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12 May, 5 tweets, 1 min read
1/5
 Jiangsu province, the largest local government bond issuer, has issued rules restricting new debt issuance by local government financing vehicles: "For highly leveraged LGFVs with poor performance, debt increases must be approved by ...

caixinglobal.com/2021-05-12/jia…
2/5
 investors, according to guidance issued earlier this month by the provincial government. LGFVs with good financial results and low debt ratios can still increase operational debt by a certain amount."
3/5
 What does this mean? Only one or some combination of three things: the locus of future borrowing will shift from insolvent LGFVs to healthy ones, until they too are unable to meet the new criteria; local governments will discover or invent new ways (often hidden) of...
4/5
 financing local activity; or Jiangsu province will no longer be able to contribute to achieving national GDP growth targets.

The point is that without the unsustainable rise in the debt burden that we have seen in the past decade, China would not have been able to...
5/5
 achieve even half of its GDP growth targets. The rising debt burden is not something that better regulation can fix. Because GDP growth targets can only be met by substantial non-productive investment, a rising debt burden is fundamental to the growth model.

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More from @michaelxpettis

Michael Pettis Profile picture
12 May
1/4
 “If the goal was to reduce imports from China then it succeeded,” said Craig Allen, president of the U.S.-China Business Council, which represents U.S. companies do business in China. “But if the goal was...
wsj.com/articles/u-s-t…
2/4
 to increase manufacturing employment in the United States I don’t see any evidence that that’s happened. If the goal was to increase imports from other countries in Asia or increase manufacturing employment in Vietnam, it’s succeeded.”

carnegieendowment.org/chinafinancial…
3/4
 This was always inevitable. In a globalized world in which transportation costs are low and the cost of capital transfers nearly zero, US tariffs on specific Chinese goods can at best shift trade imbalances around. Their impact on the overall US trade deficit or the...
Read 4 tweets
Michael Pettis Profile picture
12 May
1/4
 According to this WSJ article: "Large card issuers...say that overall card balances—and thus the firms’ interest income—are falling. To make up for it, issuers are spending more on marketing and loosening their underwriting standards."

wsj.com/articles/credi…
2/4
 This reinforces one of the points that@M_C_Klein and I make in our book. Contrary to popular opinion — even among economists who really should know better — a country's savings rate isn't determined by that country's moral values, or its cultural...

yalebooks.yale.edu/book/978030024…
3/4
 attitudes towards thrift, but depends rather on structural reasons, among the most important of which are bank lending standards. Because in every country there is a wide range among households of attitudes towards risk and thrift, the amount of consumer credit depends...
Read 4 tweets
Michael Pettis Profile picture
12 May
1/5
 Good interview. I agree with Leland Miller (@ChinaBeigeBook) that in China a rapid, chaotic debt adjustment – i.e. a financial crisis – is, and has always been, extremely unlikely. Just look at the Huarong debacle. While the risk of crisis will rise as foreign capital...
2/5
 becomes an increasingly important part of the Chinese financial system, for now it isn't. As long as the regulators can maintain control of the country's liabilities, and can restructure them at will to prevent a balance-sheet breakdown, there is unlikely to be a crisis.
3/5
 This doesn't mean debt isn't a problem. Once debt can no longer rise, there'll be an adjustment in which the overvalued assets that back the debt are effectively amortized, and this adjustment must have an adverse impact both on reported wealth (what John Kenneth Galbraith...
Read 5 tweets
Michael Pettis Profile picture
11 May
1/5
 This article suggests that because the Chinese credit markets have largely calmed down since Huarong's credit problems first emerged six weeks ago, this might encourage the regulators not to bail out Huarong, in which case Huarong will have to...

bloomberg.com/news/articles/…
2/5
 restructure its debts and impose haircuts — perhaps even substantial ones — onto their creditors.

It would be a good thing if this were true because it would help undermine the moral hazard that underpins lending in China, but there are at least two reasons I'm skeptical.
3/5
 First, given how complicated and messy a Huarong restructuring would be, it was almost certainly the emergence of a consensus that regulators would in fact bail out creditors that explains why the markets calmed down. Undermining that consensus would also undermine the calm.
Read 5 tweets
Michael Pettis Profile picture
11 May
1/8
 The release today of the Chinese census data has set off an explosion of references to China’s demographic crisis, but I think we risk getting too carried away by the various catastrophist narratives.

scmp.com/economy/china-…
2/8
 In the long run there is no question that a faster-then-expected decline in the population – made worse by an even faster decline in the working-age share of the population – will reduce the potential size of the overall Chinese economy.
3/8
 It is less clear, however, how it affects the welfare of Chinese people over the long term, partly because demographic changes work their effects very slowly and, more importantly, what matters most to China’s longer term outlook is how it maneuvers the next 5-7 year.
Read 8 tweets
Michael Pettis Profile picture
11 May
1/4
 Presenting monthly and quarterly data on a year-on-year basis, as China prefers, is supposed to help adjust for seasonal factors, but it is only useful during stable times in which changes are limited and occur smoothly.

bloomberg.com/news/articles/…
2/4
 In recent years – and especially in a year involving the Covid-19 disruptions – they can be very misleading. For example PPI prices were up 6.8% in April year on year, after a 4.4% rise in March, while CPI rose 0.9% in April, following a 0.4% rise in March.
3/4
 So does this mean inflation in China is accelerating? Maybe not. Month-on-month PPI inflation actually dropped from 1.6% in March to 0.9% in April, while according to People’s Daily month-on-month CPI actually
Read 4 tweets

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