1/12
I thought in this thread I'd explain why "rebalancing" is so important for China. For 10-15 years China has been locked into a growth model in which debt must inexorably rise faster than GDP, which itself is rising faster than any meaningful measure...
I thought in this thread I'd explain why "rebalancing" is so important for China. For 10-15 years China has been locked into a growth model in which debt must inexorably rise faster than GDP, which itself is rising faster than any meaningful measure...
https://twitter.com/michaelxpettis/status/1405375820236005381
2/12
of real debt-servicing capacity. At this rate if Beijing tries to keep the average GDP growth rate above 4-5%, within a decade debt will rise from 280% of GDP (the official level at the end of 2020) to anywhere from 370-410% of GDP.
of real debt-servicing capacity. At this rate if Beijing tries to keep the average GDP growth rate above 4-5%, within a decade debt will rise from 280% of GDP (the official level at the end of 2020) to anywhere from 370-410% of GDP.
3/12
Even if the real debt level wasn't higher than the official data claim, and even if GDP didn't overstate real growth in the underlying economy, this would still be an unprecedented level of debt.
Even if the real debt level wasn't higher than the official data claim, and even if GDP didn't overstate real growth in the underlying economy, this would still be an unprecedented level of debt.
4/12
Unless you believe that China has infinite debt capacity (it doesn't), there are, broadly speaking — and quite literally — only four ways China can "resolve" its rising debt burden.
Unless you believe that China has infinite debt capacity (it doesn't), there are, broadly speaking — and quite literally — only four ways China can "resolve" its rising debt burden.
5/12
The first is to transform the economy so that investment is redirected from infrastructure and property sectors into productive sectors like high tech. This in principle will allow investment growth to remain high without requiring even faster growth in debt.
The first is to transform the economy so that investment is redirected from infrastructure and property sectors into productive sectors like high tech. This in principle will allow investment growth to remain high without requiring even faster growth in debt.
6/12
Every country in China's position (including China) has promised to do this, but none ever has, mainly because productive sectors — even if they were currently starved of capital — are just too small to absorb the sheer amount of investment that has to be redirected.
Every country in China's position (including China) has promised to do this, but none ever has, mainly because productive sectors — even if they were currently starved of capital — are just too small to absorb the sheer amount of investment that has to be redirected.
7/12
The second — promised by China’s more sophisticated economic policymakers — is to replace declining investment with rising consumption to drive GDP growth. This effectively means sharply shrinking the government share of GDP and redirecting it to the household sector so...
The second — promised by China’s more sophisticated economic policymakers — is to replace declining investment with rising consumption to drive GDP growth. This effectively means sharply shrinking the government share of GDP and redirecting it to the household sector so...
8/12
as to allow China to maintain growth targets without the debt that is necessary to sustain current investment levels. Beijing has promised this for 10-15 years, but the necessary political transformation has always prevented them from doing this except at a glacial pace.
as to allow China to maintain growth targets without the debt that is necessary to sustain current investment levels. Beijing has promised this for 10-15 years, but the necessary political transformation has always prevented them from doing this except at a glacial pace.
9/12
The third and fourth ways involve a drop in GDP growth. One way would be for a very sharp – and presumably short-term – contraction in GDP driven by a financial crisis, although I think this is still very unlikely in the case of China’s highly-controlled financial system.
The third and fourth ways involve a drop in GDP growth. One way would be for a very sharp – and presumably short-term – contraction in GDP driven by a financial crisis, although I think this is still very unlikely in the case of China’s highly-controlled financial system.
10/12
The other would be a Japanese-style “lost” decade – or more – of very low growth once debt constraints kick in, and China slowly rebalances as it is forced to control the overall rise in its debt level.
The other would be a Japanese-style “lost” decade – or more – of very low growth once debt constraints kick in, and China slowly rebalances as it is forced to control the overall rise in its debt level.
11/12
There is technically a fifth way, but this requires an expansion in China's trade surplus the the rest of the world simply couldn't absorb, so I have ignored it. The point is that there is literally no other way China can maintain high GDP growth rates while preventing...
There is technically a fifth way, but this requires an expansion in China's trade surplus the the rest of the world simply couldn't absorb, so I have ignored it. The point is that there is literally no other way China can maintain high GDP growth rates while preventing...
12/12
its debt burden from surging unsustainably, and the proof is that for over a decade it has promised to stabilize leverage in the economy and it has proven impossible to do so. This isn't just bad luck, it is structural.
its debt burden from surging unsustainably, and the proof is that for over a decade it has promised to stabilize leverage in the economy and it has proven impossible to do so. This isn't just bad luck, it is structural.
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