They've said this many times before, Noah, but things have been getting consistently worse, not better. The amount of debt it takes to generate a unit of GDP has been growing rapidly, even as GDP growth has slowed, and within Beijing there is a fierce debate about whether...
or not they should take aggressive steps to get debt under control, even if this results in much slower growth and a rise in unemployment. Last year for example there was a big debate over whether to target 6% GDP growth or something much lower. If they did not think the...
debt were a serious problem, and if they believed that Chinese growth was healthy, real and meaningful, why would they even bother having this debate?

The biggest disagreement I have with the Economist, I would say, is over their failure to understand the sources of...
Chinese debt and why the debt burden matters. They seem to think that the fact that China has avoided a financial crisis means that debt isn't that big of a problem, whereas I would argue that China was never likely to have a financial crisis, not because debt isn't a...
problem but rather because financial crises are balance-sheet events, and with its closed banking system and strong regulators, Beijing can restructure liabilities at will and so can quite easily prevent a balance-sheet crisis.

The real test is whether it is possible for...
China to maintain high growth rates without much faster growth in the debt that must fund huge amounts of non-productive investment. These two are related, of course, because if most debt goes to fund investment, and if the investment is productive, there is no way a...
country's debt-to-GDP ratio can grow so rapidly and for so long.

But if anything is clear, it is that China simply cannot tolerate any slowdown in the growth in debt without suffering a very, very sharp slowdown in GDP growth. We know from the history of investment-driven...
growth "miracles" that the problem always arises once total debt stops growing faster than GDP. In that case the country either adjusts in the form of a crisis or in the form of "lost decades" of much slower growth, and a considerable part of that adjustment consists of...
writing down years and years of misallocated investment that was capitalized when it should have been expensed (similar to what Galbraith referred to as the "bezzle").

That, by the way, is one of the main differences between growing debt in China and growing debt in...
the US, Europe and elsewhere. In the former case the expenditures are capitalized and show up as increases in wealth, but not in the latter cases.

We have no idea of how long China can sustain this growth in debt, but we also know that the longer it goes on, the more...
difficult the adjustment will be. Until then, nothing has really changed, in my opinion.

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More from @michaelxpettis

17 Sep
There is a very important point buried in this article. In June the OECD (like many others) calculated that China’s GDP would shrink sharply in 2020 – by 3.7% in their case. They are now projecting that it will grow by 1.7%.

Even if this were their last upward revision, and I don’t think it is, this would normally be an astonishing (and terribly embarrassing) revision.

It’s not just them: most other China GDP growth projections from the IMF, the ADB and other public and private financial...
institutions were originally negative and now have also been revised sharply upwards to nearly 2% or 2-3%.

I, on the other hand, have been proposing since late April and May that China’s GDP growth this year would probably be 2-3% – but not because...
Read 11 tweets
16 Sep
Very interesting @johnauthers piece on the relative value of the Chinese currency and the rising Chinese and US imbalances – unlike in most other countries in which imbalances are generally contracting.

One point he makes with which I don't think...

I agree is when he says: “As China has had much higher inflation over the interim, this means the yuan is now much less competitive.” Actually China has had CPI inflation and PPI deflation, with the former driven largely by food shortages. Given that PPI deflation is what...
is most likely to be reflected in the cost structure for Chinese manufacturers, it seems to me that the differential between the appropriate US and Chinese prices indices would actually suggest that the RMB is more, not less, competitive than changes in the nominal...
Read 4 tweets
15 Sep
While many analysts see the most recent NBS data release – with retail sales showing the first monthly year-on-year increase in 2020 and industrial production up 5.6% year on year in August – as evidence of a “solid” economic recovery in China, this graph shows just how...
lop-sided and vulnerable this recovery has been. Before 2020, retail sales – which is a proxy for consumption, although it includes other things – had grown slightly faster than industrial production, suggesting a slow rebalancing in an economy that urgently needed to...
rebalance, but in 2020 that relationship has completely reversed, with industrial production growing so much faster than retail sales that it threatens to derail the last few years of limited rebalancing.

If the production side of the economy were the constraint in...
Read 11 tweets
11 Sep
Growth in Chinese debt continues to be very high. According to data released today by the PBoC, aggregate financing in China was up RMB 3.6 trillion in August, more than twice the RMB 1.7 trillion in July and roughly 40% above consensus expectations. The stock of debt...
grew 13.3% year-on-year, versus 12.9% a month ago. This is a big number, bringing year-to-date aggregate financing up by RMB 26.0 billion, for a nominal 10.4% growth since January.

The first eight months of 2019 accounted for 60% of the total increase. If the same...
proportion holds this year, growth in aggregate financing this year will be 14.6%. If, instead, the total amount of additional debt in the last four months of 2020 is the same nominally as in the last four months of 2019, the growth in aggregate financing this...
Read 5 tweets
11 Sep

Much of what this article calls yuan strength was actually dollar weakness – on a trade-weighted basis the yuan has been pretty flat – but I would add two points.

First, with very large inflows on the trade account, the irony is...

scmp.com/economy/china-… via @scmpnews
that Beijing might indeed be intervening again, although indirectly, to keep the currency from appreciating.

Second, the PBoC has long known that while a weak currency may be good for exports, it weakens domestic demand by effectively reducing the household share of...
GDP, which is why all the claims in the past 5-6 years that Beijing would respond to slower growth with a large depreciation never made sense to me.

This is where the contradiction in the dual currency model becomes obvious. International circulation benefits from...
Read 4 tweets
9 Sep
The latest China Perspectives Dashboard from Fitch has just been released. Among other things it says that roughly RMB 3 trillion in Special Bonds have been issued so far this year: “Our analysis suggests the largest category corresponds to funds raised for infrastructure...
projects, which have more than tripled from the same period in 2019, accounting for almost one-third of Special Bonds issued this year."

RMB 3 trillion is 80% of the RMB 3.75 trillion quota for this year, with the latter equal to about 3.7% of GDP, and 75% greater than...
last year's issuance.

Fitch believes that about 7% of the roughly RMB 1 trillion that went into infrastructure was invested in "new infrastructure" – telecom and high tech (see below) – which many analysts have argued represents a shift from the...
Read 6 tweets

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