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...

growth (and with less than 2-3% GDP growth in most normal years), the country's debt-to-GDP ratio would probably move very little. However if Beijing wants GDP growth above 8%, it will only be able to achieve it with a 4-5 percentage-point...

increase – at a minimum – in the country’s debt-to-GDP ratio.

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More from @michaelxpettis

15 Jan

The biggest cost to the US economy is when workers are willing but unable to find productive jobs. That is why a major economic stimulus can bring short-term growth to the US economy without worsening the long-term debt burden. But unless...


a substantial part of domestic demand is prevented from leaking abroad too easily, the US will bear the full cost of the stimulus while sharing the growth benefits with countries that are less aggressive in paying for domestic stimulus programs, especially with countries...

like China that have responded to the collapse in domestic and foreign demand mainly by supporting domestic production.

A US stimulus that doesn't cause the trade deficit to explode, in other words, will be far more effective than one that does. This is true not just...
Read 5 tweets
14 Jan

Interesting article. Beijing can talk all it likes about the need to stabilize credit growth, and it will even seem to be successful in the first half of 2021, but inly because of a one-off surge in consumption caused by a partial reversal of the...


drop in consumption in 2020. This will allow Beijing to pressure state-owned firms to pay down debt, and maybe even to permit the occasional default. Unfortunately, however, even this "stabilizing" of credit will not be enough to make up for the big jump in credit in 2020.

Once the one-off benefit of a sharp consumption recovery wears off, sometime in the first half of 2021 (assuming no resurgence of Covid-19), it will again become impossible for Beijing to stabilize credit growth in any of the next few years as long as it...
Read 4 tweets
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
12 Jan

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...
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

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