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...


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.”

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. 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. 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). 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. 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.

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 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.

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.

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More from @michaelxpettis

23 Nov

It is good news if Nigeria's rich really are directing the bulk of their wealth into investment in Nigeria. One of the best things under-invested developing countries can do is to harness their domestic savings for domestic investment.


This for example is what Chile did in the 1980s with its pension fund system, and China in the 1990s with hard capital controls and financial repression. If countries with poor infrastructure and low investment can successfully harness domestic savings, while investment...

levels are low they actually benefit from the kinds of inequalities in income distribution that lead to a faster rise in savings than in consumption.

The problem is that the rich in many of these countries get rich by using their power to divert income to...
Read 4 tweets
23 Nov

I am not sure what it means for China’s financial regulators to crack down on people “running away” from their debts, but given the sheer amount of bad debt, what really matters systemically is how these bad debts are resolved.


Defaulting is just a way of assigning losses – to creditors, in this case – that were already incurred by bad investment decisions. If the creditors are banks, this doesn't really resolve the issue because Beijing must then decide how to allocate losses within...

the banking system. If the borrower is bailed out by local governments, as is usually the case, local governments effectively absorb the losses, which must then be paid for for either by raising taxes and fees on households and businesses or by selling off assets.
Read 6 tweets
22 Nov

Thanks to FT for publishing my most recent piece. The point I try to make in this article is that for China to double GDP by 2035 requires that at least one of the following three be true:

-China must find an entirely new engine of economic...


growth to absorb the huge amount of debt-financed spending that now goes into non-productive investments.

-China must redistribute at least 15-20 percentage points of income to the household sector to rebalance demand away from non-productive investment.

-There are no limits to a country's debt capacity, and its debt burden can rise indefinitely without ever putting downward pressure on growth.

China has been trying to accomplish the first of these conditions for well over a decade, but while there has been some success...
Read 5 tweets
20 Nov

Very interesting article. After many years in which it promised "steadily" to promote the internationalization of the RMB, China's Central Committee now says, in an outline for the next five-year plan, that it will do so "steadily and prudently".


This may seem like a minor adjustment, and some in China are insisting that it is, and that "China still has to go ahead. If you think China will be conservative or even stop the process of yuan internationalisation, you are wrong.”

But in fact I think what it really means is that there is much greater recognition within Beijing that internationalizing the RMB isn't just the equivalent of waving a bigger flag more vigorously. It entails real costs, not least of which is losing control over...
Read 6 tweets
19 Nov

Good article by @anjani_trivedi on what the recent bond defaults tell us about growing credit stresses within China. Those of us who have been watching this game for a long time know that every time we get some similar disruption in the credit...


markets, we all get very worried that this is the time in which "it" could happen.

But we have always to remember three things. First, it is very unlikely that this will be the time "it" happens. Any default large enough to convince investors that default risk is...

a real risk will also cause a disruptive and chaotic repricing of markets. Regulators know this must eventually happen, but it is always easy to justify postponing it a little longer, and they still retain the credibility and firepower to do so.
Read 8 tweets
19 Nov

The State Council will unveil new measures "to prompt its consumers to buy more, as the prominent restraint on the country's economic development lies in consumption."

Yet again Beijing proposes to rebalance demand by "upgrading" consumption.


But of course that isn't how you rebalance demand. Only income transfers can do that. Some of the proposed measures will help a little, indirectly, to the extent that they subsidize consumption (e.g. lower gasoline prices, more efficient online delivery, etc.). This...

works by effectively transferring income from governments and businesses to households.

Most of the proposed measures, however, will have no net impact at all. They will mainly increase some forms of consumption at the expense of others. Until the household share of...
Read 4 tweets

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