Thread by @michaelxpettis

1/12

Li Keqiang just announced that China’s GDP growth target – surprising most analysts, who did not expect China to set one this year – would be set “above 6%” in 2021. Most analysts were expecting growth this year to be between 8% and 10%, while...

scmp.com/economy/china-…

2/12

the more conservative IMF on January revised down its 2021 forecast from 8.2% to 7.9%. This target consequently should come as a shock to most analysts and journalists.

But I have been arguing pretty consistently since December that these forecasts were likely...

3/12

to be wrong for the same reason that forecasts of negative growth in 2020 were so wrong. I expected growth to be 6-7% this year. Why? Because we have to see fixed-asset investment in infrastructure and real-estate development as the residual Beijing uses to meet...

4/12

politically motivated growth targets. Healthy, sustainable growth in China – what Beijing calls “high-quality” growth – consists mainly of growth generated by consumption, exports, and business investment, with the third closely tracking the first two. Beijing wants as...

5/12

much "high-quality" growth as possible and as little FAI as necessary, clearly because it recognizes that the latter generates non-productive growth and an enormous debt burden.

Because of Covid-19 “high-quality” growth last year was expected to be negative, which...

6/12

is why most analysts predicted negative GDP growth overall, but that was always unlikely. Since April I had expected GDP growth in 2020 to be between 2-3%, mainly because Beijing would respond to negative high-quality growth by kicking off a major FAI spending spree...

7/12

which would drive up the debt-to-GDP ratio by at least 20 percentage points. In the end that is what happened, with the debt burden rising in fact by an astonishing 25 percentage points.

That is also why I wrote in January that "it is only...

https://twitter.com/michaelxpettis/status/1351058958925111296

8/12

because Beijing sharply increased all the things it has been trying to rein in that the GDP measure was able to rise.”

In 2021 much of this would go into reverse. With a partial reversal of last year’s increase in household savings, consumption and business investment...

9/12

would probably drive roughly 6-7 percentage points “high-quality” growth this year. Given the terrible debt numbers and the very visible worries among top policymakers, this gave Beijing a chance to cut back sharply on FAI in infrastructure spending and real estate and...

10/12

allow them to successfully “stabilize” China’s debt-to-GDP, keeping it growing by probably no more than 1 or 2 points this year.

That is why I didn’t expect GDP growth this year to be anywhere near the consensus. It would almost certainly come in much lower as Beijing...

11/12

used the one-off surge in consumption to reverse (only partially) some of the FAI- and debt-related damage last year.

But it is important to remember that this is only a one-off. Once the partial reversal of last-year’s contraction in consumption is completed, we are...

12/12

back to the same old growth model, in which any growth target above 2-3% will require significant FAI and a soaring debt burden.