Although engineers in democracies may look longingly at the ability of authoritarian governments to force through major infrastructure projects, it is a mistake to think that this is the important difference between...


infrastructure building in China and the US. The checks and balances in democratic systems may reduce efficiency, but they are better at long-term adjustment, and so the differences reflect little more than the standard trade-offs between the two systems.

What really matters is the relationship between desired and actual investment. In the early 1990s, when it really began its infrastructure-building spree, after five decades of war and Maoism China was hugely underinvested in infrastructure for its level of development.

In that case almost everything it built was economically viable – i.e. contributed more value to the economy than it cost – and the associated rise in debt was more than matched by a rise in the debt-servicing capacity of the economy, for which GDP was a proxy.

20 years later it is clear that China has overinvested in infrastructure, and infrastructure-building is now more about generating economic activity than it is about creating economic value. We know this must be the case because only when that happens will the debt...

associated with investment rise faster than debt-servicing capacity, which is itself likely to be overstated by GDP.

This isn't a new problem. Brazil's spectacular infrastructure-building spree of the 1960s continued far longer than was justified, through the end of...

the 1970s, mainly to maintain high GDP growth rates and the Brazilian "miracle", just as Japan's rebuilding from the wreckage of WW2 continued far too long through the 1980s with its famous "bridges to nowhere". In both cases this left their host countries in the late...

stages of their "growth miracles" with rapidly-rising debt and, ultimately, large debt burdens around which they suffered very difficult long-term adjustments.

As long as a country has substantial infrastructure needs (and the US does, especially in transportation), it...

doesn't matter that the political systems that support infrastructure development in different countries like the US and China are different. Either way spending on infrastructure will make economic sense, the country will get richer, and the associated rise in debt...

will be more than matched by a rise in the economy's real debt-servicing capacity – i.e. there will be no increase either in the country's debt burden or its inflation. And either way, once it begins to use government spending on infrastructure as a way of...

generating economic activity, even though it is no longer productive, the country's debt burden will rise and it will be economically worse off in the long run.

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More from @michaelxpettis

5 Apr

Rajan is right to question "the notion that industrial countries can allow their sovereign debt to grow indefinitely". One of the many ways to misunderstand MMT is to believe that boosting domestic-currency government debt doesn't matter.


But it does indeed matter – beyond some level a higher debt burden can raise real costs for the economy, increase volatility, and reduce balance-sheet flexibility. But because I think the global economy is demand constrained, and not supply constrained, I am less worried...

than Rajan about the debt impact of "badly designed handouts".

What matters is not a nominal increase in the debt but rather an increase relative to the real debt-servicing capacity of the economy, for which GDP is a proxy, and to the extent that these handouts are...
Read 5 tweets
3 Apr

Interesting and important article by @KeithBradsher about new rules that limit how much money foreign banks can transfer into China from overseas and that require them to tighten their balance sheets. While some see these measures as designed...


to limit the ability of foreign banks to operate in China, I suspect they have much more to do with worries about the impact of foreign financial institutions on domestic financial stability.

That is why I disagree with those who propose that measures like these...

are likely soon to be reversed as China continues opening up. As I have long argued, in spite of its extremely fragile financial balance sheets, China was never likely to have a financial crisis in part because as long as its banking system was closed it could easily...
Read 4 tweets
3 Apr

By now it should be pretty clear how much of a problem debt is in China, how much risk there is embedded in the financial system, and just how worried the regulators are. We should have been able to see this well over...


a decade ago, but economists are not very good at understanding the dynamics of debt and how balance sheet structures condition economic behavior. It is only once debt has become unmanageable that we begin to worry that we may have a a problem with debt.

For the same reasons what seems to be much less clear to most analysts is the relationship between these risks and the underlying performance of the Chinese economy. The problems of soaring debt and increasing financial fragility are not just incidental, in other words.
Read 6 tweets
3 Apr

While Rogoff is right that a large economy like that of China's should have independent monetary policy, in which case its currency should not be managed against other currencies, it is unlikely that Beijing will let the currency float freely until...

it has substantially cleaned up and reformed its banking system, something that could take decades at best.

Given China's extremely high debt levels and the economy's reliance on soaring debt for growth, the insolvency of the banking system, and the structural inability...

of the banks to make economic decisions, Beijing has been extremely reluctant to risk administering any shock to the economy, or even to reduce its control over the financial system – in fact many would argue that in recent years Beijing has actually increased its control...
Read 7 tweets
1 Apr

This article has been pretty widely circulated, which is why I want to point out why I disagree with it. It complains that by creating demand for commodities, China’s investment binge is making Joe Biden's infrastructure investment program more...


expensive, and that, to make matters worse, Beijing has been very cleverly racing ahead of the US by stocking up on commodities last year when it didn't yet need them.

But aside from the fact that China’s investment binge is no more making Joe Biden's stimulus more ...

expensive than Joe Biden's stimulus is making China's investment binge more expensive, it isn't really true. In fact Chinese investment surged last year, accounting for nearly 200% of the country's GDP growth. This is the main reason China bought large amounts of...
Read 8 tweets
1 Apr

"He added the trade tensions are long-standing and they will continue to exist as China’s economy becomes increasingly competitive across every part of the value chain."

This suggests substantial confusion over basic trade dynamics. Trade tensions...

are not caused by economies becoming more productive, because in that case their export success is rewarded with rising imports.

Trade tensions are caused by economies that achieve "competitiveness" by keeping wages, relative to productivity, lower than that of their...

trade partners. It is only because of lower relative wages that surplus countries cannot convert export success into imports, and instead convert them into persistent trade surpluses.

Countries like Germany, Japan, China, etc. don't run persistent surpluses because...
Read 5 tweets

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