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Michael Pettis

@michaelxpettis

23 Sep

@adam_tooze

1/14
Very thoughtful (as usual) piece by @adam_tooze on observing the Evergrande observers. He asks, at the end, "What if this is actually what a shifting of economic gears looks like?"

adamtooze.substack.com/p/chartbook-on…

2/14
I think Evergrande is more of a premonition of the shifting of gears than the beginning. What typically seems to happen with the high-savings/high-investment development model is that countries start off with many years of high growth and low debt, but as they close...

3/14
the gap between actual investment and desired investment (i.e. the amount of investment they can productively absorb), rather than adjust the model they typically maintain high investment rates.

Read 14 tweets

Michael Pettis

@michaelxpettis

22 Sep

@SCMPNews

1/4
Damned if you do, damned if you don't: "At least eight cities in mainland China have come up with measures to prevent developers from offering excessively cheap homes to stabilise the market and prevent a collapse in prices."
scmp.com/business/china… via @SCMPNews

2/4
The article lists many ways in which local officials fear that lower housing prices would be harmful to the economy, including its adverse impact on local government revenues. They are right, of course, but the alternative – ever rising prices – is worse in the medium term.

3/4
This problem emerged over a decade ago, or at least that's how long I have been writing about it, but even when it finally became clear to everyone that soaring housing prices were a problem, the costs of resolving it always seemed higher than...

Read 4 tweets

Michael Pettis

@michaelxpettis

22 Sep

1/6
This FT article suggests that foreign investors can help prop up the US Treasury market as the Fed begins to cut back on its bond buying, but I disagree. I would argue that this idea of foreign "support" of the US bond market is based...
ft.com/content/47551b…

@profsufi

2/6
on viewing US debt incrementally, rather than systemically.

An important series of papers by @profsufi, @AtifRMian and @ludwigstraub have already shown that in the US, when rising income inequality causes an increase in the savings of the...
scholar.harvard.edu/files/straub/f…

3/6
rich, this paradoxically does not lead to more US savings but rather to more US debt among lower income Americans. I argued in my 2013 book that this is because US investment is not constrained at all by scarce savings, and so more savings cannot result in more investment.

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Michael Pettis

@michaelxpettis

20 Sep

@scmpnews

1/4
Another useful article by Zhou Xin. Among other things he estimates that Evergrande's on- and off-balance sheet obligations may amount to as much as 3% of China's annual GDP. That's a lot of debt.
scmp.com/economy/china-… via @scmpnews

2/4
But none of this is new. Many of us have know for years (some of us for over a decade) that the property-development sector was creating a very serious imbalance in the Chinese economy, and this includes a number of regulators and policy advisors.

3/4
So why didn't Beijing act sooner to reverse the problem? Perhaps because, as Albert Hirschman used to point out, the constituencies that benefit disproportionately from unbalanced growth are often powerful enough politically to block attempts to reverse these imbalances.

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Michael Pettis

@michaelxpettis

20 Sep

1/9
The idea that more efficiency in financial markets is by definition a good thing is based on an unrealistic model of financial markets in which the only thing that drives capital is a search for productive investment in the real economy.
ft.com/content/983bc6…

2/9
If markets are inefficient enough – i.e. frictional costs high enough – to distort the flow of capital to its most productive use in the real economy, then it makes sense to implement policies that lower fictional costs. This can only improve the capital allocation mechanism.

3/9
But at a certain point frictional costs become so low that they have almost no impact on the way capital is allocated to productive investment. In that case, lowering frictional costs further only benefits speculative, high-turnover capital and the derivatives market.

Read 9 tweets

Michael Pettis

@michaelxpettis

20 Sep

1/5
Very interesting article on the range of problems Evergrande has faced in recent months and years. I didn't realize that already 3-4 years ago the commercial paper that Evergrande used to pay suppliers and contractors was being discounted at 15-20%.
caixinglobal.com/2021-09-20/cov…

2/5
That should have been a warning that the company was already facing a serious liquidity squeeze, or else why implicitly borrow at such astonishingly high rates? And yet, at the time, Evergrande was also paying large dividends to its shareholders.

3/5
Of course, as this article notes, Evergrande's problems are also problems for China's economy: "Its liabilities are equivalent to about 2% of China’s GDP. It has more than 200,000 employees, who themselves and many of their families have invested billions of yuan in...

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