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...
China’s economic growth, as it had been in the 1980s and 1990s, then it would be legitimate to conclude anyway that China had recovered. But even Beijing has publicly admitted for over a decade that the real constraint is the demand side of the economy, specifically...
domestic consumption and the private sector investment driven by domestic consumption.

Not only have these barely recovered, but what many analysts are missing is that even this limited recovery has been driven by Beijing’s substantial boosting of the production side of...
the economy. By expanding public sector investment in logistics and infrastructure, underwriting an expansion of credit to businesses, and otherwise subsidizing production, Beijing has bolstered production to create the employment that has indirectly boosted consumption...
Put differently, economic recovery in China (and the world, more generally) requires a recovery in demand that pulls along with it a recovery in supply. But that isn’t what is happening. Instead Beijing is pushing hard on the supply side (mainly...
because it wants to lower unemployment as quickly as possible) in order to pull demand along with it. The problem with this strategy, as I have been writing since May, is that either it is resolved by a rapid increase in China’s trade surplus, which weakens the...
recovery abroad and forces an increase in foreign debt burdens, or it is resolved by faster growth in Chinese public-sector investment, which, because most of it is no longer productive, increases the Chinese debt burden. And this is exactly what we have been...
seeing in the data.

China’s “recovery”, in other words, is simply an exacerbation of the problems that have long been recognized. It isn’t sustainable, and unless Beijing moves quickly to redistribute domestic income, as I explain below, it will...
either require slower growth abroad or an eventual reversal of domestic growth once Chinese debt can no longer rise fast enough to hide the domestic demand problem.

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More from @michaelxpettis

29 Sep
It's not so much Atlanticism but international relations more generally that will remain in retreat no matter who wins the US election, and although the world tends to be obsessed with the US and with its bilateral relationships, this retreat won't...

depend on whoever is the US president. People in most countries believe their countries should turn inwards.

I argued in my 2013 book that we were going through a period in which global trade would inevitably contract, geopolitical conflicts...

intensify, and anti-foreign and anti-immigrant feelings rise, and I think this remains a global issue. Perhaps because of its obsession with the US and with, more recently, the Trump circus, much of the world (and the global press) seems to focus on bilateral problems the...
Read 5 tweets
28 Sep
Perhaps we shouldn't be surprised. I didn't look at the full details of the restructuring, but from what I saw it seemed to me that all it really did was to postpone principle repayments for a few years. If Argentina simply had a temporary problem...

of matching up cashflows, this might make sense, but if Argentina's external debt was more than it's exports could support (and clearly it was, as @Brad_Setser has argued), it didn't help at all.

Anyone who studies the history of sovereign debt restructuring knows how...
this will probably turn out: For many years both sides will pretend that Argentina has a liquidity problem, not a solvency problem, during which time the economy will struggle as the debt gets regularly extended, until finally, once debt prices are low enough, Argentina...
Read 6 tweets
28 Sep
All this external debt is definitely storing up future trouble for developing countries, but not just for them. When developing countries borrow money from abroad and spend it domestically, part of it can flow abroad again in the form of rich...

people's profits, but most of it must go directly or indirectly to pay for imports from abroad.

This means that foreign borrowing by developing countries effectively transforms useless ex-ante savings into real global demand, something the world economy urgently...
needs. The problem is that once these countries can no longer borrow, and must begin to pay down the debt, what was once an addition to global demand becomes a subtraction from it: spending on real goods and services must be cut to fund increases in ex-ante savings.
Read 5 tweets
28 Sep
This article suggests that thanks to big data, Chinese exporters can redirect sales from foreign consumers to domestic consumers. It cites as an example a toothbrush manufacturer for whom exports now account for 60% of sales, down from 90%, after... bloomberg.com/news/articles/…
Alibaba data on what Chinese consumers want helped them to figure out how to sell more domestically. The article goes on cite to Bai Ming, deputy director of the Ministry of Commerce as saying: “Turning to the domestic market adds one more option for Chinese exporters. In...
the future, exporters can sell to the market that’s most favorable, which reduces risks.”

This kind of thinking represents a classic fallacy of composition that is far too common in most discussions of Chinese rebalancing. While it is true that certain individual...
Read 8 tweets
24 Sep
For years I have been arguing that as long as total foreign portfolio inflows were low, they wouldn’t matter much to Chinese financial stability, but as they rose they would become increasingly destabilizing. Although I still don’t think the total...

amount of inflows have yet reached a danger point, they have risen so dramatically in the past year that I expect that within a year or two they might become problematic.

It seems that Beijing is starting to recognize the risks. As this very good SCMP article...
puts it, “The rapid strengthening of the yuan exchange rate in recent weeks has triggered a debate in China about whether Beijing’s recent moves to open up its domestic financial markets to more foreign investment might have resulted in an unwelcome wave of...
Read 5 tweets
22 Sep
This is a little surreal. For years certain countries like Germany saw their productivity-adjusted wages decline dramatically relative to those of their trading partners – especially their EU trading partners in the period before the 2008-08 crisis.

They nonetheless refused any policy that might reduce or reverse the beggar-thy-neighbor impact of this relative wage decline, however, and ended up running huge surpluses as they exported their domestic demand deficiencies abroad.

Now that currency movements are forcing...
those income-distribution adjustments anyway (a stronger euro effectively transfers income from EU manufacturers to EU households), the EU is beginning to complain that other countries may also be implementing beggar-thy-neighbor policies.
Read 7 tweets

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