a powerful signal that the Chinese government will not tolerate an excessive financialization of their economy. They have studied our recent history and decided that they did not want to go down the same path as we did. I can't blame them for that.

Eddie_T
Eddie_T

It’s not sustainable. “One child” is about to bite them on the butt in a big way...and they are going to need some Americans, French, and Mexicans to buy their exports...because nobody else has a large graduating class of good consumers.

PecuniaNonOlet
PecuniaNonOlet

The big question is what is Biden going to do with China. Will he continue the tarriff game or not. Sign new trade deal?

Doug78
Doug78

Not many people posting. Either it's very uninteresting or most people post comments while they are work between bouts of work. Weekends are for ourselves.

Six000mileyear
Six000mileyear

Demand must be slow in China domestically and globally since the sporting goods I've been browsing on Alibaba have had their prices slashed 25%. Sales might do better if Alibaba had a warehouse / fulfillment center in the US. Goods have cleared customs, and delivery dates are more certain. That would leave vendors with the easy task of improving product descriptions.

Realist
Realist

Having travelled in China many times over the last few decades I can attest to the fantastic growth that occurred there. Every few years it looked liked a completely different country. Did it come with a cost? Absolutely. Not all progress is good. The US is no different. You bear the scars of previous growth as well. Has China made mistakes? Who hasn't? Are their growth numbers real? Who cares? Quibbling over China's growth numbers doesn't change the fact that their country has been transformed in record time and several hundred million people were raised out of poverty. China in the last two decades was much like the US after WW2, but on steroids. They are beginning to slow down now. It is inevitable. You can't keep up that pace of growth. I will give you one single comparison: the US has 362 km of high speed rail lines; China has 30,000 km of high speed rail. I took a ride in one of their high speed trains for fun. Though it had a top speed of 600 Km/hr, it only got to 425 km/hr, because it was only a 20 km ride and it had to have time to stop. It was a 3 minute trip.

caradoc-again
caradoc-again

Every economy has big set backs during its ascent. China will be no different. The question is not will it become #1 (it will), it's what happens to the rest of the world when China stumbles on the way up.

Will there be sufficient decoupling or will we all be dragged down in a deflationary maelstrom.

My suspicion is we all go down if the Yuan gets a hit. Chinese problems will be exported. If it happens soon (no one can say when) it will be an epic blow to EU, USA, EM and commodity exporters on top of the current pressures.

$ will take off, foreign debts in $ will crush EM, an avalanche of shit and the managers ofvtge senior currency (Fed) will have to act to save the world or the subsequent depression will be off the charts.

caradoc-again
caradoc-again

Every economy has big set backs during its ascent. China will be no different. The question is not will it become #1 (it will), it's what happens to the rest of the world when China stumbles on the way up.

Will there be sufficient decoupling or will we all be dragged down in a deflationary maelstrom.

My suspicion is we all go down if the Yuan gets a hit. Chinese problems will be exported. If it happens soon (no one can say when) it will be an epic blow to EU, USA, EM and commodity exporters on top of the current pressures.

$ will take off, foreign debts in $ will crush EM, an avalanche of shit and the managers ofvtge senior currency (Fed) will have to act to save the world or the subsequent depression will be off the charts.


Global Economics

FEATURED
COMMUNITY