Michael Pettis Profile picture
Oct 10, 2021 11 tweets 3 min read Read on X
1/7
Very interesting article. A series of Chinese studies may be discovering something about the high-speed rail system that France had already learned: rather than boost the economies of secondary cities, being connected...

scmp.com/news/china/sci… via @SCMPNews
2/7
to the HSR may actually reduce economic activity and encourage a brain drain. Even patent applications in secondary cities have dropped significantly, according to one study, after the city was connected to a high-speed line.
3/7
If this is true, it undermines the claim that even if much of the HSR is not economically viable today, it will generate enough growth in the less economically advanced areas to become viable in the future. The value of HSR is more likely to decline than to increase.
4/7
This reinforces a point I have made many times before, including in the linked essay. The idea that concentrating investment in poorer regions will drive economic convergence is based on a confusion about what drives growth.

carnegieendowment.org/chinafinancial…
5/7
Poorer regions are usually poorer because their social, economic, legal, and cultural institutions prevent businesses and workers from being able to absorb high levels of capital productively.
6/7
In that case more investment only generates sustainable growth when these regions are relatively underinvested, and this doesn't mean relative to more advanced regions but rather relative to their own specific institutional capacity (what I call the Hirschman level).
7/7
Once each region has as much investment as it can productively absorb — and in China most regions reached that point well over a decade ago — more investment doesn't help. What it needs is more institutional reform.
1/4
The point of this thread is not to suggest that investment in HSR, or capital deepening more generally, is economically a bad idea. It is in fact often a very good idea – for example infrastructure investment in China in the 1990s, or in the US today – but we should ...
2/4
understand both the conditions under which it can accelerate economic development and those under which further economic development will not occur without the right institutional reforms, in which case further capital deepening can actually reduce future growth.
3/4
As a corollary, the longer an investment-driven growth model has proven successful, the more politically entrenched it is likely to become – that is certainly what the historical precedents suggest – but in fact the less successful it is likely to be...
4/4
in the future as it closes the gap between actual investment and the amount of investment the region can productively absorb.

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More from @michaelxpettis

Oct 19
1/9
Bloomberg's Chris Anstey notes that "the consumer — not the producer — has been the main focus of officials in Washington. By contrast, China’s leadership, drawing on Marxist tradition, of course focused on production."
@AnsteyEco
bloomberg.com/news/newslette…
2/9
There is nothing wrong, of course, with maximizing consumption. The whole point of economic development, after all, should be to improve total welfare. This was one of Adam Smith's main points.
3/9
What academic economists have real problems understanding, however, is that to be sustainable, the rise in consumption has to be supported by a rise in production, not by a rise in debt and certainly not, most foolishly of all, by minimizing the price of imports when these...
Read 9 tweets
Oct 18
1/9
China Daily says that the next Five-Year Plan might see a change in the way local governments collect taxes, shifting collection from the site of production to the site of consumption.
chinadaily.com.cn/a/202510/17/WS…
2/9
This will presumably change local-government incentives from encouraging more production to encouraging more consumption. According to China Daily, "Local governments, eager for economic growth and...
3/9
tax revenue, aggressively court the same favored industries with favorable policies. The result is a dangerous cycle of redundant construction, vicious internal competition, and ultimately, some oversupply situations."
Read 9 tweets
Oct 16
1/5
Chinese debt continues to rise quickly, with total social financing rising by 8.7% year on year in September (more than twice GDP growth) to RMB 437.08 trillion. This is equal to nearly 312% of 2025's expected GDP (versus 303% at the end of 2024).
caixinglobal.com/2025-10-16/chi…
2/5
In the first nine months of the year, TSF rose RMB 30.09 trillion. If you assume interest on the stock of debt at an average of 2.5%, this implies that it required an increase in debt in the past year equal to 17% of GDP in order to boost nominal GDP by around 4%.
3/5
Bank lending grew by less than expected, or 6.6%, a record low and down from 6.8% in August, and while many analysts have focused on the implications for credit growth, what it really shows is that in recent months there has been a shift in the locus of debt creation.
Read 5 tweets
Oct 15
1/9
WSJ: "According to the people close to Beijing’s decision-making process, Xi’s hard-line strategy is based on the belief that Trump will ultimately fold and offer concessions rather than deploy Washington’s own significant leverage."
via @WSJwsj.com/world/china/ch…
2/9
If true, this could be a very high-risk strategy. According to the WSJ, "With hiring slowing, manufacturing contracting and prices rising, many economists say the U.S. isn’t positioned to absorb another major trade fight with China."
3/9
But if you were to rewrite the sentence as: "With hiring slowing, domestic demand stagnant and prices declining, many economists say China isn’t positioned to absorb another major trade fight with US", it would no less true.
Read 9 tweets
Oct 14
1/8
WSJ: "President Trump is trying to publicly de-escalate tensions with China to soothe markets while privately keeping up pressure on Beijing—a difficult balancing act that is being closely watched by Wall Street."
via @WSJwsj.com/world/china/tr…
2/8
This is also the impression I got from my meetings last week. There is a sense that Beijing overplayed its hand, perhaps because until China is able to boost domestic demand (something that will be extremely difficult), it is still very vulnerable to a trade contraction.
3/8
Although it is the growing US trade deficit that accommodates the growing Chinese surplus, I suspect many in Beijing think that it is the bilateral surplus with the US that matters, which is why it believed it needed to "win" the trade discussions as quickly as possible.
Read 8 tweets
Oct 2
1/9
FT: " UBS's Paul Gong played down the chances of an EV industry-wide consolidation in the near term, as deep financial support for lossmaking groups from provincial governments and capital markets stands in the way."
ft.com/content/5f73d2…
2/9
This is a very appropriate example of János Kornai's distinction between economies that operate under hard-budget constraints and those that operate under soft-budget constraints. The hard-budget constraint sets a limit to the extent of losses a business can have.
3/9
In market economies, Kornai argued, hard-budget constraints prevent entities from persistent loss-making activities unless investors truly believe that future profits are likely to be enormously large. It is economics, not politics, that determines the extent of investment.
Read 9 tweets

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