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Michael Pettis Profile picture
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13 Feb, 5 tweets, 2 min read
1/5
Interesting and important piece by @BrankoMilan on the structure of inequality in China. I would add that there are two different but related kinds of "inequality" in China that must form part of any adjustment process. There is of course the...

foreignaffairs.com/articles/china…
2/5
highly-distorted distribution of income within the household sector in favor of the political elite (on which this article focuses), but there is also the highly-distorted distribution of income between the household sector and the non-household sectors.
3/5
In China, the household share of GDP is in rough parity with the share of non-households (businesses and governments), whereas in a more "normal" economy households retain 2-3 times the share of GDP. I would argue this distortion may be politically harder to resolve...
4/5
because it would imply a major rebalancing of economic power between the household sector and the government sector, which in turn implies a major shift in relative political power.

Who would be the biggest losers in such a shift? My guess is that it would...
5/5
hurt provincial and local governments disproportionately (and perhaps business) rather than the central government, but however it happens would require a substantial reconfiguring of political institutions.

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More from @michaelxpettis

Michael Pettis Profile picture
14 Feb
1/4
While the NDRC and the politicos continue to support more infrastructure expansion, there have been more warnings about debt from policy advisors, with a government-linked think tank noting recently that “Infrastructure investment for the whole...

scmp.com/economy/china-…
2/4
year of 2020 increased by 3.41 percentage points more than the growth rate of nominal GDP, but its stimulus effect was limited compared to the scale of debt expansion."

We will see a partial (temporary) reversal this year, but it seems almost impossible to break...
3/4
the relationship in which GDP growth requires faster growth in FAI, which in turn requires faster growth in debt. This can go on for a long time, but it obviously isn't sustainable, and the longer it goes on, the more difficult the adjustment.
Read 4 tweets
Michael Pettis Profile picture
14 Feb
1/9
While debt-to-GDP ratios already have a limited but very misunderstood use, it seems economists are finding bright new ways of misunderstanding them. Now we say that when nominal interest rates are lower than nominal growth rates, the resulting...

economist.com/finance-and-ec…
2/9
downward pressure on the debt-to-GDP ratio makes rising government debt and larger government deficits more sustainable and more easily justified.

This is totally confused. When the nominal interest rate is lower than the nominal GDP growth rate, it only means that net...
3/9
borrowers are getting a disproportionate share of growth relative to net lenders. This in and of itself changes the comparability of the debt-to-GDP ratio, so the fact that the ratio may decline tells us nothing about its sustainability which, I'm glad to say, isn't...
Read 9 tweets
Michael Pettis Profile picture
12 Feb
1/4
I know everyone is struggling to come up with clever Ox metaphors, but I really don't think we can describe China's economy as having exhibited "ox-like endurance". That would seem to imply that the various components of the Chinese economy have...

scmp.com/comment/opinio…
2/4
been loyally plugging away in spite of adverse conditions.

But China's reported GDP only grew last year after nearly everything Beijing wanted to expand in fact contracted sharply, forcing Beijing to expand substantially everything it wanted to contract. If it wanted to...
3/4
contract that activity, it must be because it believes that this activity does not add value to the economy, or else why would it want to cut back? The ox, in other words, stopped plowing the field and chose instead to stay busy by digging a ditch that no one needed.
Read 4 tweets
Michael Pettis Profile picture
11 Feb
1/4
Interesting article. "Of the 20 most commonly used apps in China — ranging from photo editing to file sharing, from maps to streaming platforms — all have some kind of in-app loan services."

Nearly every modern bubble economy was characterized...

protocol.com/china/chinese-…
2/4
in part by an explosion in new – and so unregulated – forms of lending. Beijing is trying to regulate this app-based from of micro-lending, but this only helps if the new forms of lending are unnecessary froth on the structure of the economy and so can be suppressed.
3/4
The problem, I would argue, is that in retrospect it usually, or even always, turns out that the structure of the bubble economy had evolved to the point where the rapid extension of credit was fundamental to its growth. If that is the case in China (and I think...
Read 4 tweets
Michael Pettis Profile picture
10 Feb
1/5
One quibble. In spite of having terrible debt dynamics, I've always thought that China was unlikely to have a financial crisis because financial crises are caused by the sudden unravelling of balance-sheet mismatches. In China’s closed banking...

scmp.com/economy/china-…
2/5
 system, liabilities are easily restructured by the authorities, and so mismatches on paper are not mismatches in reality. But too many economists – who really should know better – simply assume that “excessive” debt matters only to the extent that it might lead to crisis.
3/5
This is not just wrong, it is circular. In fact both finance theory and most of the historical evidence suggests that over the medium and long term, countries with excessively-high debt levels that don’t suffer financial crises often sharply underperform those that do.
Read 5 tweets
Michael Pettis Profile picture
9 Feb
1/6
Chinese bank loans were up RMB 3.58 trillion in January, and total social financing was up RMB 5.17 trillion, both exceeding expectations, but because the growth in TSF seems to be slowing down, some analysts may be misinterpreting the implications.

scmp.com/economy/china-…
2/6
Major changes in the base means you must be very careful about how you compare growth rates over time, and analysts and journalists must watch the real arithmetic of China’s debt burden. While it is true that January’s TSF growth rate was lower month-on-month in 2021 than...
3/6
it was in 2020 (1.8% versus 2.0%), this occurred on a much higher base, which necessarily undermines the comparability of these two numbers. It turns out that while the growth rate of debt decelerated, the growth in the debt burden actually accelerated.
Read 6 tweets

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