1/8

Zhang Bin notes that China’s reliance on debt-fueled growth – especially local-government debt – is creating huge systemic risks for the economy and argues that Beijing should rely more on US-style quantitative easing, rather than Chinese-style...

scmp.com/economy/china-…
2/8

fiscal expansion, to power growth. Among other things he says the former will lower debt costs, strengthen the role of the private sector, and raise the consumption share of GDP.

While he is certainly right to worry about China’s terrible debt burden and the role of...
3/8

fiscal spending in driving it, I am not sure US-style QE will help. To the extent it lowers borrowing costs, this will mostly come at the expense of depositors, which means downward pressure on the household share of GDP and, with it, on the consumption share, in which...
4/8

case the only way it really boosts consumption (by some sort of wealth effect?) is by replacing local-government debt with household debt. This doesn’t solve China’s debt problem so much as transfer it from one overburdened sector to another.
5/8

What I think most analysts still haven’t fully recognized is that there are literally only three ways China can stabilize its debt burden. First, it can discover a new outlet for productive investment that replaces the huge amount of non-productive investment that has...
6/8

driven GDP growth and debt for the past 10-20 years – very unlikely given that Beijing has been promising, unsuccessfully, to do this for at least a decade, and the sheer extent of investment needed makes it hard even to imagine how the numbers would work.
7/8

Second, in order to drive rapid and sustainable consumption growth it can implement for one or two decades an annual transfer – politically hard to pull off in the best of cases – equal to 2-3 percentage points of GDP from local governments to ordinary households.
8/8

Third, it can restrain non-productive investment altogether, which means allowing GDP growth to drop to 2-3% or lower. There is no policy “innovation”, in other words, that can maintain high growth rates without a significant worsening of the country’s debt burden.

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More from @michaelxpettis

13 Apr
1/5

China's trade surplus in March was the lowest in a year – $13.8 billion, or roughly 1% of GDP – mainly because of higher-than-expected imports. Chinese custom officials seem to think strong imports are a problem, and blamed higher commodity prices.

scmp.com/economy/china-…
2/5

That brings the Q1 trade surplus to $117.1 billion, or just under 3% of China's GDP. This is still much higher than a world struggling with weak demand can reasonably expect to absorb: the equivalent of a fiscal contraction of roughly 0.5-0.6 percentage points of GDP for...
3/5

the rest of the world, although mostly concentrated in the Anglophone economies, who collectively absorb over two-thirds of the global demand imbalance. Still, it's better than trade surplus during most of last year equal to roughly 5% of Chinese GDP.
Read 5 tweets
12 Apr
1/6

Thanks, Diane. You make an important point, which is that the main problem is not that they are lying about their GDP data, as many people assume, but rather that China's GDP data measures things (investment, for example) that in some cases represent real growth in the...
2/6

underlying economy and in other cases don't. The problem is that we don't distinguish the difference between the two.

The CIA stats on the USSR, for example, did a better job of measuring "actual" economic activity than the published Soviet reports, but then we simply...
3/6

assumed – incorrectly, as it turned out – that this economic activity must have the same relationship to the underlying economy as it did in more market-driven economies like that of the US and the UK. The fact that economic agents in these economies operate with hard...
Read 6 tweets
12 Apr
1/6

The Biden administration’s stimulus package is definitely good for US growth – more US consumption encourages US businesses to invest more – but part of this positive impact will be dissipated by an expanding US trade deficit, the consequence of...
scmp.com/economy/china-…
2/6

which would be effectively to convert a portion of the increase in US consumption into an increase in foreign savings, much or most of which the US will be forced to absorb.

The problem isn’t that an increase in US demand will flow abroad in the form of...
3/6

imports. This wouldn’t matter if US trade partners implemented similar policies that focus on expanding the demand-side of their economies, in which case higher US imports would be balanced by higher US exports.
Read 6 tweets
11 Apr
1/6

NOPE apparently means “net options pricing effect”, and the "theory" recognizes that delta hedging is highly self-reinforcing – i.e. rising prices force delta hedgers to buy, thus pushing prices up further, while falling prices do the opposite.

ft.com/content/dd3b8f…
2/6

We've known this for a long time, however, and it is true of any form of leverage, with the main difference between "straight" leverage and leverage through options being that the former is linear and the latter non-linear.
3/6

I discuss this in my 2001 book, for example, as an example of balance-sheet "inversion", as have George Soros, Hyman Minsky and, in a different way, Irving Fischer. When I used to trade Latin American bonds, we always kept an eye on the amount of...

amazon.com/Volatility-Mac…
Read 6 tweets
10 Apr
1/4

It is probably much too late, but Beijing seems more determined than ever to take steps to stabilize home prices, with the deputy housing minister repeating the now-common mantras: “Local governments should take responsibility to ensure that a...

scmp.com/business/china…
2/4

home is for living in, not for speculation, and should not use the real estate sector as a short-term tool to stimulate economic development.”

That sounds reasonable, but the fact remains that the real estate sector and infrastructure spending are China’s most important...
3/4

tools for stimulating economic activity. Beijing cannot expect to come close to doubling GDP in 15 years without extensive use of both tools, which means that while they might be able to rein in housing prices this year as a partial reversal of last year’s terrible...
Read 4 tweets
9 Apr
1/10

CFR has put together an excellent “Global Imbalances Tracker” that allows users access to current account data in a very handy format. There were two things that struck me most as I went through it.

on.cfr.org/3mIWx7W via @CFR_org
2/10

First, CFR helpfully groups together the Anglophone countries (US, UK, Canada, Australia, NZ) to show that collectively they typically account for roughly 2/3s to 3/4s of global current account deficits. This is an extraordinarily high share, especially considering that...
3/10

trade theory suggests advanced economies should generally be running surpluses. In fact the CFR data show that other advanced economies do indeed overwhelmingly run current account surpluses, collectively accounting for roughly two-thirds of total global surpluses.
Read 10 tweets

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