Although obviously each case must be evaluated separately, I broadly agree with @D_Brautigam's conclusion. While I have no doubt that China (like other countries) had planned to use development lending for geo-political advantage, I'd argue that...


Chinese lending to developing countries is characterized more by inexperience – veering at times towards incompetence – than it is by some master plan of debt-trap diplomacy.

Certainly the case I know best, that of Venezuela, is a story in which Beijing constantly...

over-estimated debt-servicing capacity (and willingness) and underestimated the risks that more experienced creditors were avoiding, and as a result is looking at pretty sizable losses that aren't even being compensated for by goodwill. If Beijing could turn back the...

clock with Caracas and start again, I am pretty sure it would do everything differently.

The problem is that this whole issue is so politicized that most people are certain – without much familiarity with the data – either that Chinese lending is self-evidently part of...

some brilliant, dastardly debt-trap diplomacy or that it represents an equally brilliant, win-win new development strategy that will transform the prospects of developing countries.

It is neither. It is mostly the very familiar story of every country when it...

first "goes out". China made all the standard development-lending mistakes in the past 10-15 years and is much less confident about its ability to get it right than it had been even a few years ago.

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More from @michaelxpettis

21 Feb

Copper futures are up, presumably on confidence in a domestic economic recovery, although I wonder if they aren't up really for the same reason all other assets in China – and the rest of the world – are up: lots of liquidity and plenty of leverage.


China accounted for over half of global copper consumption in 2019, with construction of power facilities taking up 37% of the volume, the real estate sector accounting for 21% and consumer appliances 15% of the total. This year I expect consumer appliances to do very...

well as we get a partial recovery of last year's contraction in consumption, but for that reason I also think growth in infrastructure and real-estate investment will be weaker. The regulators have made it clear that they want to restrain the growth in the country's debt...
Read 5 tweets
19 Feb

Beijing continues to take small steps to ease capital outflows. Clearly the country is having trouble digesting large inflows on the trade and financial accounts, but while the world – and China in the long run – would be much better off if it...


recycled these inflows by importing foreign goods, thus helping to add to global demand, in the short run this continues to be too difficult, and so China must recycle these inflows by acquiring assets abroad, in this case, by private Chinese individuals.

This is bad for the global economy, of course, but I think it is also making the Chinese financial system riskier. When rising financial inflows from foreign investors are netted against rising private Chinese acquisition of assets abroad, the inevitable result is a...
Read 4 tweets
19 Feb

As Ant's retail lending contracts, "Chinese borrowers have turned to alternative lending platforms, many of which charge higher interest rates because they lack Ant’s economies of scale". These interest rates may be 5-15 percentage points higher.


This creates an interesting balance-sheet dynamic. If household debt levels are "manageable", higher interest rates discourage borrowing and slow the growth in household debt. If household debt levels are too high, however, and must be rolled over to be...

serviced, higher interest rates will increase the share of debt servicing that must be rolled over and will cause household debt to grow faster.

I don't know how you would go about finding out which is the case, but if I were the regulators I would want to know whether...
Read 4 tweets
18 Feb

I don't have all the data yet, but I think I am a bit more skeptical about the "big spending" story than many others are. Total consumption at major retailers and restaurants during this year's Spring Festival was up 4.9% over the equivalent...


period in 2019, so there certainly was a partial recovery of consumption, but nominal GDP during that period was up at least 10%, which implies to me that the consumption share of GDP growth was lower than in 2019, even though we are all expecting it to be much higher...

this year than in previous years. So far this hasn't seemed to have happened.

More importantly, spending on travel collapsed. I would have expected this to provide a pretty substantial one-off boost to spending on other types of consumption. I might not be thinking about...
Read 7 tweets
18 Feb

Very ambitious investment programs like this may or may not make economic sense in the long term – we will have to wait and see – but it is important to understand that, in the short and medium term, all real subsidies to the production side of...


the economy are effectively paid for in real terms by explicit or implicit transfers from the household sector. It is only after they have proven successful that they begin eventually to "repay" the cost of the subsidies. Programs like these, in other words, will...

at first automatically worsen China's income imbalance and, with it, the consumption imbalance.

Some might argue that this still serves "dual circulation" by strengthening domestic demand, and that may well be the case during the initial investment phase of the...
Read 5 tweets
18 Feb

Just before I saw this article I was re-reading (for the second time) Glyn Davies's 1994 history of money and came across this passage:

"There are few things more impressive than the haughty analytical certainty with which fundamental theories...


of money are for a time universally held, only to be discarded in favour of a diametrically opposite but equally firmly and widely held new orthodoxy, which in turn lasts until the whole process reverses itself suddenly a generation or so later. It is this process of... Image

polarized change which is the long-term constant in the history of money, the points of change naturally occurring during short periods of such obvious crisis in monetary affairs that thoroughgoing investigations by the monetary authorities take place accompanied by an...
Read 6 tweets

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