Interesting and important article. For years analysts have argued – and some still argue – that Chinese public-sector investment, including the rapid expansion of its railway system, remains productive and good for China’s economy.


But if that’s the case, why would Beijing worry about the associated debt, and why sharply reduce its plans to expand mileage in favor of trying to “to maximise the benefits of its massive existing rail”? If this spending had been productive all along, financing it with...

debt wouldn’t matter because the debt would have grown by less than the capacity to service the debt (for which GDP is supposed to be a proxy). The associated debt wouldn’t be a problem at all.

Clearly Beijing understands – perhaps a little late – that while all of this...

activity is boosting economic activity and reported GDP, it is not boosting the real productive capacity of the economy. The fact that it has been so difficult for them to recognize and resolve the problem makes me pessimistic about their ability to rebalance growth. Most...

analysts understand that a rebalanced economy will allow China to rely less on non-productive investment, but few seem to understand why it will be very hard to rebalance growth without FIRST sharply reducing non-productive investment.

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More from @michaelxpettis

14 Jan

China’s trade surplus in December came in above expectations at $78.2 billion. Equal to 6% of China's December GDP and 1.2% of the rest of the world's GDP, this acts as a substantial drag on foreign demand and will make recovery for the rest of...


the world harder, even as it boosts the Chinese recovery and enables Beijing somewhat to moderate its huge 2020 increase in the country's debt burden.

China's trade surplus was $537 billion for 2020, or 27% above last year's and the second highest ever recorded (after...

the $594 billion of 2015), but with $370 billion in the past six months, I think this may have been a record six-month trade surplus for China. Without significant structural change, of which there is as yet little evidence, I do not see this surplus disappearing quickly.
Read 7 tweets
13 Jan

Good article, except the final paragraph: "Policymakers hope the world's second-largest economy can deliver on expectations for 8 per cent growth in 2021, a number that will make stabilising the macro leverage ratio just that little bit easier."


I don't think this is the right way to think about it. GDP growth and credit growth are not independent. If they were, it might make sense to assume that a higher GDP growth rate would make the debt more manageable, but in fact without a transformation of China's economy...

the only way for China to achieve higher a GDP growth rate is with even faster growth in debt. Counterintuitively, it is slower GDP growth rates that will make it easier for China to manage its debt burden. If Beijing is satisfied this year, for example, with 6-7% GDP...
Read 5 tweets
12 Jan

This is a good paper (and good thread) documenting the strengthening in recent years of creditor rights in sovereign debt. The authors point out, for example, that the share of debt crises involving litigation has increased from about 5% in the 1980s to 30-50% after 2000.

Is this a good thing or a bad thing? As the authors note, some analysts “expect stronger creditor rights to have a positive market impact, as governments become less likely to over-borrow and default strategically”, while others believe “that creditor rights can become...

too strong, making sovereign debt ‘excessively hard to restructure’”

There is little evidence of the former, and I would argue strongly for the latter: strengthening creditor rights is usually bad for both the obligor and creditors overall mainly because it can...
Read 9 tweets
12 Jan

The uselessness of Trump's trade war with China doesn't mean that the US should not act aggressively to address its decades of large trade deficits. It just means that global conditions of negligible transportation costs, zero communication costs...


and frictionless capital flows require a completely different approach to trade than 100-200 years ago.

The first two conditions render bilateral trade relationships almost irrelevant in determining who runs surpluses and who runs deficits, and the third condition...

means that trade imbalances are driven by capital flow imbalances. While Peter Navarro’s approach would probably have borne results 100 years ago, even by fifty years ago they were already obsolete, and today do little more than temporarily distort production markets...
Read 7 tweets
11 Jan

An article worth thinking about: “As changes to the world structure accelerate, China’s rule is in sharp contrast with the turmoil in the West,” says Beijing.

I agree, but I draw a different conclusion. The world is certainly currently going...


through "a period of turbulent change", in Beijing’s words, and great structural adjustments, but usually when that happens, what matters in the long run is not how stable a system seems but rather how successfully political, economic and social institutions adjust to...

the new conditions. In the past these adjustments have almost always been messy, chaotic, and disheartening to most, but ultimately they were necessary even if we were unable to judge them so at the time.

I would argue that the world today is undergoing both a reversal...
Read 11 tweets
11 Jan

China's CPI inflation was 0.2% for the past 12 months, substantially higher than the -0.5% registered in November but lower than the roughly 2% of the past five years. I believe demand deposits yield 0.35% and 1-year and 2-year deposits yield 1.5%...


and 2.1%, which means that for now households are getting a real return on their savings, but they won't be if CPI prices continue to rise as fast as they have in the past several weeks. The real return on savings matters a lot to the distribution of income and to the...

share households retain of GDP, which in turn matters to rebalancing.

On the other hand PPI prices are still in year-on-year deflation. PPI prices declined by 0.4% in December, about half of what was expected, compared to a 1.5% decline year on year in November.
Read 4 tweets

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